我認為我自己是個相當聰明的人，但沒有那麼聰明，如果您知道什麼我是甚麼意思；不是Mensa(譯註：一個高智商者的組織)候選人，但也够聰明到能得幾紙文憑，幫助我得到工作，從那兒真正的教育才開始。我的母親曾經告訴我，我的IQ在俄亥俄州的Butler縣是一年級學生最高的，聽起來印象深刻，直到我發現只有隻手可數的孩子接受了這個考試。您很聰明，但如果您不是以優等成績畢業於杜克大學和加州大學洛杉磯分校的研究所，那你也不是天才。那就是我的樣子。但是，我接受這事實，因為我已得到結論：成功-至少事業上的成功-需要的不只是IQ。成功要的是CQ。
CQ，就我所認為，是所謂「常識商數」。它提到要有能力不僅是吸收資訊且針對需求將資訊再利用，同時在獨特不同的環境或脈絡底下分析應用。CQ Mensa候選人能以明顯平衡和奇蹟的狀態觀看世界-「這合理嗎？」如果不是，「會有什麼改變？何時會發生呢？」然而，衡量CQ的問題是您從來不能相當肯定的認為您或任何其他人有CQ。或許它是難以捉摸甚而短暫的。它也是非常個人的：當從您自己的眼裡關注時，世界總是合乎邏輯-它是其他人似乎不能瞭解的。在商業和投資的世界裡，時間仍然有撕去偽裝者假面具的習性，他們有很高的IQ，卻在經驗測試的CQ得分不到100。Warren Buffett，IQ及CQ真正的Mensa，在許多年前以最尋常通俗的口吻說得最好：「直到浪潮退去前，您不知道誰在裸泳。」
CQ，依Buffett的隱喻，知道當水浪正高，且全世界似乎在海灘正享受無止盡的夏季時，防護性的掩蓋手段-稱它們為泳衣保險政策-應該穿戴起來。那是對全球性投資環境的適當描述，直到2008年貝爾斯登事件發生。世界似乎趕到了長期展開的「大穩定」，於是幾乎所有人都假設沒有任何事會出錯。我幾天前在收音機聽見了名聲顯赫，高IQ的投資組合經理人描述他自己為25年長久牛市的孩子-被訓練成要在跌勢買進。實際上，我們全部是牛市的孩子。 但那些定義為「跌勢買進」，或包含僅過去四分之一世紀的長久時間架構，確實是自我限制，也或許是缺乏常識。現在瀕於結束的時代，不是從雙位數通貨膨脹的灰燼裡誕生的單世代牛市，也不是80年代政府對私人創新之箝制的結尾。它的意義更多，期間甚至更長遠。I think of myself as a pretty smart guy, but not that smart, if you know what I mean; no Mensa candidate but intelligent enough to earn a few paper degrees that helped get me a job where the real education began. My mother used to tell me that I had the highest IQ of all the first graders in Butler County, Ohio, which sounded impressive until I figured out that there were just a handful of kids that had taken the test. You’re smart but not a genius if you graduated “non” cum laude from both Duke and UCLA graduate school. That’s me. Still, I’ll take it because I’ve come to the conclusion that success – at least in a career – requires more than an IQ. It requires a CQ.
A CQ is what I think of as a “Common Sense Quotient.” It refers to an ability to not just absorb information and recycle it upon demand, but to analyze it and apply it within a uniquely different environment or context. A CQ Mensa candidate is able to view the world in a state of apparent equilibrium and wonder – “does this make sense?” And if not, “what might change it, and when?” The problem with measuring CQ, however, is that you never can be quite sure that you or anyone else has it. It’s elusive and perhaps even ephemeral. It’s also uniquely personal: the world always makes sense when viewed from your own eyes – it’s those other people who can’t seem to understand. Still – in the business and investment worlds – time has a habit of unmasking one-dimensional pretenders who have the obvious IQ, but score below 100 with an experience-tested CQ. Warren Buffett, a bona fide Mensa in both categories, said it best many years ago in his usual folksy way: “You don’t know who’s swimming naked until the tide goes out.”
CQs, then, in Buffett’s metaphor, know that protective cover-ups – call them swimming-suit insurance policies – should be worn even when the water’s high and the whole world seems to be enjoying an endless summer at the beach. That is an apt description of the global investment environment up until Bear Stearns 2008. The world seemed so caught up in the long-term unfolding of the “Great Moderation” that almost everyone assumed that nothing could go wrong. I heard a brilliant, high-IQ portfolio manager describe himself on the radio a few days ago as a “child of the 25-year secular bull market – trained to buy on dips.” In fact, we all are bull market children. But those that define it by “dip buying,” or a secular time frame encompassing only the past quarter century, are certainly self-limiting and perhaps lacking in common sense. The era now coming to an end is not a one-generational bull market that was born out of the ashes of double-digit inflation, and the end of governmental strangulation of private initiative in the early 1980s. It was much more, and much longer in duration.
