The article by Bill Goss was sent to me by a fellow memo reader. Gross writes what I have been trying to say in a far better manner.( See 1 below.)
And this is called news - Iran to be less co-operative. (See 2 below.)
Sever Plocker calls on Olmert to do that which Olmert is most incapable - tell the truth. (See 3 below.)
Hillary was under gunfire, or so she claims, now we find out about Livni and her exploits for Mossad. No doubt this is all being released to buck up Livni's campaign for Olmert's chair. As I wrote earlier( a woman may be elected but not in the U.S. but in Israel.See 4 below.)
It is becoming second thought time regarding Obama's ability to win. The press and media will seek to portray any white backlash as racially based but it is mostly because he is so far outside mainstream American values notwithstanding his oratory to portray himself otherwise.
Also, as I suggested, the Democrats treated the renegade states of Fla. and Michigan, as we did blacks. Citizens of these two states are not whole persons. And I thought the Gore argument was about counting everyone. What hypocrisy in the name of Democrat Democracy. (See 5 below.)
1) Investment Outlook
By Bill Gross
You can fool some of the people all of the time,
and all of the people some of the time,
but you cannot fool all of the people all of the time.
– Abraham Lincoln
What this country needs is either a good 5¢ cigar or the reincarnation of an Illinois “rail-splitter” willing to tell the American people “what up” – “what really up.” We have for so long now been willing to be entertained rather than informed, that we more or less accept majority opinion, perpetually shaped by ratings obsessed media, at face value. After 12 months of an endless primary campaign barrage, for instance, most of us believe that a candidate’s preacher – Democrat or Republican – should be a significant factor in how we vote. We care more about who’s going to be eliminated from this week’s American Idol than the deteriorating quality of our healthcare system. Alternative energy discussion takes a bleacher’s seat to the latest foibles of Lindsay Lohan or Britney Spears and then we wonder why gas is four bucks a gallon. We care as much as we always have – we just care about the wrong things: entertainment, as opposed to informed choices; trivia vs. hardcore ideological debate.
It’s Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome – better educated, harder working, and willing to sacrifice today for a better tomorrow. Can it be any wonder that an estimated 1% of America’s wealth migrates into foreign hands every year? We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense of self importance on a geopolitical scale, that our allies are dropping like flies. “Yes we can?” Well, if so, then the “we” is the critical element, not the leader that will be chosen in November. Let’s get off the couch and shape up – physically, intellectually, and institutionally – and begin to make some informed choices about our future. Lincoln didn’t say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we’ve been doing a pretty good job of that for a long time now.
I’ll tell you another area where we’ve been foolin’ ourselves and that’s the belief that inflation is under control. I laid out the case three years ago in an Investment Outlook titled, “Haute Con Job.” I wasn’t an inflationary Paul Revere or anything, but I joined others in arguing that our CPI numbers were not reflecting reality at the checkout counter. In the ensuing four years, the debate has been joined by the press and astute authors such as Kevin Phillips whose recent Bad Money is as good a summer read detailing the state of the economy and how we got here as an “informed” American could make.
Let me reacquaint you with the debate about the authenticity of U.S. inflation calculations by presenting two ten-year graphs – one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the U.S. An observer’s immediate take is that there are glaring differences, first in terms of trend and second in the actual mean or average of the 2 calculations. These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S.
This, dear reader, looks a mite suspicious. Sure, inflation was legitimately much higher in selected hot spots such as Brazil and Vietnam in the late 90s and the U.S. productivity “miracle” may have helped reduce ours a touch compared to some of the rest, but the U.S. dollar over the same period has declined by 30% against a currency basket of its major competitors which should have had an opposite effect, everything else being equal. I ask you: does it make sense that we have a 3% – 4% lower rate of inflation than the rest of the world? Can economists really explain this with their contorted Phillips curve, output gap, multifactor productivity theorizing in an increasingly globalized “one price fits all” commodity driven global economy? I suspect not. Somebody’s been foolin’, perhaps foolin’ themselves – I don’t know. This isn’t a conspiracy blog and there are too many statisticians and analysts at the Bureau of Labor Statistics (BLS) and Treasury with rapid turnover to even think of it. I’m just concerned that some of the people are being fooled all of the time and that as an investor, an accurate measure of inflation makes a huge difference.
