Paul McCulley | July 2003
Promiscuity In The Pursuit Of Virtue
pimco.com
The Bottom Line
I believe the Treasury market is in a “rational” bubble, because the intermediate term global economic outlook is a bi-modal one, rather than a “normal” bell curve. Put more bluntly, Keynesian reflationary policies will work and inflation will go up, or they won’t work and deflation will unfold. A perpetual muddle-along scenario, the easiest one in the world to predict, is also, I think, the least likely.
As long as this is the lay of the economic land, Treasuries (swaps) are both too rich to buy and too cheap to sell. Not a pleasant place for an active portfolio manager: If it’s a bubble, playing it on the long side is a bigger fool game, but if it is not a bubble, playing it on the short side is a foolish game. The “truth” will be revealed only in the fullness of time.
Until it is, a close-to-index duration stance is the right posture for active fixed income managers, particularly after the vicious sell-off of the last several weeks. In a world of a “rational” bubble, the rational portfolio manager must worry more about being wrong than being right.
The name of the game must be to stay in the game, until time is full.
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