Our modern age is becoming more virtual than physical, which I find increasingly depressing if only because I’ve failed to keep pace. I don’t even own a cellphone. Still, it doesn’t take a Boomer to observe that the reality outside as opposed to inside a computer or a cellphone should be the preferred experience. Scientists claim we are all just bits of information with billions of 1’s and 0’s, glued together to form a beating heart. Even so, I’m sticking with live chirping as opposed to Angry Birds for now. Virtual reality seems just a tadUNreal to me.
Aside from a computer or cellphone’s obvious utility though, I think many of those in younger generations that use them are hoping to capture time in a figurative bottle, using a Samsung or Apple handheld as opposed to the proverbial wine-shaped container of another era as they take pictures. YouTube and Facebook apps, for example, record and memorialize events, creating a virtual history that can be preserved, with the most treasured experiences being measured in the millions of future hits as opposed to the euphoria or sometimes depressing succession of individual moments in the here and now. Watching a sporting event or concert, I can’t help but be struck by the thousands of cellphones attempting to capture, in near unison, a moment in time that can be texted to hungry audiences. Recipients seem eager for a seemingly unlimited number of experiences in their or someone’s immediate past, as opposed to the present moment. My view is that there is time stored in that cellphone but its vintage may be somewhat sour, as compared to the sweetness of the here and now. The most unfortunate aspect of this new virtual reality stored deep within “inner space” is that more and more people, especially young people, are evolving to believe that these experiences are “natural.” A Pew survey in 2011 found that the average American teenager sends or receives between 100 and 200 text messages a day. At some point they may get so caught up in their frantic “busyness” that they fail to capture their present.
Still, my plea for “living in the moment” is a most difficult one, is it not? The present comes and then it goes, and staying in the moment is sort of like chasing fireflies on a hot summer evening in the Midwest. The light goes on and off, and then it’s on to the next firefly. It’s hard to capture a firefly unless your focus is laser-like, and the cellphone with its camera may help us to do that in a virtual, but not a real way. All of us, though, may need a bottle of sorts to store time’s mercurial moments. As John Denver once sang, “What a friend we have in time, gives us children, makes us wine.” I like that. But it’s the wine drinking and the children makingthat should be the highlights. The cellphones? Well in my world they exist just for your calling – not mine. They may be virtual, but they’re not reality.
PIMCO’s reality in recent months has been captured by the phrase “The New Neutral.” Having introduced the “New Normal” in 2009 with much success but unfortunately no trademark protection, we now venture forward in time, hoping to store this new metaphor in a proverbial bottle, cellphone, or better yet – portfolio – to much fanfare and ultimately alpha generating success. But a firefly it is not. To PIMCO “The New Neutral” has a more permanent status, a secular lifespan, that suggests things are just gonna be this way for at least the next 3–5 years, and likely much more.
What is “The New Neutral” and why is it important to the pricing of all financial assets? Well “The New Neutral” refers to the Federal Reserve’s (and other central banks’) policy rate, the fed funds rate, which serves as a foundation for the cost of credit and the ultimate pricing of bonds, stocks and a host of alternative assets. If the FF rate changes, other asset prices move as well, not necessarily in tandem but sooner or later. The Fed’s policy rate is, by its character, the lowest yielding and highest quality investment that can be found over most investment cycles, but it guides all other assets and ultimately sets their prices.
Back in the 1930s a famous economist by the name of Irving Fisher theorized that while the short term FF rate could change, it only moved with inflation, and therefore ultimately the “real” FF rate was constant. Time and historical experience has proved otherwise, suggesting that GDP growth, productivity and now a number of other factors might change the rate aside from inflationary influences; in other words the “real” rate was subject to ups and downs much like everything else. It was as “virtually” impossible to capture at any point in time as that Midwestern firefly. Take a look at Chart 1, displaying perhaps the most frequently cited research on the real FF rate, a study done by Laubach/Williams cited in my last month’sInvestment Outlook. It shows not only significant cyclical changes in the real rate but also a significant long term “trend” change that has witnessed a decline in the real yield from over 4% in early 1970 to below 2% (and heading lower) today. Their most recent calculation of the current “cyclical” rate is actually -0.25%.