PIMCO’s and Governor Stein’s “rational temperance,” in contrast to excessive historical bouts of “irrational exuberance,” simply counsels to lower return expectations, not to abandon ship. PIMCO is a global investment manager — not one with a perpetual frown or even an ever-present half empty glass — but one which hopes to provide alpha and above market returns while still standing tall in the aftermath of future irrational bouts of exuberance. We join with Governor Stein and perhaps Alan Greenspan in encouraging not an exit but a reduced expectation. Credit spreads nor interest rates cannot be artificially compressed forever, nor can stock prices rise perpetually on their coattails. Be rational, be optimistic if so inclined, but temper it with a commonsensical conclusion that we have seen something similar to this before, and that previous outcomes seldom matched the exuberance.
IO Speed read:
1) Chairman Greenspan’s “irrational exuberance” speech in 1996 posed an excellent question, and history provided the answer.
2) Fed Governor Jeremy Stein asks the same question in 2013 with a uni-dimensional but useful model.
3) Stein’s paper, accompanied by correlations from Bianco Research, suggests caution in today’s high yield market.
4) High yield bonds, stock prices and other risk spreads move in relative tandem.
5) PIMCO cautions “rational temperance:” be bullish if you want, but lower return expectations on all asset classes.