The U.S. seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners’ equivalent rent, and 3) geometric weighting/product substitution. The changes in all three areas have favored lower U.S. inflation and have taken place over the past 25 years, the first occurring in 1983 with the BLS decision to modify the cost of housing. It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world – a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners’ equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made.
In the 1990s the U.S. CPI was subjected to three additional changes that have not been adopted to the same degree (or at all) by other countries, each of which resulted in downward adjustments to our annual inflation rate. Product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives: more hamburger/less filet mignon when beef prices were rising, for example. In turn, hedonic quality adjustments accelerated in the late 1990s paving the way for huge price declines in the cost of computers and other durables. As your new model MAC or PC was going up in price by a hundred bucks or so, it was actually going down according to CPI calculations because it was twice as powerful. Hmmmmm? Bet your wallet didn’t really feel as good as the BLS did.
In 2004, I claimed that these revised methodologies were understating CPI by perhaps 1% annually and therefore overstating real GDP growth by close to the same amount. Others have actually tracked the CPI that “would have been” based on the good old fashioned way of calculation. The results are not pretty, but are undisclosed here because I cannot verify them. Still, the differences in my 10-year history of global CPI charts are startling, aren’t they? This in spite of a decade of financed-based, securitized, reflationary policies in the U.S. led by the public and private sector and a declining dollar. Hmmmmm?
In addition, Fed policy has for years focused on “core” as opposed to “headline” inflation, a concept actually initiated during the Nixon Administration to offset the sudden impact of OPEC and $12 a barrel oil prices! For a few decades the logic of inflation’s mean reversion drew a fairly tight fit between the two measures, but now in a chart shared frequently with PIMCO’s Investment Committee by Mohamed El-Erian, the divergence is beginning to raise questions as to whether “headline” will ever drop below “core” for a sufficiently long period of time to rebalance the two. Global commodity depletion and a tightening of excess labor as argued in El-Erian’s recent Secular Outlook summary suggest otherwise.
The correct measure of inflation matters in a number of areas, not the least of which are social security payments and wage bargaining adjustments. There is no doubt that an artificially low number favors government and corporations as opposed to ordinary citizens. But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation. And although the Gordon model for the valuation of stocks and real estate would stress “real” as opposed to nominal inflation additive yields, today’s acceptance of an artificially low CPI in the calculation of nominal bond yields in effect means that real yields – including TIPS – are 1% lower than believed. If real yields move higher to compensate, with a constant equity risk premium, then U.S. P/E ratios would move lower. A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.
A skeptic would wonder whether the U.S. asset-based economy can afford an appropriate repricing or the BLS was ever willing to entertain serious argument on the validity of CPI changes that differed from the rest of the world during the heyday of market-based capitalism beginning in the early 1980s. It perhaps was better to be “entertained” with the notion of artificially low inflation than to be seriously “informed.” But just as many in the global economy are refusing to mimic the American-style fixation with superficialities in favor of hard work and legitimate disclosure, investors might suddenly awake to the notion that U.S. inflation should be and in fact is closer to worldwide levels than previously thought. Foreign holders of trillions of dollars of U.S. assets are increasingly becoming price makers not price takers and in this case the price may not be right. Hmmmmm?
What are the investment ramifications? With global headline inflation now at 7% there is a need for new global investment solutions, a role that PIMCO is more than willing (and able) to provide. In this role we would suggest: 1) Treasury bonds are obviously not to be favored because of their negative (unreal) real yields. 2) U.S. TIPS, while affording headline CPI protection, risk the delusion of an artificially low inflation number as well. 3) On the other hand, commodity-based assets as well as foreign equities whose P/Es are better grounded with local CPI and nominal bond yield comparisons should be excellent candidates. 4) These assets should in turn be denominated in currencies that demonstrate authentic real growth and inflation rates, that while high, at least are credible. 5) Developing, BRIC-like economies are obvious choices for investment dollars.
Investment success depends on an ability to anticipate the herd, ride with it for a substantial period of time, and then begin to reorient portfolios for a changing world. Today’s world, including its inflation rate, is changing. Being fooled some of the time is no sin, but being fooled all of the time is intolerable. Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market’s assumption of low relative U.S. inflation in comparison to our global competitors.
