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Posts Tagged ‘Robert Rodriguez’

Inflation, Deflation, or Stagflation?

Posted by Larry Doyle on June 1st, 2009 11:06 AM |

I am an eternal optimist and, as such, I never want to see people’s spirits waver. I encourage people not to allow the current economy to “deflate” their hopes for better days. By the same token, I am a pragmatist and caution people not to view the recent bounce in our equity markets as reason for an overly “inflated” sense of optimism. In this same spirit, though, we need sufficient optimism along with practical analysis to avoid the perils of “stagflation.” Let me expound.

The debate between analysts touting prospects for inflation versus deflation is ongoing. Those concerned with deflation highlight increasing levels of unemployment pressuring wages, falling asset valuations, and slack consumer demand. Those concerned with inflation point toward the unprecedented levels of liquidity injected into our system via all of the government programs. The inflation hawks maintain the economy merely needs a small spark and inflation will spread in an uncontrollable arson-like fashion.

I actually believe there is a very real chance we get developments from both camps leading to the scourge known as stagflation. How may this play out?

Many respected analysts are promoting the concept of a new “normal” economy. This scenario entails an economy operating with enormous government deficits, an elevated level of unemployment, and little to no shadow banking system (securitization of loans and other assets).

In this new “normal” economy, GDP may only eke out small positive growth given these heightened pressures. Pimco’s Mohamed El-Erian writes of A New Normal:

This reflects a growing realization that some of the recent abrupt changes to markets, households, institutions, and government policies are unlikely to be reversed in the next few years. Global growth will be subdued for a while and unemployment high; a heavy hand of government will be evident in several sectors; the core of the global system will be less cohesive and, with the magnet of the Anglo-Saxon model in retreat, finance will no longer be accorded a preeminent role in post-industrial economies. Moreover, the balance of risk will tilt over time toward higher sovereign risk, growing inflationary expectations and stagflation.

Even as we come out of this recession, our economy will run increased risks of slipping into another recession given the lack of cushion provided by a strong consumer, the burdens of heavy government debts, and inability to easily access credit.

El-Erian adds:

For the next 3–5 years, we expect a world of muted growth, in the context of a continuing shift away from the G-3 and toward the systemically important emerging economies, led by China. It is a world where the public sector overstays as a provider of goods that belong in the private sector. (As one of our speakers put it, we have transitioned from a world where the private sector provided public goods to one where the public sector provides private goods.) It is also a world in which central banks and treasuries will find it difficult to undo smoothly some of the recent emergency steps. This is particularly consequential in countries, such as the U.K. and U.S., where many short-term policy imperatives materially conflict with medium-term ones.

As our global economy transitions to this new “normal,” I believe the likelihood of stagflation is quite high. For those who recall the perils of our economy in the early 1980s, stagflation is not a pretty picture. How does one manage investments and personal finances in an environment of stagflation?

Let’s deal with the component parts. Given sluggish growth, limited credit, and lessened opportunities, it is of paramount importance to cut expenses and minimize debt as much as possible. Servicing debt will be an ongoing challenge and increasingly problematic. Be proactive at this point in time in adjusting your finances to this reality.

Where will the inflation come from and how does one address it? In my opinion, the inflation “train” will arrive sooner than we think. Some of the savviest investors, including Financial Pacific Advisors’ Bob Rodriguez and noted Black Swan author Nassim Nicholas Taleb, are already positioning themselves for it. (The WSJ reports, Black Swan Fund Makes a Big Bet on Inflation).

How can people protect themselves from the inflation monster? Increase exposure to the following:

  – precious metals and commodities

  – critical infrastructure (power plants, agriculture, water, transportation)

  – necessary life items (drugs, medicines, food)

  – stronger and more fiscally prudent foreign markets

Decrease exposure if not get outright short

  – longer maturity (5yr and and longer) Treasury bonds

This stagflation story will have many chapters and I will be writing extensively on it. Please share your thoughts, opinions, and recollections of the early 80s economy so we can all move forward most effectively in navigating the economic landscape.

LD

“Reflections and Outrage” by Robert Rodriguez: Strongly Recommended Reading

Posted by Larry Doyle on June 1st, 2009 5:00 AM |

Bob Rodriguez, Partner and Chief Executive Officer of First Pacific Advisors, delivered the keynote address the end of last week at the Morningstar Investment Management Conference.