The past era can best be described as a more than half-century build up in credit extension and levered finance. While home mortgages or buying a washing machine on “time” began in the early decades of the 20th century, the use and innovative application of credit really began when – well, when I was born. 1944 is as good a year as any to chronicle the beginning of our levered economy. I was a child of war, but also a child of a new global leadership confirmed at Bretton Woods and founded on faith in the U.S. dollar and the healing power that its printing could bring to the global community. That Richard Nixon amended the bargain in the early 1970s did no immediate damage save for the inflationary decade that followed. Credit continued to be the mighty lubricant of capitalism’s engine, allowing its pistons to accelerate at an increasing pace as financial innovation mixed with our own animal spirits produced more and more profits, more and more jobs, more and more everything. Mortgage-backed GNMAs in the 1970s, financial futures a bit later, swaps, then credit default swaps (CDS) – the litany is too long to list.
What is important, though, is that at some point early in the 21st century, things began to go terribly wrong with this miracle of modern finance. It was spreading substantial benefits via diversification and indeed the productive powers of lending upon which capitalism depends. But it had assumed an arrogance – if a secular phenomenon can be personified – that nothing could go wrong. It was promoting not just smooth sailing – a moderation – but a “great moderation.” Unstoppable. Except, of course, for that homeowner in Modesto, California, who bought a marked-up home for $500,000 with no money down and a 2% teaser interest rate. Even the pinnacle of levered finance could not support that fantasy and so, as yields inevitably rose and the defaults began in 2006, our great moderation was exposed for what it was – a naked swimmer at high tide.
And so – “bravo, brava,” a metaphorical history of the human comedy as experienced by Bill Gross since 1944. How prescient, how personal, how CQish, how self-serving. I suppose. But PIMCO’s still standing, and that in this month of October 2008 is as strong a testament to a collective CQ as any I know. We’ve got some Mensans to be sure, but a bunch of high CQs as well, including my partner on the investment desk, Mohamed El-Erian, who like Buffett, is probably a dual Mensa but would be the last to admit it.
For those of you who are reading these Outlooks for more than just a history lesson and a commercial, however, let me point you to our latest commonsensical thought piece, one that can be explained with a simple diagram that resembles an atom of uranium – one of nature’s more unstable elements.
Uranium-238 has something like 92 electrons circling its nucleus, sort of like the diagram you see in Figure 1. And, importantly, uranium-238 is metaphorically quite similar to the global financial system of the past half century. At its nucleus was the overnight Fed Funds rate which, when priced low enough, led to an ever-increasing circle of productive financial electrons. The overnight policy rate led to cheap commercial paper borrowing and then leapfrogged outward and across the oceans to become LIBOR. In turn, government notes and bonds as well as markets for corporate obligations were created, leading to their use as collateral (repos), which fostered additional credit and additional growth. The electrons morphed into productive financial futures and derivatives of all kinds benefitting all of the asset classes at the outer edge of the #238 atom – stocks, high yield bonds, private equity, even homes and commodities despite their being tangible as opposed to financial assets.
This was how the scientists, the financial wizards with Mensa IQs, visualized the financial system a few years ago: leverageable assets held together by a central bank policy rate at its nucleus with institutional participants playing by the rules of conservative self interest and moderate government regulation. Out of it came exceptionally high returns on assets with minimal risk – the highest returns occurring with the most levered electrons farthest from the nucleus.
Over the past year, however, the process has reversed course and your 401k is probably a 201k now. Levering has turned into deleveraging; uranium-238 has morphed into uranium-239 and we’ve had a nuclear implosion – destructive fusion not controllable fission. What’s an investor to do? The simplest way to explain this is that during the past 60 years or so, an investor wanted to follow the energy outward from the nucleus. A financial system in the process of levering leads to excessive returns for electrons on the perimeter. When the process reverses, however, when fusion takes over, an investor wants to be at the center – in Treasury bills or bank CDs. In fact, over the past 12 months, those government-guaranteed, low-durational assets have been virtually the only ones to show positive returns.
There will come a time, however, perhaps over the next few weeks or months, when deleveraging of the private sector is met by the leveraging up of the government sectors: the TARP, CPFF, and MMIFF will inject over a trillion dollars of liquidity into the system over a short period of time. At that point, our nuclear atom will begin to stabilize and it should be safer to move a little distance back out toward the perimeter where yields and potential returns are very attractive. PIMCO would focus on the following:
- A continued above-average allocation to agency mortgage-backed securities – now yielding close to 6%.
- An overweight position in bank capital – bonds and preferred stock in companies where the Treasury has an equity stake. With Uncle Sam as your partner, default seems remote.
- A focus on the frontend of the yield curve. The Fed will stay low for an extended period of time while the inevitable inflationary pressures of government bailouts lay further out on the yield curve.
Can these and a host of other investment ideas come from a commonsensical understanding of the uranium atom, the difference between fission and fusion, and its metaphorical connection to levering and delevering? We at PIMCO think so. Our CQs are engaged, our bathing suits are on; the tide goes out, but inevitably comes back in.
William H. Gross
Managing Director
