2014 Already!

Janus is the Roman god who looked forward into the future and to the past, hence the two faces. Even January the month, is derived from that god. The sun starts it's climb into the sky and the days lengthen on December 26th. The Romans, superstitious as hell, never consecrated a day to a God that wasn't on the very first day of the month. If you picked the first day, they believed it would imbue the rest of the month with good luck. So they picked January 1^st to be the beginning of the new year.

Janus looks forward and back. I'm sure many people do the same and also swear to all that is Holy they'll carry out their New Year's resolutions. Gym memberships, nicotine patches and a host of other positive actions will be taken I'm sure. I was never into making resolutions as January isn't a month that gave me too much motivation. It's damned cold and spring seems like it's another eon away. To me, January is a month to hunker down and endure. But still, anytime is a good time to make the positive choice.

 

An aside for a moment please...

 

As for New Years Eve's, I wasn't the type to get silly falling down drunk either. I may have done that in my late teens but the novelty wears off quick. It then becomes a typical party on a Saturday night except everyone yells at 12 AM. For you youngsters out there, there was a time in the past when police stations, even Pawtucket's, would have a coffee setup in their station for drivers who were too drunk to drive. Stop in and have a cup or two to straighten out some, then drive home. No questions were asked.

 

Boy, how things have changed since the 70s! If you get caught after drinking one Pink Squirrel, they'll pull your license today and in your futures lives too.

 

 

 

Ok, I got that out of my system.

From rereading my own articles here, a a lot of them are memories. Perhaps it's the age I am that I do this. Perhaps it's the fact that “discovery” isn't as amazing to me now as it once was when I was younger. The older you get, the less “It's New to You” is a revelation. Hell, some of the crap I talk about is as mundane as a plank of wood and wood is no revelation at all. Other events or people I come across I've never experienced before don't shock me as there is always something familiar about them all. So there is a hook I can grab onto. Also, things, people and events repeat...constantly. There might be a new actor or different place, but the story I've heard in some form or another before. As for people? They are always people if you get the drift.

 

You know what's odd at this age? Since I don't have the energy, time nor the drive to “build” something out of my life versus when I was 20 years old, my goals to reach now aren't on some pinnacle, some mountain top. I've reached that pinnacle. I've seen the mountain top. There were plenty of goals I've aimed at that I managed to surmount. I finally attained a BA. I made damn sure my close relatives lived out their lives at home instead of dumping them. I always preferred the quality of friendships vs the quantity. I was fairly successful in keeping people I've known for over thirty years close by. This is trivial but I managed from Radio Shack stereo components to high quality ones and built a few myself. What's odd about it all? I never planned at some of these goals, they were thrust upon me.

 

There were other goals that'll never be reached due to outside influences that force you to navigate to a different port as the one you were aiming at is now unreachable. What's a goal I wanted but never could reach? Astronomy. How's that for an ultimate Geek career? I've always been (and still am) fascinated by what's out there. The problem for me is that astronomy is nothing more but super heavy math. Fourier analysis, multivariate, zeta functions. Are you fucking kidding me? When tested with the GRE's and Miller's Analogies, I scored a standard deviation above everyone else when it came to language knowledge, comprehension and such. . When it came to mathematical knowledge, I managed long division, fractions and quadratic equations barely. My mathematical GRE was a standard deviation below! My height regarding math reached junior year high school stuff. That surely wasn't getting  me into Cornell. No matter anyway, there's a dearth of MA level astronomers awash in the job market since computers made them obsolete. W

 

When I was six, I wanted to be an astronaut, but again there were problems. No Air Force Academy was going to accept someone who is as liberal as I was. I couldn't imagine myself at Ft Collins in Colorado, whooping it up with a bunch of authoritarian loving, blond, blue eyed, “He's a chip off the ol' block” types.

 

Now, my goals are all about depth. What I mean by that is since I have attained some of what I wanted, it's time to polish it, deepen the hue and to improve on what I have already.

 

Happy New Year! Keep growing in your own way wherever that leads you.

They Call Him Baby Love

Ever count up the loons you worked with over the years? I've had my share. Perhaps, even I was that loon on someone else's list? The worst was this character I knew (this was in the late 80's) who hailed from and was proud of the South Providence shithole he was spawned in. Fool, as I'll call him, was sent to us for a few months and why he lasted that long I can't understand. He'd show up late most times with a newer and better excuse than the last. I swear management didn't give a crap because a body is a body Then again management was involved with Joe Mollicone. Every Monday Fool would try to wow us with his latest weekend parties and women he scored on Prairie ave. Wow, that's where I wish I could've been! Fuck Christy's Landing in Newport or even a working class neighborhood bar, Prairie Ave is where you want to be seen...with an oversized warm can of Colt 45.

One of the things he felt expert in was his constant ball busting. Of course, I was the target. He'd fire a bunch of insults or compliments at me. I didn't know. He spoke “street” and I couldn't comprehend street. Perhaps he was trying to amaze me or startle me with his shocking personage. At first it was shocking but it got real old real quick and finally completely boring. There's a reason why the phrase, “One trick pony” was invented.

