We've had massive disinvestment in commodities over the last 20 years. Which means that they're both oversold and under-owned, and probably under- produced-or the capacity produced there has withered away in many respects over the last 20 years. So there's a good contrarian play in commodities.
Simonoff: Any particular commodities?
McCulley: I'm not an expert in commodities. I would tend to want to think in terms of buying something that was indexed to a basket of them, and, in fact, there are several products in the marketplace that do that.
My friend Jeremy Grantham is a huge fan, obviously, of timberland. I think that it's a good contrarian play, in part because I think the dollar is in secular decline.
Simonoff: I can understand you saying the dollar is overvalued. But why would anybody want to hold euros when their economies have sputtered for decades?
McCulley: Because they don't want to hold dollars. So that's a wise-ass response. You've got two things with respect to the dollar that can make it come down. One, you know, global investors become less enamored of it. I sometimes refer to the dollar as the cover charge into the party in celebration of capitalism in America, and that party is over. More importantly, in many respects, is that as a policy matter we would want to have a weaker dollar in the years ahead. Part of the process of restoring a degree of pricing power to corporate America-particularly corporate America exposed to global competition is a somewhat lower dollar.
Simonoff: You say the capitalist party has run amok, and certainly, with all the accounting scandals, that would be hard to argue with. However, some of the underlying trends of the 1990s, particularly productivity, seem to indicate that there was something real to what we experienced. Even in this period of post-bubble disorder, productivity growth seems to be sustained.
McCulley: There was something real to the new economy underneath all of the hype and bubble and infectious greed, to use Mr. Greenspan's new phrase. I don't think it was all a fraud and a mirage. There was something fundamentally real. The most important thing is that we have sufficient acceleration in our structural productivity that we now consider 4% unemployment to be the natural rate of unemployment, and we're sitting here at 6% unemployment. We all agree that it would be a wonderful thing for the unemployment rate to come down. Whereas you go back five to 10 years ago and the economic community and most importantly, the Fed, considered 6% to be as low as you could go on the unemployment rate.
Simonoff: Your colleague, Bill Gross, has pointed out that the reason we got 17% a year for 17 years in stocks was that 20 years ago, you could get 14% in bonds. If there is to be another boom in financial assets, are we going to have to go through a period of high inflation?
If you look at the era right after World War II, which set up the great bull market of the '50s, you had very high inflation in the late '40s. Is it possible to have another boom in financial assets without first having a period of severe underperformance?