Paul McCulley, a managing director at PIMCO in the United States and “good friend of Al Gore”, debunked a few commonly held views at a media briefing this week.
Despite growing criticism about government involvement in markets, McCulley described the government bailouts of the banking system as a necessary way of preventing the world from sliding into a global depression.
“The risk of an economic Armageddon has been truncated with force,” he said.
While he admitted he would “like to eventually get back to capitalism”, for now the US government had provided an “excellent bridge” to a capitalist system.
He also said concerns about inflation on the back of stimulus packages were overstated.
According to McCulley, such fears were based on economic theory that was irrelevant in this crisis and that the system needed the excess liquidity.
The Keynesian economist also provided a reality check for institutional investors.
He reckoned the days of beta delivering double-digit returns were part of the “old beta”. Under a period of systematic de-leveraging around the world, the new beta will only deliver returns that are closer to nominal gross domestic product.
Admitting he was “highly strung” on Australian coffee, McCulley’s views, nevertheless, are a salient reminder for super funds, whose recent performance has suffered after a dream run of double-digit returns.
Indeed, his view echoed the sentiments of author and FEAL presenter Satyajit Das.
According to Das, investors had “been living in a fool’s paradise” for too long. This was simply because over the past 20 years investment returns have been exaggerated due to abundant and cheap debt.
On the back of these subdued returns, McCulley said trustees would have some hard choices to make.
No doubt difficult and perhaps painful decisions will have to be made by two of the largest US pension funds, Calpers and Calstrs, which face large funding gaps after losing a quarter of their value in 2008/09.
For now, McCulley said funds would need a very good manager to manage their beta and if they wanted more from their alpha, they would have to take a punt on their growth.
This growth won’t necessarily come from such sources as fixed income; rather it will be the emerging markets as they move from an export-oriented industry to a greater focus on developing their own economies.
