Happy Talk on a Tough Day

Bill Miller, the record-setting manager of the (LMVTX)Legg Mason Value Trust, and Paul McCulley, resident Federal Reserve watcher and bond fund manager at Pimco, don't generally see eye to eye. Equities typically do best when times are good while bonds are the better bet in times of economic weakness, so it's no surprise that Miller and McCulley often stake out different points of view.

Lately, though, they seem to be finding common -- and optimistic -- ground, which might come as some relief to readers on an otherwise disappointing day for financial assets.

While historically low rates in the bond market have prompted some predictions of a coming slowdown or even a recession, McCulley and Miller both see analysts exaggerating risks and wisdom in the markets.

For Miller, whose fund has beaten the S&P 500 a record 14 straight years, low interest rates and inflation, along with record returns on equity, profits and cash flows have created a splendid environment for stocks. Citing recent positive forecasts from General Electric (GE), IBM (IBM) and Citigroup (C), Miller dismissed concerns that have been raised about the growing current account deficit and resulting weakness in the dollar.

"This is just one of the things people are worrying about while the broad economic picture could hardly be better," he wrote in his recently posted fourth-quarter wrap-up.

McCulley is more circumspect but he too dismisses the pessimistic fear that long-term rates are too low or that the Fed is about to kick its rate-hiking campaign into high gear. He particularly took aim at those who think Asian central banks buying Treasuries have created artificially low rates.

"It is not enough for active investment managers to simply say that the arrangement creates a universe of stupid buyers of duration and yield curve risk, who will ultimately come to their senses," McCulley wrote in his monthly commentary posted this week. "In the fullness of time, that might well be the case. But it is also true that in the fullness of time, we are all dead."