If he wasn't the center of attention for over five minutes he'd start butting in, no matter the social situation, to regain that spotlight back. It didn't matter what he'd say, just something outlandish to have people look at him funny. He'd be in the lobby of the building we worked, looking out through the plate glass windows and try to one up passer bys on the sidewalk. I believe one time he threatened to fight one of them who probably looked at him funny too.

Then one day, I started hearing this from him: “Hey Baby Love, how's it hanging?” “You holding, Baby Love?”

“Baby Love?” “Holding?” I had no idea what he was talking about.

I used to tell about this guy's antics to my college buddies every so often as this clown from South Prov seemed to damned well over the top. As a joke, one of my friends got ahold of White Out (remember White Out? This is an old story mind you...) and he painted, “They Call Me Baby Love” on my portable Smith Corona typewriter I had at RIC. It's very useful to keep a typewriter in the trunk of your car when a term paper is due in four days. You can type it out anywhere.

He thought it was funny. Everyone thought it was funny. I didn't at the time. Even reading “Baby Love” on my typewriter reminded of me of that weirdo and I didn't want to think of him at 2 PM as I had to work with him at five.

Fool finally was fired. I think his coming in late for the 133^rd time was the clincher.

Typical Pawtucket Xmas

Usually I do a Christmas Eve story but I'm running out of them. So it'll be a little vignettes of scenes I remember from long ago.

 

Billy K was our friend. He came from a HUGE Irish family. I guess the admonition from the Pope to be “fruitful and multiply” was taken seriously. Billy's nickname around here was “Dirt Bomb” and that was easily evidenced by his continued wearing of dirt splotched clothing. Overall, he was a ball buster but a good friend who had your back at any moment too. He never backed down from a fight no matter how large the opponent was. He was a typical street fighter who feared no one and probably felt no pain either. Hell, he enjoyed getting into a scrap.

 

Billy's car was this rusty, dented Station Wagon that had a four barrel carburetor on top of it's engine. If you put a blade on the front of the car, it could've plowed up the earth it was so powerful. Add to that it was your typical 70s gas hog. Around a particular Christmas back then, he was missing a good part of his exhaust system as well. There were times when I could hear him start it up at his house three blocks away and knew enough to go upstairs to tell my brother that Billy was coming.

 

One Christmas Eve I was at a Polish family gathering with gwumpkies and perogies and all that weird food the Polish eat. We guys were taking turns drinking this Polish liquor called “Spiritus” which was Polish moonshine apparently. The stuff burned like hell when you drank it. The bar and buffet table was downstairs in a finished cellar that night when we all heard Billy start up his car. We knew he'd be by in about one minute.

 

Billy comes roaring down the street with his “Dirt Bomber” station wagon whose sound could make windows rattle. He comes in, completely drunk way too early and starts “Merry Christmas-ing” everyone there. He then picks up Sharon's one year old to hold and adore, all the while with a Marlboro cigarette dangling from his mouth near the baby's face. The women in the room became anxious that Billy was too drunk thought he'd put a nice cigarette burn onto the baby's face with the loose cigarette. We guys were thinking how funny this looked. Billy could hardly stand and was in his green Dickie mechanic's clothing covered in grease, holding this clean, fresh bay in his arms. The two couldn't have looked more at odds with one another. The aunt of the baby moved in quick and scooped the baby from his arms and probably saved her.

 

After finding the Spiritus bottle, Billy knocks down three shots in succession, puts a perogie or two into his work coat pocket and says he has to visit others. We followed him out to the street because this was still a developing comedy. He gets into his car, fires it up, shaking our chests from the reverberation and hits the gas. The car lurches in reverse down the street at an ever increasing speed. We figure out this wasn't a mistake as he kept at it till he passed the intersection, hopped a curb and the ass end of his car plows into this 12 foot yew bush on the McPherson property. He throws it into drive and then comes off the curb and fishtails, at great speed, into the intersection to make his way to his next stop. We figured it was the Supanic house as you could easily navigate the car's direction in your mind just from the exhaust blast alone.

 

 

 

Remember these? Imagine no exhaust.

*****

 

I once used to make killer dinners for my family. I had made a real demi glace with some decent beef stock and it took me all day. The process is this: Beef stock to Espagnole sauce to Demi glace. It takes all day because you are reducing the volume of the liquid with evaporation and you add various herbs and brown roux as you go. The final product, if you tasted it, is like crack cocaine. But, we're not finished yet. Demi glace is a “mother” sauce that can be developed further. I decided I'd do a Robert Sauce (pronounce Robert with a snotty, upsnooted French accent, “Roe-bear!”) in which you add shallots, white wine and Dijon mustard to the demi glace and reduce that further again. The final sauce matures to a velvety consistency.

 

I had made it because we had a nice, fat tenderloin of beef and you can't waste a cut of meat like that without some just as precious sauce to go with it.

 

So, the food is on the table and we all start eating. I don't have to be told that they're enjoying it because I can see how fast the food is disappearing and how they're reaching for seconds.

 

I then see my brother dump another pile of mashed potatoes onto his plate and then tries to scoop more of the Robert sauce onto them. The bowl had run dry.

 

“Do you have anymore GRAVY?” he asks.

 

“Gravy...” I think.

