Monday, May 01, 2006

The benefits of a large chip stack.

The conclusion that you, the guy at the table with the short-medium stack of chips, is supposed to garner from this PIMCO letter can be summarized as "I raise you are foolish to bet against the chip leader, even with pocket aces." Basically, Pimco invites a bunch of people to an economic forum, the contents of which will doubtlessely reinforce the "correct" long term implications of the myriad causes that effect long-term price dynamics. Pimco then hopes these participants take the wise and sage advice of the world's largest and obviously most generous firm ( away their investment magnanimous) and toe the line. Its the old pro telling the rookies that he, as the largest stack, dictates the terms of the game.

I am always amused at the "secular/cyclical" if, ex ante, we can differentiate and categorize the causalities into mutually exclusive terms. PIMCO will simply give their version of the world, and this version will be over-weighted by participants who look at PIMCO's enviable stack of chips. Soros called this "reflexivity", but poker guys might call this a "semi-bluff".

"Secular vs. Cyclical Forces
Secular forces determine market direction over the long term, but
there are clearly times when cyclical forces dominate, either
reinforcing or contradicting the secular trend. For this reason, PIMCO
supplements our secular views with quarterly Economic Forums that
examine cyclical factors and help to fine-tune our strategy over
shorter time periods. The Secular Forum establishes our outlook for
the global economy and the broad direction of bond markets over the
next several years. The Economic Forums provide forecasts for economic
growth, inflation and interest rates over the next several quarters.

PIMCO's portfolios and strategies are rooted within our secular views,
with the flexibility to fine tune our strategies based on the
shorter-term views developed at our cyclical forums. We would not
reverse course or alter our secular views without the full examination
of long-term structural forces that our Secular Forum provides. For
example, we may trim exposure to a bond market sector that we believe
to be temporarily overvalued, such as mortgage-backed bonds, even
though we take a strongly favorable view of that sector for the long

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