The multiyear run of performance by emerging market (EM) sovereign external debt has been remarkable but residual valuations look either just fair (investment grade) or expensive (high yield) versus other comparable credits. We still see abundant opportunities in EM local markets, while EM equities are poised to benefit from a relatively low starting point for both earnings and earnings expectations.

While not immune to global economic headwinds, emerging market investments remain well positioned to outperform their developed world counterparts over time. The multiyear run of performance by emerging market (EM) sovereign external debt has been remarkable but residual valuations look either just fair (investment grade) or expensive (high yield) versus other comparable credits. We still see abundant opportunities in EM local markets, while EM equities are poised to benefit from a relatively low starting point for both earnings and earnings expectations.

The unusual move of minting a large platinum coin might shock politicians into cleaning up the fiscal mess. But the rest of the world may see it as inflationary.

Federal Reserve Chairman Ben Bernankes term ends in January 2014, and it is unclear whether he will stay on for another. We expect Bernanke will muster every means he can over the next year to help the U.S. and indeed the world emerge from a gloomy time.Here, then, are 10 items we suggest for Ben Bernankes to-do list in 2013.

We expect the last minute deal in the lame duck session to result in about 1.3% of GDP contraction, slightly less than our earlier prediction of about 1.5%. The compromise eliminated (or at least delayed) the possibility of the most damaging equity market outcomes. The deal failed to set up a framework for structural deficit reform in 2013. Almost immediately, Congress must address the debt ceiling, the sequester and the continuing resolution to keep the government funded.

Investors are increasingly focused on alternatives to traditional investment strategies. Unconstrained bond portfolio construction should be driven by an outcome-oriented goal, with strategies assessed on an individual risk/reward and correlation basis, and each investment in the portfolio evaluated rigorously for the expected risk and return as well as the potential impact of the correlation to other investments in the portfolio.

It was Milton Friedman, not Ben Bernanke, who first made reference to dropping money from helicopters in order to prevent deflation. Bernanke's now famous "helicopter speech" in 2002, however, was no less enthusiastically supportive of the concept. In it, he boldly previewed the almost unimaginable policy solutions that would follow the black swan financial meltdown in 2008.

In our hypothetical illustration, rebalancing tail risk hedges more frequently than once a year offers some benefit under all volatility curves (ignoring transaction costs) but the benefits are greatest when the volatility curve is flat or steep. Some of the benefits of rebalancing can quickly disappear if the transactions costs are large. Two key points for investors to consider: Hedging has to be a systematic, repeated, asset allocation decision to obtain best long-term benefits, and the hedge program has to be active and consider pricing levels so efficient rebalancing can be implemented.

Our base case for China includes incremental policy reform, but we also see an increased chance of a potential positive surprise on reform, resulting from the recent changes in leadership. Japan's new government will likely focus on reflating the structurally impaired economy, but policy effectiveness will remain questionable. Australia is being burdened by the unintended consequences of the policy responses of others, accompanied by the impending rebalancing of the Chinese economy.

Policy developments in particular, the European Central Banks acceptance of its role as a lender of last resort have helped to normalize European financial markets but been insufficient to promote decent growth. Eurozone leaders recently laid out a long-term roadmap to achieve stability, but the plan faces great execution risk, technically and politically, and in cross-border coordination. We continue to take a cautious approach and underweight European credit risk and European financials in general, looking for specific opportunities rather than broad exposure.

President Obama's November 2011 postponement of a decision on whether to permit an oil pipeline from Canada's oil sands to the U.S. Gulf Coast caused a barrage of protests and negative press in Canada. Canada's new focus on building capacity to sell to Asia-Pacific could hinder U.S. ambitions of energy independence from overseas oil, since the U.S. imports roughly 30% of its crude oil from Canada. We see investor opportunities in rail transportation and pipeline systems that possess excess capacity.

The maturation of the global cyclical growth phase suggests we look to a handoff to more secular drivers of growth. But strong secular drivers remain elusive due to the continuation of New Normal headwinds.Policies are at important crossroads in every major economy. 2013 will be the year of policy change, with policymakers in major economies challenged to enact structural changes that spur private sector growth before government-balance-sheet-led growth is exhausted.