 

He pours gobs onto his potatoes and I have to think, 'Ah well, at least he likes it...even if he has no clue as to what's he eating.”

Selfish Piggies

One of the Seven Deadly Sins

 

 

I'm usually never a pig in public when it comes to free food. Unless I'm hungry then my concern about maintaining a perception of me, that's kind and normal, goes out the window. I was at an event, the ubiquitous Christmas party, when I scanned the buffet table and saw a fat bowl full of marinated mushrooms.

 

I used to hate many foods as a kid, mushrooms being in the top five. I didn't want to eat anything that is the Zombie of the plant world. I knew mushrooms lived off of other dead things and I thought that disgusting. I had good reason to steer clear of them. Until I had marinated mushrooms when I was 18.

 

At a local restaurant and out of curiosity, I popped one of those things into my mouth, knowing I could spit the vile thing out if wanted to. My mouth exploded with about nine different flavors when I bit into one. “My GOD...This is crack cocaine!” might have been a close reaction I had.

 

So at Q's last night, there they were, a nice bowl of them on the buffet table. The problem was how could I abscond with about 1/3 of the bowl without seeming like a glutton. It's simple really. I went up and got a large plate, put one of each item on the plate, then maneuvered in front of the mushroom bowl and used the serving spoon to gather up a heaping pile of them onto my plate. My eyes then shot a quick, left-right look around and I did it again, adding to the pile I had already. Later in the corner, while I ignored everyone around me, I had my own little Heaven as I munched the mushrooms.

 

I'm reminded of a Simpsons episode where they live in Paris for a bit. Homer opines:

 

“In America, everyone said I was a fat, gorging pig. But in France...I'm called a gourmand!”

 

Once I was done with that, I had to get more but I wasn't about to fill 1/3 of my plate with other useless foods. I again go back, take a few shrimp, then get in front of those mushrooms again and scoop up more. It was then I saw I had lowered the level down to the last third of the bowl.

 

“Oink! Oink!”



 



Kollidge Raydeeo

It was so polluted in 1969, the Cuyahoga river burned. I mention the river in the piece ahead and the fire here depicted has nothing to do with the story, but the history of industrial Ohio and the river is cool.  

 

 

 

One of the other things about owning a Yagi/Log Periodic antenna (I won't explain the engineering of it, too dull) is not only can I yank in Nantucket stations, I also can pick up those 100 watt college stations you've never heard of. 100 watt radio transmitters don't go far at all, perhaps 20 miles on a good night. That's why most don't know about them, there's little coverage area. To be honest, I've never knew some of these small colleges even existed. That's what's great about a decent antenna, it can be used like a microscope looking for the smallest of things.

It was late, I was listening to some indie/folk music by chance. I like that time of night, it's dead still and the rest of the world has crawled under the covers. Usually the play lists on most radio stations becomes liberalized as advertisers who buy spots at 1 AM aren't really going to freak about demanding certain music be played. The DJ's have a little latitude here. I've always said the best music can be heard after midnight.

I heard an idie song speaking of the flooding of the Ohio and Cuyahoga rivers when I realized it was more about the singer’s lament at pouring forth music and lyrics that'll never see the light of day. “What's the worth of it?” asks the singer.

I thought the music and meanings were intriguing so I stayed on the station 91.3 FM for a hour and let it run through the night till the morning. I've told you before  I've done that, let the stereo sing on softly all night long as I sleep. My audio nightlight.

This morning I get curious as to what the hell is 91.3. I do a Google search and find out there's a Stonehill College in Easton, Massachusetts. “There is? Since when?” I thought. Their radio station pumps out a terribly weak 100 watts.  Now compare that too WBRU, which pumps out the maximum allowed of 50,000 watts. I read further and I find out Stonehill is a Catholic college associated with the University of Notre Dame. Stonehill ain't cheap, it'll cost you $50,000 pazoozoo's a year to attend. To date, this is how much I now know of Easton too.

I then hunt down the song I heard. Google's great for that, you type in the misheard lyrics of a song and generally you can nail it on the first try. I found out that the song was written by “Over the Rhine,” an Ohioan husband and wife indie duo formed in the early 90s. The named their band after a residential neighborhood in Cincinnati. Over the Rhine, when I looked it up, looks like a tired, burnt out factory neighborhood. A dump.

Now armed with all this information, I have found another band to steal music from via torrents and cheat them out of their deserved compensation.

As I hunt down the band for even more information, I curiously keep coming up with Christian websites that did interviews with them. I then find out the couple did an interview where Christ was the savior of their marriage.

“Oh...shit.” I think. This band I found is solely focused on Christian rock music. They probably tour doing small concerts for Christian youth groups at summer God camps. Now I can nearly taste the vomit in my mouth. Songs about adoring God, waiting till marriage to fuck your girlfriend, never jacking off and telling girls to keep their legs closed are probably the main diet of songs I begin to think.

I hop to a few more links and find out that this band has a bite though. Some of their songs excoriate religion, or rather the fakery you find in it with various ministers and hucksters who preach God and have their hand out for donations. My view on them begins to soften and soften further. I think, “Ok, ok...perhaps they've retained their skepticism about anything in this world. Good, I'm the same way...always looking for the bullshit.”

