PIMCO's Bill Gross Sees a Bleak Future 86 comments
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This isn’t really news but Bill Gross set forth his expectations for the economy over the medium term. It’s pretty much the same pitch we’ve heard from PIMCO over the last month or so but still worth revisiting.
From Fox Business:
Bill Gross, co-chief investment officer of bond mutual-fund giant Pimco, on Thursday offered investors a sobering market outlook in which he sees lower returns, decreased U.S. growth and the loss of the dollar’s status as the world’s reserve currency.
In a speech delivered to advisers and investment managers at the Morningstar Investment Conference, Gross outlined what Pimco colleague Mohamed El-Erian has termed the “New Normal.”
In a world of more regulation, private-sector deleveraging and less consumption, “it’s hard for [Pimco] to imagine” the Dow Jones Industrial Average ($INDU) climbing back to 14,000 or home prices returning to 2006 levels, Gross said.
“Growth will be stunted,” he said. “It will be a different type of world and we have to get used to that.”
The U.S. economy will grow at between 1% and 2% a year rather than 2% to 3% a year for the next three to five years at least, Gross said. “That will make a significant difference for corporate profit growth,” he said.
Moreover, unemployment will hover around 7% to 8% rather than the recently typical 4% to 5%, he added, and the higher rate would be around “for a long time to come.”
Gross added that inflation would also start to accelerate in about three to five years’ time.
Gross also said that the dollar will lose its reserve status and that the government will focus more on middle class wage earners at the expense of business. He bases the latter statement on the preferences he detects in the Obama administration’s approach to the Chrysler and GM restructurings.
It’s a pretty stark assessment when you stop and think about it. If he’s right about growth as low as one or two percent, then I wonder exactly what currency he sees replacing the dollar. So long as the U.S. grows that slowly, the rest of the world, at least in the medium term, is not going to go racing away. Therefore, what economy is all of a sudden going to look to be such a great place to hold liquid funds? I buy into the argument that the dollar fades but not that it is supplanted.
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But what is the alternative? The yen? Uh, have you seen Japan's economy recently? The euro? Because the EU doesn't have problems with its banking system or anything like that. The pound? Sure, why not give reserve status to a currency where the country may lose its AAA rating. The yuan? Do we really want a reserve status currency where a bunch of thugs control it?
I do agree with Gross that we will not see a typical recovery and we will not see the kind of growth we were used to. We've still got a lot of debt to pay off, in both the private and public sector.
I f you take PIMCO's view and compare it CBO forecasts, it is immediately apparent that the CBO is not buying into the new normal or simply ignoring it; they are forecasting nominal growth of 4.5% a year through 2015.
If PIMCO ir right, which I believe they are, and CBO wrong, it has enormous implications for the budget deficit.........which will only get worse. And this will spill over into tax policy, another piece of the new normal.
With the most optimistic forecasts and creative accounting, the administration is being challenged to balance the budget; Obama and the administration will be forced to raise taxes to balance the budget and will be forced to increase them further to fund healthcare reform.
Obama wants to raise income taxes for high earners, impose new levies on business and tax greenhouse emissions, but those moves would not generate enough cash to cover the cost of health care, much less balance the budget, and they have not been fully embraced by Congress. Lawmakers are considering other ways to pay for health reform, including new taxes on sugary soda, alcohol and employer-provided health insurance.
The latest revenue generating idea is the Value Added Tax, a tax imposed upon the profit generated at every level of manufacturing. Effectively it is a national sales tax cooked into the price of a finished product as opposed to 10% slapped on at the register.
Taken together all of these taxes, assuming they pass through Congress, will drain the live out of what was once a robust and vibrant economy. This will come to characterize our new normal, something the Europeans have been dealing with for some time inside their sluggish and sclerotic economies.
On May 31 08:15 AM CautiousInvestor wrote:
> While somewhat troubling, I happen to share his view as it seems
> most consistent with the facts.
>
> I f you take PIMCO's view and compare it CBO forecasts, it is immediately
> apparent that the CBO is not buying into the new normal or simply
> ignoring it; they are forecasting nominal growth of 4.5% a year through
> 2015.
>
> If PIMCO ir right, which I believe they are, and CBO wrong, it has
> enormous implications for the budget deficit.........which will only
> get worse. And this will spill over into tax policy, another piece
> of the new normal.
>
> With the most optimistic forecasts and creative accounting, the administration
> is being challenged to balance the budget; Obama and the administration
> will be forced to raise taxes to balance the budget and will be forced
> to increase them further to fund healthcare reform.
>
> Obama wants to raise income taxes for high earners, impose new levies
> on business and tax greenhouse emissions, but those moves would not
> generate enough cash to cover the cost of health care, much less
> balance the budget, and they have not been fully embraced by Congress.
> Lawmakers are considering other ways to pay for health reform, including
> new taxes on sugary soda, alcohol and employer-provided health insurance.
>
>
> The latest revenue generating idea is the Value Added Tax, a tax
> imposed upon the profit generated at every level of manufacturing.
> Effectively it is a national sales tax cooked into the price of a
> finished product as opposed to 10% slapped on at the register.<br/>
>
> Taken together all of these taxes, assuming they pass through Congress,
> will drain the live out of what was once a robust and vibrant economy.
> This will come to characterize our new normal, something the Europeans
> have been dealing with for some time inside their sluggish and sclerotic
> economies.
The Washington Post notes:
Global financial chiefs agreed yesterday to reshape the International Monetary Fund, moving to broaden its mission ...