Mr. Rodriguez is a 35 year veteran in the financial industry and a Morningstar Manager of the Year three times. In my humble opinion, there are none better in the industry today. As I referenced on NQR’s Sense on Cents with Larry Doyle last evening, I totally concur and feel strongly about Mr. Rodriguez’s powerful pearls of wisdom. I beseech you to read this address, save it, read it again, and share it with your colleagues!

Allow me to comment and highlight Mr. Rodriguez’s major focal points. Mr. Rodriguez addresses every major issue in our financial world today. He layers those issues on top of the potential social impact our country faces. Mr. Rodriguez is not bashful in highlighting that our day of reckoning is upon us. I have read this piece three different times. I am more impressed and in greater agreement with his assertions after each reading.

Rodriguez addresses the following:

1. the need for personal and professional discipline and integrity

2. he recounts an experience in which he was solicited to “pay to play” by his biggest account . . . he passed and never regretted it

3. he castigates the financial industry for its performance over the last few years (be mindful he delivered this speech to an audience of financial managers!!)

4. he talks about how and why he has made a major shift into energy stocks within his fund!!

5. the changing nature of the markets and the global economies.

6. he rails on Alan Greenspan

7. Rodriguez offers, “my trust has been severely shaken in the Federal Reserve, the Treasury, the Congress, and the Executive Branch of government…”

8. “the regulatory agencies and federal government were complicit in laying the groundwork that allowed many of these credit excesses to develop prior to this economic crisis.”

9. he addresses the horrendous business practices being promoted by GMAC.

10. the positive economic impact of the Stimulus will be offset by ongoing reduction in consumer spending.

11. “we have to be careful about what is meant by sacrifice . . . a democratic government is the only one in which those who vote for a tax can escape the obligation to pay for it.”

12. Rodriguez’s outlook on the market:

   — we are currently experiencing a bear market rally

   — corporate earnings will disappoint

   — the stock market overall will be price constrained for TEN YEARS

   — “I view the Treasury market as being in a bubble territory with foolish leaders at the helm.”

   — the bulk of the economy’s credit problems are still to come as charge-offs on trillions of dollars in loans remain to be recognized.

Reflections and Outrage
by Mr. Robert Rodriguez
Partner and Chief Executive Officer First Pacific Advisors

MUST READ!!

LD

Recommended Weekend Reading

Posted by Larry Doyle on May 30th, 2009 2:05 PM |

I strongly recommend the following:

Reflections and Outrage
Robert L. Rodriguez, Partner and CEO
First Pacific Advisors; May 29, 2009 

This treatise put forth by Bob Rodriguez, the Morningstar Fixed Income Manager of the Year three times running, is as fine and comprehensive a review as I have seen to date. Rodriguez touches on the economic, financial, and political compenents of the current period. Rodriguez also addresses the future implications for our markets and global economy if the current approach does not change.

If you read nothing else this weekend, please do not skip this piece. You will not be disappointed. You will be enlightened.

The Dollar as World Currency: A Turning Point?
by Komal S. Sri-Kumar
Chief Global Strategist
Trust Company of the West

Are you aware of recent trade agreements between Brazil and The People’s Republic of China? Komal Sri-Kumar takes us into a world not covered by our media or analysts. In so doing, he addresses a topic which will likely have long term implications for our greenback.

Credit Crisis Watch: Thawing–noteworthy progress
by Dr. Prieur du Plessis
Chairman, Plexus Asset Management

This post at John Mauldin’s Outside the Box provides plenty of graphs and analysis supporting the current case promoting a turning in our economy. From Libor to commercial paper spreads to credit spreads, du Plessis makes a strong presentation. Will the stabilization and improvement continue? Well, prior to making that assessment, it is critically important to know from where we came and where we are now. This research piece provides a thorough analysis.   

Pimco’s Gross Says Harvard, Yale May Need to Alter Investments
by Sree Vidya Bhaktavatsalam and Gillian Wee
Bloomberg 

Will the investment styles at these universities withstand the rigors of the Brave New World in the Uncle Sam economy? What approach did Harvard and Yale embrace? These endowments launched headlong into alternative investments in which they sacrificed liquidity in pursuit of larger returns. Noted investment manager Bill Gross questions how effective that approach will be going forward. We can learn plenty from this article and measure our own investment approach in the process.

LD






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