It hits me that this is the reason 91.3 played this song, it's a Christian group but with none of that Southern Baptist Fundamentalist drool. Well, why not I think, south eastern Massachusetts is liberal as it can get, even if you place a Catholic college there.

Pope Francis, given his strong Social Justice views and not afraid to speak them out, would probably like Over the Rhine.

 

 

 

Husband and wife team, Over the Rhine

Occasionaly I Won at Stuff I Suck At

 

 

 

Growing up I never played any “organized” sports. The biggest reason was my inability to have any coordination. Walking in a straight line was tough enough. If they ever do a MRI on my cerebellum, they'll probably find it was wired by God's stand-in on the Tuesday night overnight shift.

That doesn't mean I didn't like sports. I preferred the ones where there were no strict rules to memorize and abide by. Pick up games in the street were good enough. In gym class, we would play “murder ball” where twenty basketballs were loosened onto the court and two teams would try to “take out” opposing members by hitting them. I excelled at that as I could duck, twist and jump to avoid being hit and understood that when aiming at a running target, you “led” them and threw the ball where they would eventually end up in a second.

Through grammar and high school, there were the Golden Boys who excelled at any sport and were revered for it. In Jr High I knew of one kid called Doug S. He was a naturally gifted athlete where most sports skills came easy to him.

I can remember being bitched at for “traveling” during a basketball game we had then. Since I didn't give a crap about basketball I never learned the rules. I thought it stupid that I couldn't run the damn ball down the court w/o having to bounce it every damn three steps. “I thought the object was to get the ball down to the other side of the court?” I'd complain. The others rolled their eyes at me.

So, like most people ,what you don't excel at or even achieve mediocrity with, you dislike. Why do something that only brings the derision of others? It turned into a self fulfilling prophecy. I sucked at sports skills and refused to practice at them as the disdain from the others made want to leave anyway.

But one day I kicked Dougie S's ass and nearly caused a fight.

In ninth grade, we had gym at Goff and it was then run by a Mr Charland. He was OK I guess as he knew half the class were filled with kids that had two left hands and legs. So, he apportioned the spots on teams accordingly too. He had a bigger job of corralling a bunch of 14 year old boys than trying to teach us games.

Charland, had to come up with activities to keep us busy. One thing he dreamed up was a one on one competition where we had to throw a soccer ball from the centerline past a goalie guarding a hockey net. I was paired up with Dougie who was guarding the net.

On the sidelines, mouthy predictions said that this was going to be a short game as Dougie would whip me in a few minutes. I thought so too.

Dougie was so confident that he was too busy basking in the light when I shot one by right by him and scored a point. It was after that that he became serious. I then thought of something as I saw his plan. He'd watch my eyes to see where I throw the ball. I then would falsely look to say, the left corner of the goal and then wind up and throw but use the other part of my vision to aim at the right side.

Dougie, reading me, was leaning, already moving to the wrong side of the net where my focus was and the ball slipped right by him into the other side of the goal.

I kept doing this, switching from side to side on occasion and using that the fake eye aim and racked up twenty points and won. He never picked up on the fact I was duping him the entire time with just eye contact.

At the end of the game, you could see he was visibly upset. Here I was, a proven goober in sports and I completely shut him down. The other kids on the sidelines, started speaking of cheating to where one of them yelled it out. I guess their Hero needed some reason for failing.

I then said to the sidelines, “If I cheated, then you are calling Mr Charland a LIAR.” Charland had been sitting in a folding chair the entire time watching us play.

Charland answered the kids' accusation with a simple, “He didn't cheat.” That wasn't what the kids wanted to hear but I got the best validation ever.

I didn't gloat outwardly but I was inside and it must've come out because I was beaming like sunshine. I didn't say a word but my body language displayed it all. Those around me I swear were still grumbling.

I didn't know what a problem I created by whipping him so soundly. As the day progressed, as the classes changed, a lynch mob was forming to “teach me a lesson.” I got word of it finally in Mr Holt's class as most of the most pissed off kids were there including Dougie.

One of the kids told the story to Mr Holt about how I creamed Dougie in that game and Mr Holt had to congratulate me. I then used my best manipulation to ease off the mob's pressure which was boiling to the point of jumping me en masse outside the school. I directed a question to Dougie who sat in the front of the class.

“You're not mad are you? I mean, you're not one of those SORE losers are ya?” I did emphasize the word sore, but just enough...just enough, being careful not to have it sound sarcastic at all.

It seemed that being accused as a sore loser was the trick. Doug now had to come off as a defeated, but entirely noble and moral athlete. His little speech stunned the others who were hoping to shove my face in the dirt after the last class. He disarmed their anger by courteously “bowing” to my victory and trying to come off as gracious as he could.

As far as I figured, I scored another twenty points against Dougie and the others by defrauding them out of their planned retribution on me.

Sometimes it's sooo easy.

*****

A week later, Mr Charland took me aside to ask, “How I did manage to beat Dougie?” I told him about letting Dougie read my intentions then switched it on him. He said, “Don't tell them what you did, then they'll really get pissed. To tell you the truth, the “fakes, curve balls and deceit are all strategies and are entirely legal in sports and what you did was perfect! Hell, I couldn't tell what you did!”

