Investment
Bill
Gross
Outlook
North To Alaska
“North to Alaska,
we’re goin’ NORTH – the rush is on.”
I learned several things during a recent
twelve-day cruise to the Inland Passage
of Alaska. For one, I discovered that you
can’t start a dogsled by yelling “mush.”
Sergeant Preston of the Yukon might
have been able to, but that was at least
30 years ago and today’s dogsled isn’t
your father’s Oldsmobile – so to speak.
Twenty-first century huskies only pull
when they hear the word “hike”, so I
found that if you’re going to quarter-
back an Alaskan sled these days, you
literally have to pretend you’re Joe
Montana, but without the “huts.” When
I cornily attempted to interject “Hut-1”,
“Hut-2” into my doggy cadence,
I wound up on the receiving end of a
sit-down strike instead of an Iditarod
trophy. So much for my career as a
dogsled jockey, or even an NFL quarter-
back, I suppose. Any such dreams were
quickly turned back to “mush.”
I also learned a lot of fascinating details
about the Alaskan/Yukon gold rush of
1898-99. Getting to the nuggets of the
Yukon’s streams was no easy task – as it
turns out far more difficult than their
grandfathers had it nearly 50 years
before in California. The 500-mile
July 2001
inland journey beginning in Skagway,
Alaska required the scaling of moun-
tains resembling Mt. Everest, which by
itself was Herculean. Check out the
kicker though: each miner was required
to carry in 1000 pounds of supplies to
insure his survival once he arrived. To
do THAT meant that these 99’ers had to
scale the ice laden peaks not once but
literally 5 or 6 times as they backtracked
up, then down, then up again with
200 pound loads of grain and smoked
meat. Where was Webvan back then,
I ask you!
Less than half of those that began the
trip actually made it to the gold fields
and fewer still, of course, struck it rich.
That is the way of the world, I suppose,
and even more so the way of capitalism.
Optimism drives companies and inves-
tors to unheralded peaks of excess,
backtracking up and down mountains
of risk with the hope of high profits at
the end of the journey. That there are
nuggets on the other side of the moun-
tain is beyond doubt, but who gets them
and at what cost is the fascinating part
of this historical, nay, ongoing saga.
What was and remains certain is that
 Investment Outlook
the optimism of capitalists is a powerful
force for economic progress but one
which is often subject to setbacks and
individual or even collective disap-
pointment. We appear to be at just such
an ice laden juncture in July of 2001. To
find out why, put on your warmest boots
and muskrat-lined jacket and hop on
board this dogsled of mine to see where
it might take us over the next few months.
Mush you Huskies… I mean Hike!
Last month’s Investment Outlook de-
scribed at length the secular dilemma of
“weak links” that threaten to derail or at
least weaken any U.S. economic recov-
ery, and therefore keep interest rates
and stock prices relatively low. Five
percent annual returns for both bond
and stock markets over the next few
years would be a cryptic yet accurate
description of the markets as we see
them for several years to come due to
muted productivity, yet still benign
inflation, and a developing skepticism
of equity investors over the inevitability
of guaranteed double-digit corporate
profit increases. Still there are games
within games and business cycles
within secular movements that necessi-
tate adjustments to the reins of almost
any portfolio managers’ dogsled – no
matter how long the race or how far the
destination. And now as we head
towards summer’s end there is the
growing anticipation among econo-
mists and money managers alike of the
economic recovery to come. 275 basis
points of Fed cuts, $300 refund checks
July 2001
for almost every taxpayer, and a
liquidation of excess business invento-
ries have sparked the hopes of prospec-
tors everywhere that the good old days
are just around the corner. While its
timing might be in doubt, let me join the
chorus and admit that there is no
question of a future economic recovery.
Recoveries always follow downturns.
There is a recovery out there, but its
magnitude, not starting point is the
more important question. And to
describe it, analysts have simplistically
employed the old economist’s game of
alphabet soup. Extreme optimists
believe in a V-shaped recovery, imply-
ing a quick return to the good old days.
More cautious forecasters speak of a U,
which signifies a more gradual ascent.
And bearish curmudgeons babble in
terms of Ls, which is meant to portray a
muted recovery that only goes so far
and no further. Actually, although I find
the L-shaped recovery most probable
for many reasons soon to be advanced,
the L letter itself is a rather inaccurate
graphic portrayal of a muted recovery.
The L actually portrays an economy
that goes down and stays down – for
the count. What I think we’re about to
experience is more like a half H: down,
then back up, but with only half as
much growth as experienced in the
heyday of Greenspan’s New Economy
juggernaut.
The explanation for my half H rests
almost entirely on the assumption of a
wounded consumer and investment
sector, that will be extremely difficult to
restart let alone bring back to pre-
slowdown levels of growth. I and others
have discussed in past months the
substantial levels of overspending and
excess investment that have character-
ized the American economy in recent
years. Negative personal savings rates
and investment in excess of 14% of
GDP have combined to place the
American private sector in hock to not
only its own savers, but the rest of the
world as well, which in turn has cheer-
ily agreed to serve as our banker via an
accelerating current account deficit.
The combination, as shown in the chart
below, portrays the U.S. private sector
moving from a 4% surplus to a near 6%
deficit in less than a decade. It could be
rightly argued that it was this total
swing of 10% that allowed the U.S.
economy to grow at an annual rate nearly
2% faster than historical averages.
A Private Problem
U.S., % of GDP
8 following three events have taken place:
Private-sector
Financial
Balance
4 2) bond markets have declined in yield
0
-4
-8
1960 65 70 75 80 85
Source: The Economist, July 12, 2001
Forget about productivity miracles.
We simply borrowed more and more,
then spent it before lenders had
second thoughts.
Well, why stop now? An objective answer
would have to include the possibility
that we don’t have to stop – that we can
turn this economic slowdown back into
a V-shaped recovery quicker than you
can yell “hike”, by continuing to drive
the private sector financial balance
deficit further and further into red ink.
To do so, though, would require a
rejuvenation of business and consumer
“animal spirits” that has typically been
produced by easier money and lower
interest rates from the Fed. Granted,
Greenspan has moved quickly to
re-induce confidence into the American –
and therefore – global economy, but
aside from some mild upticks in several
consumer confidence surveys, something
seems to be missing this time. In normal
business cycles, six months after aggres-
sive easing by the Federal Reserve the
1) stock markets have risen by 10-15%,
by at least 50 basis points, and 3) the
U.S. dollar has depreciated in value.
In combination, these three factors have
been the reason why a V and not a half
H-shaped recovery has invariably taken
place. Stocks going up have promoted
* the consumer wealth effect as well as
90 95 2000 accelerated business investment. Bond
*Q1 2001 yields going down have allowed for
lower mortgage rates and generated
substantial refi activity, which in turn
has led to more consumer spending.
And the weaker dollar has given manu-
facturing the breathing room to increase
exports and profit margins as well.
To date none of this has occurred as
pointed out in part by the following
chart:
Mush, Not Hike
7
Fed Funds
Rate
6
5 of the Yukon gold rush, but no – “The
10-Year
Treasuries
4
3 into the equation. These 21st Century
J F M A
2001
Source: Commerce Department; DataStream
To complete the statistical triangle,
since January 3rd when the Fed first
started to ease, stocks are down over
10% by most index measurements,
and the dollar is up by 8% or so on
a trade-weighted basis. The Fed’s magic
then has so far failed to convince
private investors, whether they be in
stocks, bonds, or currencies, that their
markets should be following the
Greenspan “Hike!” – thus starting the
dogsled forward in typical V-style
recovery fashion. By perversely moving
in the opposite direction, they more or
less insure that it won’t take place.
Until stocks go up, bond market yields
go down, and the dollar weakens from
current levels, then, we are looking at a
muted recovery and the near certainty
of a half H recovery – up, but only half
as much as in prior recoveries.
The U.S. and many global economies
are most certainly goin’ north as we
approach year-end – just like the 99’ers
rush is (not) on.” Greenspan has yelled,
“Hike” but like yours truly, he may have
interjected a few “Hut-1s” and “Hut-2s”
M J J dogs don’t seem to be responding, and
the warming huts of Iditarod and the
V-shaped recovery are still a long way
off. Look for more Federal Reserve
cuts in the immediate future to get our
economic dogsled up to crusin’ speed.
William H. Gross
Managing Director
840 Newport Center Drive
P.O. Box 6430
Newport Beach, CA
92658-6430
(949) 720-6000
Past performance is no guarantee of future results. All data as of 6/30/01 and is subject to change. The return on both individual
securities and mutual fund investments will fluctuate and the value of an investor’s shares will fluctuate and may be worth more or
less than original cost when redeemed. This article contains the current opinions of the manager and does not represent a recommenda-
tion of any particular security, strategy or investment product. Such opinions are subject to change without notice. This article is
distributed for educational purposes and should not be considered investment advice. The charts are not indicative of the past or future
performance of any PIMCO Fund.