As John Lennon forewarned, it is getting harder to be someone, and harder to maintain the economic growth that investors have become accustomed to. The New Normal, like Strawberry Fields will take you down and lower your expectation of future asset returns. It may not last forever but it will be with us for a long, long time.

As Canadian consumers have increased their mortgage debt and bid up housing prices, the potential for a disorderly unwinding of these imbalances rightly concerns the Bank of Canada. PIMCO believes that the banks next policy move will be to raise interest rates, but with the traditional aim of fighting inflation rather than reducing home prices and consumer debt. We expect the Bank of Canada to continue tightening mortgage credit and using moral suasion to damp the housing boom and discourage consumers from taking on more debt.

If the eurozone is to endure, it will require reduced economic differences among countries and larger common fiscal capacity. Emerging market central banks are likely to remain in wait-and-see mode while looking to the U.S. for clarity on the fiscal negotiations and domestic macro prints for signs of moderation in both inflation and activity. While central banks in advanced economies have not traditionally used explicit policies to target exchange rates, the European debt crisis may change all that.

Our base case for a fiscal cliff resolution continues to be a lame-duck mini-deal that would reflect about 1.5% of GDP in fiscal contraction in 2013 (vs. nearly 5% without a deal). But the dynamics of polarization and partisanship that played a role in past dysfunctional negotiations may have gotten worse. On a more optimistic note, it is widely known that second-term presidents are largely interested in their legacies spearheading noteworthy, bipartisan and lasting accomplishments for the history books.

Between now and the election expect markets to continue to reflect the changing election probabilities. Expect Treasury yields to climb if Romneys probability of victory increases due to fear of what he will do when it comes to Fed nominations. However, any substantial rise in Treasury yields based upon a Romney victory is likely to be a buying opportunity, because Fed policy will be accommodative regardless of who controls the White House.

So I pulled out my magic lamp that for some reason works only every October 22nd, and rubbed until the Genie appeared in his red and white checkered cloak with a 10-inch diameter Flavor Flav clock hanging ceremoniously around his neck. Being a rather forward, although not disrespectful Genie, he immediately said, "Mr. G, instead of the yield on the 10-year Treasury, perhaps this year you should wish to know who is going to win the Presidential election?"

PIMCO expects that the debate over the fiscal cliff will end in fiscal consolidation, but not a fiscal catastrophe. Unfortunately, while the Fed's monetary policy actions have been, by and large, successful in achieving its intermediate-term goal of increasing asset valuations, they have not been effective in influencing real economic outcomes. Our forecast for the drag on GDP from the fiscal cliff in the coming year is roughly negative 1.5%. Improvement in the housing market will only fill a small part in that hole.

The demographic, financial and political lines separating developed and emerging countries are increasingly blurred, and we believe bond investors will need to adapt. Not only do investors need to take a more holistic approach to analyzing and investing in sovereign debt, they also need to reconsider their strategic thinking regarding benchmarks and their tactical approach to seeking returns. PIMCO Global Advantage Strategy utilizes a GDP-weighted benchmark and capitalizes on PIMCO's global resources to create a portfolio designed to reflect the evolving international opportunity set.

While the ECB's engagement as a lender of last resort is crucial, Europe's big four governments must provide political commitments supportive of ECB policy to counter the lingering threat of a Greek exit, address convertibility risk, and build a more stable union. However, this will require sustained growth. Faced with capital flights from the periphery and lowered credit ratings, the key challenge remains crowding-in private and foreign official investors to buy peripheral sovereign debt.

Long/short equity is a distinct investment approach that seeks to reduce downside risk while still capturing much of the equity markets upside potential. By removing the long-only constraint, long/short managers have an expanded opportunity set with the potential to generate returns and mitigate risk from both long and short investment ideas. Long/short equity strategies have a lower long-term volatility and risk profile than the market as a whole and have captured a good percentage of price movement in up markets and a smaller percentage in down markets.

Investors who are concerned about inflation should focus on increasing their exposure to asset classes that provide a positive beta to changes in inflation. We believe that asset prices are much more sensitive to inflation surprises than actual inflation levels themselves. Given the current macro environment, investors face the possibility that low growth and high inflation may coexist. Commodities provide a levered response to inflation. Investors can hold a relatively small amount of commodities to hedge a much larger portfolio.

The Federal Reserve's QE3 program combined with more aggressive communication are likely to have implications for Treasury Inflation Protected Securities (TIPS).