Add another twenty points!



Mohamed A El-Erian...Dull, Boring and RIGHT.

The name sounds like some terrorist waiting to ambush you huh? He's not. He's one of the top economists this country has. Several years ago, he predicted where we'd be and nailed it because back testing works. You have thousands of hoodoo-voodoo financial fortune tellers and no one checks on their predictions. El-Erian has others check his. Also, he's not full of complete BULLSHIT as most economists are.

So, here's his next one, a three to five year outlook on where we might be headed. A warning. It's dry financial wonk-speak. Do what I do, read it and blow past the parts that need an Egyptologist to decipher and you'll come away with at least the gist of it all. The other economist I follow is an Iranian Jew living in NYC called Nouriel Roubini. Another smarty who isn't full of cow dung. 



New Normal ... Morphing.  Mohamed A. El-Erian

The New Normal has morphed to include consequential elements of a "stable disequilibrium." In the midst of notable multi-speed dynamics, the global economy as a whole is muddling along a road that will give way over the next three to five years to one of two stark alternatives: either sustainable global growth, institutional and political renewal in the West and safe deleveraging; or growth shortfalls that cause financial instability, fuel greater social tensions, accentuate political dysfunctions and complicate debt traps.

Our Secular Forum analysis identified eight key themes for long-term investors, along with their portfolio implications. Maintaining an approach that has served PIMCO’s clients well for four decades, our investment professionals gathered in Newport Beach last week for three days to discuss the three-to-five year outlook for the global economy and markets. Again, we were privileged to hear the insights of global thought leaders and experienced practitioners from outside PIMCO (see box), as well as our new (and really impressive) class of MBAs and PhDs. As you can imagine, we covered quite a few themes: from the hyperactive role of central banks to quite dysfunctional politics, from increasingly influential demographics to unusual economic and financial configurations, and from exciting innovations to disturbing income inequalities and social tensions.

Yet, with the anchoring role of PIMCO’s 2009 concept of a multi-speed New Normal (yes, it has played out as anticipated), we managed to converge on a three-five year outlook for the global economy – not as an end in itself but, rather, as a means to specify longer-term investment themes. Think of this annual “Secular Forum” as providing the medium-term guardrails for how, where, why and when we invest the funds that you have entrusted to us.

1 It informs and influences the positioning of our commodity, currency, equity, fixed income and multi-asset strategies (in terms of beta and alpha generation, as well as risk management approaches). Needless to say, the findings will be supplemented by the conclusions of our next quarterly Cyclical Forums, the four-times-a-week meetings of the Investment Committee, and high-frequency interactions among colleagues in our 13 offices around the world. I must admit that, going into this year’s discussions, I found the context even more challenging than usual. Indeed it was the most complex since I first joined PIMCO in 1999. This complexity is not just due to a global economy in the midst of multiple historical realignments. It is also because highly experimental central bank policies have disconnected most asset prices from the complex ecosystem. Fortunately, I was helped by insightful presentations, robust discussions and remarkable inputs from talented colleagues.

So, starting with a bit of context, here are our major findings and broad investment implications. Context A prior Secular Forum concept – that of a “New Normal” involving unusual and persistent multi-speed dynamics within and across countries again proved valuable in anchoring our starting point. Indeed, the concept has become so mainstream by now that, just last month, Christine Lagarde, the managing director of the International Monetary Fund, used a “three-speed world” to frame the conversation for officials gathering in Washington, D.C., for their semiannual policy discussions.

A relatively robust set of fast-growing emerging countries (led by China) has continued to act as the locomotive for the global economy. From a GDP perspective, they have been compensating for the slowest Western economies mired in unsatisfactory growth – first Japan and now, to a greater extent, a growing part of Europe.

In the middle is a healing U.S. economy where an increasing number of sectors have rehabilitated their balance sheets but have yet to collectively reach escape velocity. This elegant “three-speed” characterization featured prominently in our discussion. And the critical question that kept on surfacing was if, when and how it would transition in the next three-five years, with particular emphasis on growth dynamics and related aspects of financial stability, cross-country interactions, and the impact of inequality and political dysfunction.  

Needless to say, the role of central banks came up a lot in our analysis. By venturing deep into experimental policy territory, and by remaining there for quite a while, central banks have tried to support growth and counter financial instability, thus buying time for economies to heal endogenously and for politicians to deliver on their policy responsibilities. In the process, they have inserted a remarkable wedge – a disconnect – between market prices and underlying economic and financial fundamentals. Despite their innovative and courageous efforts, central banks are still unable to deliver sufficiently robust growth and jobs to Main Street. But they have been investors’ best friends. Their unprecedented policy activism (including, most recently, Japan’s boldest post-war economic policy experiment) has – to use Bill Gross’s southern Californian analogy – induced the vast majority of investors to grab their risk surfboards and ride a large and growing wave of global liquidity. Investors are enticed to take more and more risk at ever more elevated prices. Most see no need to kick out of the wave anytime soon; and quite a few believe that, if it eventually breaks, it will do so gently, delivering investors to a world where improving fundamentals validate and push even higher asset prices initially rendered artificial by unconventional policy actions.