William H. Gross
Past performance is not a guarantee or a reliable indicator of future results. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. U.S. government securities are backed by the full faith of the government; portfolios that invest in them are not guaranteed and will fluctuate in value. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Investing in non-U.S. securities involves heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.
This article contains the current opinions of the author but not necessarily those of the PIMCO Group. The author’s opinions are subject to change without notice. This article is distributed for educational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Pacific Investment Management Company LLC. ©2008, PIMCO.
2) 'Iran may limit cooperation with IAEA
Iran warned Sunday it may limit cooperation with the UN nuclear watchdog, expressing disappointment over the agency's recent report that was critical of Teheran.
The International Atomic Energy Agency, in a report to the UN Security Council last week, suggested Iran was stonewalling investigators and possibly withholding information crucial to determining whether it conducted research on nuclear weapons.
Iranian Foreign Ministry spokesman Mohammad Ali Hosseini said Sunday the IAEA "could present a better report," adding Iran may have to set "new limits" on its cooperation with the agency.
Iran's newly elected parliament speaker Ali Larijani made a similar threat on Wednesday. Parliament on Sunday elected Larijani, formerly the country's top nuclear negotiator, to the powerful post of speaker for a year.
The choice of Larijani for the influential job boosts his standing ahead of 2009 elections in which he is expected to challenge President Mahmoud Ahmadinejad for the presidency.
There is growing opposition to Ahmadinejad from other conservatives such as Larijani and clerical leaders, partly over his confrontational approach in the nuclear standoff with the West.
Iran is under growing pressure from the IAEA to explain what could be secret nuclear weapons work and it has become increasingly defensive on the issue.
Iran insists its nuclear program is for peaceful purposes.
Iran is resisting a strong IAEA push for answers to allegations it tried to make nuclear arms. It refuses to compromise on the key demand that it stop uranium enrichment.
For years, Iran has shrugged off offers of economic and political rewards in exchange for an enrichment freeze. It has thumbed its nose both at UN Security Council demands that it do so, even after sanctions were imposed, and at veiled US threats of a military action.
Instead, it exploited international indecision and expanded and improved its enrichment capability.
Diplomats said the tone of the IAEA report was unusually tough and reflected deep frustration at Iran's lack of cooperation.
Briefing IAEA board members three days after the report's release, Olli Heinonen - the IAEA's deputy director general in charge of the agency's Iran file - said Iran's possession of nuclear warhead diagrams was "alarming."
Iran remains defiant.
In a statement from its UN Mission last week, Teheran again rejected allegations of an undeclared weapons program as "baseless," "totally false," and aimed at undermining the country's cooperation with the IAEA.
Asked Friday whether the IAEA's new assertiveness was due to US lobbying of the agency, Iranian Foreign Minister Manouchehr Mottaki told the AP that Washington tries "to use any possible capacity as potentiality for their political purposes."
Fears that Iran might want to make the bomb are as old as the discovery five years ago that it had assembled the nuts and bolts of a uranium enrichment program.
Enrichment can turn uranium into the fissile material used in nuclear warheads. But it can also be used to generate power and is allowed under the Nuclear Nonproliferation Treaty.
Iran insists it has a right to enrich uranium.
Starting last year, the IAEA began focusing on probing for evidence of activities that point more directly to a possible clandestine weapons program.
Based on its own information and intelligence from the US and other board members, it has asked - in vain - for substantive explanations for what seem to be draft plans to refit missiles with nuclear warheads; explosives tests that could be used for a nuclear detonation; military and civilian nuclear links and a drawing showing how to mold uranium metal into the shape of warheads.
3) Olmert, tell us the truth
By Sever Plocker
We’ve had enough of the arrogance and lawyers. I’m taking the liberty to offer advice to the prime minister.
Mr. Ehud Olmert, enough with the arrogance. Show some modesty. Enough with the haughtiness. Bow your head. Stop slamming everyone around you. Start showing regret. The act of regret is a difficult one, but the only one that may still save some of your dignity.