The IMF, which in recent years had become largely an advisory body to nations in crisis, will now be charged with aggressive monitoring of the global economy. Underscoring that role, Treasury Secretary Timothy F. Geithner said yesterday that Washington had consented to a rigorous IMF review of the U.S. financial system for the first time since the fund was created at the end of World War II.
The IMF will also, apparently, sell treasury-like bonds to raise money for loans it makes to ailing countries. This ties into statements some time ago by an economist that investors would eventually buy IMF bonds as a safe-haven investment, thus quickening the shift away from the dollar and American treasuries as reserve currency and safe-haven investments.
As previously noted, the IMF's Special Drawing Rights currency may replace the dollar as world reserve currency.
Indeed, the Telegraph's lead financial writer Ambrose Evans-Pritchard argues that "the world is a step closer to a global currency, backed by a global central bank, running monetary policy
If interest rates go anywhere near levels in the 1970s or 1990s then Uncle Sam is going to be insolvent, unless the debt can be inflated away first.
The only game in town is to let inflation roar, which is exactly what happened last time the US was in this much debt. However, at that time the US was the last man standing and able to capitalize on a World whose infrastructure had been crushed.
On May 31 08:15 AM CautiousInvestor wrote:
> While somewhat troubling, I happen to share his view as it seems
> most consistent with the facts.
>
> I f you take PIMCO's view and compare it CBO forecasts, it is immediately
> apparent that the CBO is not buying into the new normal or simply
> ignoring it; they are forecasting nominal growth of 4.5% a year through
> 2015.
>
> If PIMCO ir right, which I believe they are, and CBO wrong, it has
> enormous implications for the budget deficit.........which will only
> get worse. And this will spill over into tax policy, another piece
> of the new normal.
>
> With the most optimistic forecasts and creative accounting, the administration
> is being challenged to balance the budget; Obama and the administration
> will be forced to raise taxes to balance the budget and will be forced
> to increase them further to fund healthcare reform.
>
> Obama wants to raise income taxes for high earners, impose new levies
> on business and tax greenhouse emissions, but those moves would not
> generate enough cash to cover the cost of health care, much less
> balance the budget, and they have not been fully embraced by Congress.
> Lawmakers are considering other ways to pay for health reform, including
> new taxes on sugary soda, alcohol and employer-provided health insurance.
>
>
> The latest revenue generating idea is the Value Added Tax, a tax
> imposed upon the profit generated at every level of manufacturing.
> Effectively it is a national sales tax cooked into the price of a
> finished product as opposed to 10% slapped on at the register.<br/>
>
> Taken together all of these taxes, assuming they pass through Congress,
> will drain the live out of what was once a robust and vibrant economy.
> This will come to characterize our new normal, something the Europeans
> have been dealing with for some time inside their sluggish and sclerotic
> economies.
As for the view of the future, what happens when a person, family, business or government passes the tipping point where they become unable to service their debt is predictable. The IOUSA has passed that point. And like every empire in the history of the world, we are spending/have spent ourselves to death. It will probably not be a quick demise. Rather, it will be a slow and painful process.
Real wages have not increased since the early 1970's. We made believe we were richer than we really were by the indiscriminate use of credit. An economy with a foundation of credit/debt is a house of cards.
Personally, I find predictions of ANY GDP growth overly optimistic.
Adjusted for inflation I expect to see GDP somewhere between stagnant - no growth - or mild contraction. What the government is shoveling into the system is not "real" money. It's just more of what got us here in the first place.
Wealth preservation ? Gold, productive land like organic farms, businesses that enable people to become more efficient, and NO debt. Sounds downright "unAmerican" doesn't it.
The difference is, expect a lot more of them during its decline. Axelrod makes sense with gold (silver) and farming but also add oil, especially oil sands production. In addition, industrial minerals such as phosphate, lead, zinc and copper should do well.
A lower dollar will spur the return of a new economic base. In time.
Whatever happens to this economy Pimco will be there to grab some commissions. So, Bill Gross is nothing more than a posturer.
As for the dollar, we just concluded some fairly successful auctions. This is the "less worse" environment. Hence, the dollar will do fine as there are no other currencies even close to the dollar's status. That is written in stone and will never change. The market will slog on because hedge funds and mutual funds must justify their miserable existence. Fundamentals have lost all meaning. Whatever the sector du jour is, try to be there and make a profit. The manipulated market is nothing more than a casino. It's gambling pure and simple. The Bill Gross's of the world may sound good, but in the long run Pimco's won't put a dime in your pocket.
I wish I knew, too - I'd start converting now.
Blather.
All debt will be paid. Either by the debtor or by the lender. Either with pennies on the dollar or with dollars that are worth pennies.
Decoupling is occuring. The flight from the dollar and dollar backed assets has been picking up velocity as can be seen in the markets with the plunging value of the dollar and quickly changing yields on Treasuries. In the words of Peter Shiff, "we are not the engine, we are the caboose and we are being cut loose."
Further evidence can be seen when comparing the S&P 500 performance as versus the BRIC countries;
Russia up 72.1%
India up 51.6%
China up 44.6%
Brazil up 39.7%
S&P 500 up 0.22%
If you are invested domestically it may seem you are profiting and receiving returns of even 10 to 20 percent, however you are still losing money! Devaluation, inflation, and asset deflation contracts any gain along with currency conversion if going overseas. American dollars around the world are being treated as 'hot potatoes'. The US could find themselves isolated along with their toxic debt, corrupt financial system and less than honest political elites.