By seeking to lessen the twin problems of deficient aggregate demand and structural impediments, and by financing debt problems, central banks have delivered investors a down payment on future growth and future returns. Well, that is the hope and intention. But if growth fails to materialize over time, reality will snatch back the returns from investors in the period ahead.

Central bank activism has also been beneficial for banks. The vast majority of U.S. banks have regained a firmer footing, raising capital, cleaning up their balance sheets and starting to realign their business models. Progress has been slower in Europe. There, unusual central bank activism has just reduced (though importantly) the left tail risk of severe disruptions. Most banks still have to adjust balance sheets, business models and mindsets.

Large companies have responded differently to this multi-speed reality. Showing less exuberance and confidence than financial investors, they have yet to expand aggressively. Instead, they have remained quite focused on cost control. Meanwhile, M&A (mergers and acquisitions) activity has been largely limited to defensive transactions – those that provide cost synergies as opposed to platforms for stepped-up investments in new plants, equipment and hiring. Smaller companies, and particularly those unable to tap pockets of robust demand around the world, have faced greater challenges. Having less operational agility and depending on credit from a largely hesitant banking system, they have struggled more to maintain adequate top-line revenue growth, profitability and balance sheet resilience.

Households also vary tremendously. In the emerging world, the remarkable social transformation has continued, with millions more being pulled out of poverty (especially in China). This is unfortunately not the case in the West. While most rich and globally educated individuals here have been able to maintain income and wealth growth, the middle class continues to be squeezed and lower-income households have struggled as too many lack jobs and have been forced to draw upon dwindling savings. Most Western governments have seemed less able and less willing to compensate with stepped-up government spending and redistribution policies.

Balance sheets and mindsets are still encumbered with memories of large deficits and controversial bailouts. And economists are too divided to provide governments with the analytical air cover that they desperately need. Given powerful and pervasive central bank influence, markets have not reflected in a meaningful sense this diverse ecosystem. Instead, price signals and market functioning have been distorted by unusual policy measures, and resource misallocation has become a threat. It has been less than five years since excessive risk-taking, debt accumulation and credit entitlements pushed the global economy to the brink of a depression. Yet there are already concerns about renewed financial bubbles and the return of irresponsible financial behavior – all this at a time when governments and central banks have fewer tools at their disposal to deal with the threat of another financial crisis, and when global policy coordination has weakened to a worrisome point, especially relative to the shared challenges and responsibilities.

Outlook a gainst this complicated background, our deliberations focused on the outlook for the three groups of countries (low, medium and high speeds) and various segments that cut across them. We also addressed the even more intriguing “adding up” questions – including the manner in which the global system accommodates all this unusual diversity in the years ahead.

Whether due to insufficient policy tools or politicians’ misunderstanding of the underlying dynamics and implications, the New Normal is now looking at multiple possibilities of what the British would call a “T-junction” – where the current road eventually ends, giving way to one of two contrasting outcomes. In economic terms, the current setup would yield either to a sunny road (in terms of growth and financial rebalancing) or to a stormy one (countries and segments competing for a smaller pie while the political system finds it hard (yet necessary) to allocate and deal with burden sharing).

As stable as the current course of action looks, it may in fact become untenable at some point in the future. As illustrated in Figure 2, this “stable disequilibrium” suggests two future possibilities:

(i) driven by endogenous economic/financial healing and political renewal, the New Normal would eventually hand off to high sustainable and inclusive growth that facilitates a safe deleveraging in the West and accommodates the growing systemic role of the emerging world; or

(ii) it transitions to even lower growth that complicates the West’s (actual and potential) debt traps, causes financial instability, fuels greater social tensions, worsens political dysfunction and encourages beggar-thy-neighbor approaches at the global level.

In the interim muddle through, the slowest economies and vulnerable sectors elsewhere face a growing risk of “zombification” (as one of our speakers put it). The critical importance of growth was stressed over and over again as we explored these possibilities and the related key question for investors: If, how and when would improved fundamentals validate artificial prices in a globally consistent and sustainable fashion? Going back to the three-speed characterization, growth is needed to overcome the current malaise in low- and medium-speed countries and among vulnerable segments in the higher-speed group; and it must be maintained in the high-speed economies as they deal with their own internal and external realignments.

For investors, such high, sustainable and inclusive growth would not only translate to a general validation of current risk asset prices but also reduce the probability and severity of disruptive haircuts – all accentuated by the real possibility that, within our three-five year secular horizon, central banks are likely to become less effective in buying time with their “pragmatic experimentation,” especially as the risk of collateral damage and unintended consequences mounts.

Yes, this is what should (and could) happen – namely, renewed national and global efforts to put in place the conditions for growth, financial stability, reduced inequality and orderly global rebalancing. But what is likely to happen? Here, we converged to the following eight medium-term themes among the many that were discussed.

First, the lineup for the large economies is clear. To illustrate, we detailed a ranking for systemically important and investible countries along a spectrum anchored, at one end, by those facing the shortest journey to the “T” and the most contrasting journey out of this junction and, at the other end, by those with much longer journeys to a less stark junction.