High yield bonds returned 12% through September, even as corporate defaults continued to rise, albeit gradually. While the default rate is an important market metric, it has been a lagging indicator of high yield bond total return performance. Investors should closely monitor equity markets for signals on where high yield spreads may go.

The monthly US employment report has evolved steadily: once a lagging indicator of the underlying state of the economy, it is now seen more as a leading indicator of economic, political and social trends. Friday's data tell us, for once, rather good news.

Beginning next year, collective action clauses (CACs) will become mandatory for sovereign bonds issued by European countries under U.K. law. CACs, which allow a supermajority of bondholders to agree to changes in bond payment terms, became popular following Argentina's default in 2001 and even more so after the financial crisis of 2008. On balance, the introduction of CACs in European government bond markets in 2013 is positive for investors.

The FDIC's unlimited insurance coverage on demand deposits is set to expire on December 31. While the expiration by itself might not be a game changer, it adds to the uncertainty that looms over liquidity strategies as global interest rates continue to be squeezed. We believe that actively managed short-term strategies that dynamically adjust to market conditions are viable solutions, with more attractive risk and return characteristics than money markets.

Our analysis suggests as investors in target-date strategies near retirement they become more attuned to market swings. We believe 401(k) plans cannot succeed if participants jump out of markets at the bottom and possibly miss a rebound. Plans need to have tolerable downside risk, so participants can ride the market waves. The way to manage target-date assets, in our view, is to focus first on the risk capacity of participants relative to meeting an income goal. We ask, how much of one's final income will need to be replaced in retirement?

The excessive use of debt fueled by money printing was the pathway to the global debt crisis. Fed Chairman Ben Bernanke, an expert on the Great Depression, understands the ravages of debt deflation and his every action has been to prevent it from occurring. Greater care must be taken in the future to ensure that our fiat based, fractional reserve system does not run amok. This is why regulators are demanding that banks raise capital, reduce their proprietary trading activities, and shift their business models closer to a utility-style model.

How could the U.S. not be the first destination of global capital in search of safe (although historically low) prospective returns? Studies by the CBO, IMF and BIS (when averaged) suggest that we need to cut spending or raise taxes by 11% of GDP and rather quickly over the next five to 10 years. Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow, and the dollar would inevitably decline.

Federal Reserve officials have said several times that among other benefits, its quantitative easing (QE) programs have helped boost U.S. equity prices. Based on our analysis, QE has not been the driving force behind rising equity prices in recent years. How does the Federal Reserve measure the success of its asset purchase programs, or quantitative easing (QE), since the 2008 financial crisis QE1, QE2, Operation Twist (OT) and QE3?

When we look at how the fiscal debate is likely to play out, rather than how it should play out, our base case is the fiscal cliff will likely be resolved in a short-term deal before the end of the year, making what was a cliff more like fiscal black diamond still dangerous, but not likely to land the economy in a body cast.

The Brazilian government wants to keep interest rates low but also guard against inflation; so the authorities have moved down a path of "macro-prudential" measures, with a broad range of implications for equity investors. In reality, as the cost of capital in Brazil falls, the returns and cash flows from regulated businesses are coming under pressure. In this environment, we find that consumer businesses are the most appealing, especially if growth accelerates.

Rather than a hard landing for China, we foresee a structural downshift that could be called a "New Normal with Chinese characteristics." Australia has considerable scope for additional rate cuts and more expansionary fiscal policy to address regional weaknesses. The Japanese economy will be affected by weak economic growth in China, which will add more pressure for the Bank of Japan to respond.

Amid elevated global macroeconomic uncertainty and market turbulence, investors are searching for ways to diversify portfolios with non-traditional asset classes. Volatility risk premium strategies aim to capture a return premium over time as compensation for the risk of losses during sudden increases in market volatility. We believe investors seeking to diversify their equity risk exposures should consider adding volatility risk premium strategies to their portfolios, albeit with appropriate diversification across major option markets, active risk management and prudent scaling.

With growth in China now moderating, and the price of commodities and Australias terms of trade now declining, many investors are questioning how the Australian dollar has managed to remain well-supported. The explanation lies mainly in the changing structure of the funding of the current account deficit. Going forward this will likely have important implications for monetary policy in Australia if the decline in national income growth is not offset by a similar decline in the Australian dollar.