Throw away your armor of exaggerated self-confidence. Enough with the attitude of superiority. Show some humility. Be humble.
Stop feeling pity for yourself immediately. Nobody put a gun to your head so that you accept cash-filled envelopes. That was your free choice. You bear full responsibility for this choice. You. Not the circumstances, not the investigation, and not the temptation.
You should know better than anyone that you are not being persecuted or hunted and that you are not subjected to a lynching. The Israel Police has not conspired against you. You were completely free to say “no, thank you” when you received the first envelope containing the money. Yet you said “yes, thank you.” Your hands were the ones that counted the money, not our hands.
Therefore, don’t downplay the immorality of your actions. Deal with it openly, publicly. The Jews are a merciful people. Those who confess are forgiven. Those who do not confess are cursed.
Don’t say: Why are you picking on me, everyone is corrupt, everyone is a thief, and everyone has an American deal-maker who gives them dollars. This is despicable line of defense: It taints many good people just so we won’t see the darkness of your own face. But it will be in vain: We will see it nonetheless.
Instead of hiding behind the backs of real or pretend sinners, declare: Sinning after many have done so does not mean I haven’t sinned.
Be honest this time
For once, show spine. Tell us the truth, Mr. Olmert. Admit: I made a mistake, I was wrong, I misbehaved. I shouldn’t have done so. I lost my restraint. Ask for forgiveness and mercy. Say you’re sorry. Apologize. Simply apologize. Is it that difficult to apologize?
You know, Mr. Olmert, in business ethics courses they teach students how to identify immoral actions. It’s called the “Shabbat dinner test.” If you can fully share with your relatives, your children, and your grandchildren around the table the things you have done, with no shame, then you can be certain that you did not deviate from the rules of natural ethics. But if you cannot tell them your secrets without lying, blurring, distorting, hiding, and stuttering – you committed a moral offence. At the very least.
Change your agenda, Mr. Olmert. Cancel your planned trips. Turn directly to us, the citizens who raise children in this country. Explain your actions to us. You owe us an explanation. You have to talk to your citizens before you speak to Bush or to the court. Without wisecracks or clever answers. Without lawyers and more lawyers.
And above all: Free yourself of the bear hug of your friends and advisors. Enough with the nauseating political tricks. Give up the premiership now. Dedicate yourself to clearing your name. You would be able to reassume a leadership position only if you are clean. Show some class by leaving the Prime Minister’s Office. Set a new norm. This could be your greatest deed.
Be honest this time, Mr. Olmert. Promise us to act modestly. Promise us to bid the past farewell. Promise and deliver. If only we will be exposed to a different Ehud Olmert. I hope there is one like that.
4) Agent Livni makes British headlines
Leading candidate for Kadima chairmanship, potential successor of Prime Minister Ehud Olmert strikes fancy with British newspaper detailing her involvement in pursuing Arab terrorists as part of her past career as Mossad agent
The world is showing an interest in former secret agent Tzipi Livni. The London-based Sunday Times has reported that the foreign minister was a Mossad agent in Paris during the 1980s, when the Israeli intelligence and special operations institute was attempting to assassinate some Palestinian terrorists in Europe.
According to the report, Livni served in the Mossad during the assassination of senior PLO official Mamoun Meraish in Athens in August 1983. The ‘Times’ claims Livni was not directly involved in the assassination, during which Meraish was shot dead by a squad of two motorcycle riders, yet her Mossad activities have remained a mystery.
A short while after that, Livni left the Mossad to complete her law degree. The British newspaper known to be fond of Israeli security affairs, has published a profile article on the leading candidate to replace Prime Minister Ehud Olmert. The paper also uses quotes from surveys published in Israel over the past weekend, showing Livni has a good chance of being elected for chairmanship of the Kadima Party during its primaries.
Livni’s past as a Mossad agent is a well-known fact, but the ‘Times’ adds a few other details that have never been published. According to the publication, while Livni was based in Paris, she participated in chasing Arab terrorists throughout Europe.
“Tzipi was not an office girl,” said an acquaintance. “She was a clever woman with an IQ of 150. She blended in well in European capitals, working with male agents, most of them ex-commandos, taking out Arab terrorists.”
