Interview of Bill Miller and Paul McCulley Continued

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Consuelo Mack of Wealthtrack continued her interview of Bill Miller and Paul McCulley in Paris. Part one of the interview is available here. The second part of the interview focused on investment risks.

Miller began discussing the notion of “risk on, risk off” which he said was misleading. He said when investors refer to risk, they really mean uncertainty. Miller compared risk to what insurance companies do which is to determine probabilities of accidents and so forth. Miller added that investors deal with the ebb and flow of uncertainty where investors don’t know what the probability of outcomes will be.

Miller said when uncertainty goes down, then the so-called ‘risk assets’ go up. Miller said a perfect example was the Long Term Refinancing Operation (LTRO) where people didn’t know what was going to happen with the bank’s ability to refinance themselves.

Miller said when the ECB gave a 3 year option to the banks, it allowed them to use almost anything as collateral. This marked the bottom in the equity markets because it reduced the level of uncertainty.

Mack asked McCulley if he was aware of any uncertainties that had been eliminated. McCulley stated he thought the main uncertainties were related to central banks. McCulley said the ECB action was huge because it meant they would not allow armageddon on a 3-year year horizon.

The interview continued with discussions surrounding the Federal Reserve and the one big investment they find appropriate in the current environment and why.

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