For example, we believe that peripheral European countries (with dismal growth, alarming unemployment and fragile debt dynamics) are closest to the neck of the “T;” and they will exhibit even more trends reminiscent of the emerging economies of the old crises days.

Then there is a Japan in the midst of an historical high-risk/high-return policy regime change. France, India and the U.K. follow; and then the U.S., Brazil, China and Germany. Using this sovereign spectrum, one can construct a framework that reflects the different initial conditions facing various economic segments and the impact of socio- and geopolitical factors.

Second, and related to the first factor, growth dynamics are notably heterogeneous and most growth models need to evolve. In the West, endogenous healing and significant short-term innovation accelerators are limited mainly to the U.S. – albeit a country still confronting headwinds from incomplete deleveraging and a dysfunctional Congress. Others face stronger self-made and exogenous headwinds. And some lack growth models altogether, and have low probability of successfully implementing new ones in the next three to five years. This issue of growth models (as distinct from just growth) is an important one.

Whether it is China with its transition from export-led to consumption-led growth, or the West in the aftermath of the global financial crisis, many countries need to evolve their engines of job and income generation. And while central banks are doing their utmost to buy time, their involvement can inadvertently push countries back toward old and exhausted growth models.

Third, look for central banks to maintain their pragmatic experimentation mode. Over the next three to five years, instruments will evolve as more institutions around the world feel compelled to follow the Fed in targeting growth and jobs more explicitly. From supporting SMEs (small- and medium-sized enterprises) and broadening the set of assets they purchase to deepening fiscal/monetary compacts (effectively becoming de facto fiscal agents), some of their involvement will remain a meaningful influence on markets. As investors, we need to pay close attention to the range of “benefits, costs and risks” in what is bound to be an evolving balance. We were reminded that it is not just about the content of central bank policy. Their operational mode will vary as they temper their actions with their desire to maintain discipline and conditionality on others. It will not be a smooth process. As an example, expect the European Central Bank to swing from a “WIT” (whatever it takes) approach to more muted activism – due to moral hazard concerns in Frankfurt and elsewhere – then back again to WIT … and so on.

Fourth, unless there is a growth revolution, haircuts will increase during the three-to-five year secular horizon. As Bill detailed in his latest Investment Outlook, investors should realize that there is quite a large range of haircuts that can eat away at their capital. The less visible form – financial repression – is certain to continue. In some parts of Europe, it will likely be accompanied by more explicit forms of debt restructuring and confiscation. Indeed, the further Europe gets away from the most acute phase of its systemic crisis, the wider the set of possible burden sharing in the weakest segments. And this may become even more unpredictable.

Fifth, be sensitive to the role of political and institutional factors as they act either as accelerators of good outcomes or major disruptors. The key question here is not whether political and institutional responses need to catch up with the realities of today’s fluid economic situation. They do, both at the national and global levels. The question, and it is a consequential one, is whether we will get the necessary renewal process. It is sad to admit but, absent much greater social pressures (which no one wishes), we see little basis for predicting a major political and institutional revival over the next three-to-five years in the West. This is not to say that progress will not be made. Indeed, we have already seen notable changes and initiatives in Europe. Rather, as one speaker reminded us, “Political time is quite different from economic and market time.”

This brings us to our sixth insight: Social issues will play a more important role in determining the West’s medium-term economic outlook. From well-developed welfare systems and family networks to initial high levels of wealth, these are reasons why greater social unrest has not followed the dramatic collapse in GDP in some European economies, along with an alarming spike in total and youth unemployment. Yet, already, elections have signaled dissatisfaction with incumbents, traditional parties and, in some cases, the system itself. The politics of austerity are evolving. And we face some major elections in the period ahead, including in Germany (this year) and what may finally be a consequential ballot for the European parliament (next year).

Seventh, global and regional interactions are more likely to complicate than reconcile national politics and policies. We see it already in Europe and in some Asian reactions to Japan’s policy regime shift.   So while it is great news that the central core of the international monetary system is steadily healing (the U.S., which is also re-engaging on the international trade front, including via Trans-Atlantic and Trans-Pacific initiatives), the system as a whole still struggles with the trio of deficient aggregate demand, structural impediments and inadequate redistribution mechanisms. The negative employment aspects of certain innovations and demographic trends are also not helping.

Finally, the important focus on macro should not blind us from consequential sectoral stories. From the shale energy revolution to digitalization and 3-D printing, there are some really exciting investible stories – both as standalones and in their role in reindustrialization and disruptive transformations (including some “winner-take-all” aspects). I suspect that many of you are also interested in our big macro calls.

So, put all this together in PIMCO’s medium-term analytical blender and this is what you get for the next three to five years: In Europe, with the lack of a comprehensive resolution, the collapse of the single currency will remain conceivable though not a dominant probability. The more immediate threat is a process of “zombification” (with the balance of risk tilted to the downside), coupled with additional debt restructurings (some of which may not be decisive enough to lift growth-inhibiting debt overhangs).

The U.S. will continue to heal but maintain a cruising-growth speed that is not much greater than 2% on average, with concerns over subpar growth (relative to potential) broadening to encompass worries about the level and composition of potential.