Rarely does one find market commentators offering moderate, balanced investment advice these days. More likely one will find extreme headlines designed to capture maximum attention. We believe it is worthwhile to take time to craft an investment strategy that can withstand a range of market outcomes. In a lower-return world, we look to buy companies that are attractively priced and that can grow faster than the market as a whole, and we actively manage downside risks.

Without structural change aided by well-planned fiscal policy, we are afraid the nominal bridges of monetary policy will fail to reach their desired outcomes. The probability of a deflationary left-tail outcome emanating from the eurozone has declined substantially in the short run, yet outright economic growth in the eurozone will remain elusive in 2013.The much-publicized "fiscal cliff" is set to hit the U.S. economy on January 1, 2013, and could reduce U.S.

Our entire finance-based monetary system led by banks but typified by insurance companies, investment management firms and hedge funds as well is based on an acceptable level of carry and the expectation of earning it. In a New Normal economy where lenders dance to the Blue Danube instead of the Lindy, how should we move our own feet? Carefully, I suppose, and with recognition that historic returns are just that historic.

So long as the fundamental issues about the future of the eurozone remain unsolved, the extra supply of ESM bonds will likely drive up the borrowing costs of its weaker stakeholders. Without a cap on or exit clause from additional capital calls, the ESM could lead northern eurozone countries down a difficult and unsustainable path.

REIT unsecured debt has been one of the best-performing sub-sectors in the entire investment-grade credit area. When insurance companies began to look at REIT unsecured debt, they asked for the same type of covenants associated with property-level mortgages. These requirements have coalesced into a standard REIT covenant package. We believe low default rates and relatively high recovery rates make the sector attractive over the long term particularly for buy-and-hold investors.

The same dark forces that Japan has been battling could continue to infect the developed world. During Japan's banking crisis deflationary expectations became embedded in the economy early on, preventing real short-term rates from remaining negative and thereby clogging monetary transmission. One of the chief explanations for the outbreak of deflation in Japan was the difference in the structure of the labor market.

This summer I have been asked a lot about Europe -- not so much by economists but by others concerned that the lingering crisis there would make their daily economic life even more challenging. In responding to these questions, I have often struggled to summarize in a few sentences the causes of Europe's existential crisis, let alone what is likely to occur next (including elements of a solution) -- that is until I tried to use a hammock.

Looking at measures of the quantity of money and its transmission into the real economy reveals that ECB policy is quite tight. Growth hardly stands a chance under this scenario. Relatively tight monetary policy would perhaps be understandable if the eurozone were threatened by inflation. However, inflation is low and falling in the Eurozone. The ECB may be playing a game of chicken with European policymakers. If true, this is a dangerous strategy.

The Chinese steel industry today shows many signs of serious economic difficulties brought about by the unprecedented size and speed of industry expansion. However, as the country's focus shifts away from public investments and toward tax cuts, it will be difficult for China to absorb this overabundance of domestically produced steel. Ripple effects of this oversupply may include softening iron ore prices, a possible drop in the Australian dollar, and potentially weaker global steel prices.

Although disinflation has seemed the more likely scenario in recent years, PIMCO expects inflation to accelerate from recent levels over the next three to five years, but double-digit rates are unlikely. An understanding of the constituents of the Consumer Price Index can help us design portfolios that seek to better defend against inflation. The core building blocks of such portfolios are commodities, Real Estate Investment Trusts and Treasury Inflation-Protected Securities.

During the first phase of the euro crisis, private capital flowed out of the "peripheral" countries to the core of the eurozone, but this shift had no adverse impact on the euro. Now, investors are taking their capital out of the eurozone altogether. The euro threatens to fall further, possibly leading to serious concerns about a devaluation spiral.

The demand for most high-quality, income-producing assets continues to exceed supply due to a weaker growth outlook and aggressive policy action by global central banks. Yet we are still finding numerous opportunities globally through our bottom-up research that targets areas around the world where fundamentals are supportive and the outlook remains constructive.

Risk factors help to identify the fundamental value drivers of real assets and explain differences in the reported returns of public and private equity investments that hold substantially similar assets. By combining the fundamentals of real asset valuations with the statistical tools required to unlock the component risk factors of asset classes, it is possible to replicate the returns of private real asset investments using liquid publicly traded instruments.