Each sector of the bond market entails some risk. Municipals may realize gains & may incur a tax liability from time to time. Treasuries
& Government Bonds guarantee timely repayment of interest and does not eliminate market risk, shares of the funds are not
guaranteed. Mortgage-backed securities & Corporate Bonds may be sensitive to interest rates, when they rise the value generally
declines and there is no assurance that private guarantors or insurers will meet their obligations. An investment in high yield securities,
lower rated securities generally involves greater risk to principal than an investment in higher-rated bonds. Investing in foreign
securities may entail risk due to foreign economic and political developments and may be enhanced when investing in emerging
markets.

For additional details on PIMCO Funds, contact your financial advisor to receive a prospectus that contains more complete
information, including charges and expenses. Please read the prospectus carefully before you invest or send money. Pacific
Investment Management Company, 840 Newport Center Drive, P.O. Box 6430, Newport Beach, CA 92658-6430, www.pimco.com, 1-
800-927-4648. An investment in a (the) fund is not a deposit of a bank and is not guaranteed or insured by the Federal Deposit
Insurance Corporation or any other government agency. In addition, it is possible to lose money on investments in a (the) fund.

No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission.
This is not a recommendation or offer of any particular security, strategy or investment product, but is distributed for educational
purposes only. © 2000, Pacific Investment Management Company.

PA817.7/01