Japan will have an initial growth surge but its sustainability will be challenged by challenging structural reforms and an increasingly less accommodating regional and global context.

China will maintain average growth in the 6%-7.5% range, underpinned by gradual economic rebalancing and continued efforts to manage risks in the financial system.

How about inflation? Here, we were quite evenly balanced with somewhat of a tilt toward the possibility of higher and less stable global inflation over the three-to-five year horizon. It remains a delicate balance, however, between two competing groups: (i) supply shock vulnerability, lower growth potential, currency debasement, etc. versus (ii) output gaps, limited price pass-throughs, deleveraging, fiscal contraction, etc. Investment implications Translating all this into medium-term guardrails for portfolios requires an assessment of initial market pricing (currently assisted by central banks) and initial positioning (yes, many of our clients have benefited from the central bank wave, with over 90% of PIMCO’s assets under management outperforming (net of performance fees as of 31 March 2013) their benchmarks for the 5-year period).* With these two qualifications, here is what we concluded:

Do not lose sight of the extent to which asset prices have been disconnected from fundamentals and, thus, require major eventual validation by fundamentals. Especially with ever-elevated prices, and absent a favorable growth shift, we will continue to bring down risk postures of portfolios, starting with the most exposed parts of the economic and financial capital structure, whether corporate or sovereign. Look more intensely for opportunities away from the central bank wave. We believe that there are quite a few, judging from the work of our talented analysts and bottom-up resources located around the world. And their portfolio impact increases notably with today’s “winner takes all” and “killer app” tendencies. So, look for continued, selective offense to accompany our increasingly defensive general positioning over time. Resist the short-term focus of those financial pundits who have abandoned fundamentals in favor of just obsessing with what is cheaper only in relative terms.

As an illustration in fixed income space, consider the absolute level of yields on highly risky sub-investment-grade bonds and ask yourself whether they bear any relation to the risk being underwritten. Yet some pundits are pushing them only on the basis that they are cheaper than investment grade bonds. Recognize the risk of falling hostage to outdated and backward-looking labels, benchmarks, guidelines and mindsets. As hard as this is, conventional wisdom, concepts and practices need to evolve to better navigate different realities. Do not give up liquidity cheaply. Optionality is valuable in a changing world subject to unpredictable forces. And does anybody really doubt that European banks will soon be forced to dispose of good assets as they finally go through a proper stress test and need to both raise capital and realign their balance sheets?

Be careful of longs in currencies of hyperactive central banks that do not enjoy reserve currency status. And remember, the lineup of central bank activism will evolve quite a bit over the next few years. Protect against haircuts. You should expect future sovereign and corporate rescues to involve a growing set of bail-ins. Whether you call them haircuts or the more politically correct “PSI” (private sector involvement), a larger part of the capital structure is now vulnerable to capital losses. Evolve risk management approaches. Correlations have and will continue to change in this fluid world heavily impacted by central banks. Diversification, while necessary, is no longer sufficient for portfolio risk mitigation. Tail hedging can be an important addition, which also speaks to a broader issue: Narrow product mindsets need to continue to evolve into more holistic solution approaches.

Finally, recognize that consensus return expectations may adjust down from here. The whole point of all this unusual central bank activism is to bring to today future growth and future returns – hopefully to put economies and markets on a better long-term trajectory but also exposing them to the risk of severe air pockets should growth disappoint. You should expect alpha, rather than the asset class betas, to constitute a larger share of expected returns. Concluding remarks Back in 2006, PIMCO rejected the consensus view of a “great moderation” (and “goldilocks”) in favor of the concept of a “stable disequilibrium.” Specifically, we argued that stability on the surface was accompanied by weakening and increasingly unstable underpinnings. Our concept of a stable disequilibrium is back. Whether it is due to a lack of timely understanding, an insufficiently agile political system or imperfect policy tools, the collective response to the unusual multi-speed dynamics of the last few years has added this concept to the dynamic characterization of the New Normal. There are also consequential T-junctions out there somewhere, with some economies, segments and markets ending up following one of two highly contrasting paths. Their exact timing is difficult to specify given the myriad of economic, financial, institutional, political and social factors in play. And then there are hyperactive central banks, the markets’ best friends in recent years.

By all means, respect and benefit from the massive wave they have created and will continue to bolster. But also be mindful. It is already a very crowded wave and just small tweaks to accompanying “conventional wisdoms” can lead to major price adjustments (recall what has happened to gold in the last few weeks). In looking where and how to position portfolios, long-term investors should realize that, in addition to balance sheet strength, the resumption of acceptable and sustainable levels of real economic growth is critical – both in a positive sense, to generate sufficient capital gains and income, and in a negative sense, to avoid the increasing likelihood of haircuts that will become more creative and unpredictable. We will do our best to reflect all this in positioning the savings, pensions, investments and retirement funds you have entrusted to us to manage. We will be emphasizing the importance of economic growth, and work very hard to sidestep haircuts. And we will seek to navigate this environment for you by maintaining a higher degree of operational agility and a solid dose of resilience. Thank you again. Bill, our colleagues and I greatly appreciate your trust in PIMCO.

Mohamed A. El-Erian