The profile article notes that the legacy of the Livni family is intertwined with the struggle to establish the State. Both her parents were arrested during the 1940s, as part of the Jewish underground movements’ fight against the ruling British Mandate.
5) Fears grow that Obama can't win
By Paul Harris
Analysts believe white working class Democrats will defect to McCain if Clinton is not the nominee
With senator Barack Obama poised this week to clinch his party's nomination for President, there are growing fears in some quarters that the Democratic party may not be choosing its strongest candidate to beat Republican John McCain.
Senator Hillary Clinton has been making that argument for weeks. Now some recent polls and analysis, looking particularly at vital battleground states and support among white voters, have bolstered her case - even as Obama looks certain to become the nominee.
Obama supporters reject this argument and point to his record of boosting Democratic voter turnout, especially among the young. But sceptics in the party, already nervous about nominating Obama after the furore over outspoken pastor Jeremiah Wright, are growing increasingly concerned. 'There is an element of buyer's remorse in some areas. The question is whether it gets really strong now or in September - or even after the election is over, if he loses,' said Steve Mitchell, head of political consultancy Mitchell Research.
Another boost to Clinton's case came late last week after a pro-Obama preacher gave a race-tinged rant against her at Obama's church in Chicago. In a recent sermon Michael Pfleger - a long-term Obama backer who is white - mocked Clinton as an entitled white person angry at a black man having beaten her. His angry, red-faced speech, in which he mimicked Clinton weeping, was played repeatedly across American cable channels and the internet.
The news sent shock waves through Democratic circles; many had hoped Obama had put 'pastor problems' behind him. 'It is more of the same problem as Wright. It reinforces the image among some voters that Obama does not share their values,' said Mitchell.
The uproar also lent a disturbingly antagonistic tone to scenes in Washington DC where Clinton and Obama supporters gathered yesterday outside a party rules meeting called to resolve the problem of the disputed Michigan and Florida primaries, which Clinton claims as victories. Clinton supporters chanted 'Count our votes!' and waved placards and banners. Clinton wants those states' delegations seated at the Denver convention, even though they broke party rules by holding early contests.
Obama is now to some extent limping to the finishing line. Clinton's refusal to bow out even though her odds of victory have become almost impossible has seen her win several of the most recent contests. In fact, since 4 March, Clinton has won around half a million more votes than Obama. That run of victories should easily continue today when Puerto Rico goes to the polls, and could even extend to the final primaries - South Dakota and Montana - which vote on Tuesday. Obama had been expected to win there, but Clinton has been campaigning furiously and it could be close.
Clinton has been making the case for several months, as her support has grown stronger among white working class voters, that those voters will not support Obama in a general election. By contrast, experts believe Obama's core - educated Democrats and blacks - will remain loyal to the party no matter who the nominee is. There is strong data to back that up, especially from recent votes in West Virginia and Kentucky where large proportions of Clinton voters said they would not back Obama in November.
There is also a growing fear that many of the women backing Clinton are turning against Obama. Clinton and her supporters have controversially accused their rival, and the media, of being misogynistic in the last few weeks of the race. A recent Pew Poll showed Obama's support among white women collapsing from 56 per cent to 43 per cent.
But the electoral fact remains the same. The dramatic Obama vs Clinton contest is now down to a few hundred uncommitted party 'superdelegates', who are under huge pressure to make their decisions in the next few days. Senior party figures, including House Speaker Nancy Pelosi, have been working privately to convince them to make that decision as soon as possible, ideally this week. With Obama's delegate lead unassailable, the vast majority are almost certain to come over to his side.
Republican analysts, meanwhile, are surprised about how healthy their party's prospects look in a year when almost all indicators suggested they should lose. McCain remains competitive against Obama. He even leads in some key states. Indeed, some research predicts he could romp home against Obama.
It is that prospect, Clinton supporters say, that leads them to keep fighting. They point to Obama's performance in North Carolina as a bellwether: it was his strong win there earlier this month that dealt an almost fatal blow to Clinton's chances. Yet, two weeks after that win, polls showed Clinton easily outperformed Obama there when measured against McCain. 'Clinton has a very strong argument that she is a stronger candidate against McCain. It is just that it has fallen on deaf ears,' said Mitchell.