Bill Gross: Fed on Hold Through 2010

Bill Gross of Pimco spoke on Bloomberg with Tom Keene and Ken Prewitt. He thinks the U.S. is entering a new normal of low nominal GDP growth. However, financial bets have been made on 6-7 percent nominal GDP (think pension liabilities). Unless we get 5-6% nominal GDP growth debt deflation and deleveraging dynamics the D-process will take hold, Gross says.

This is not a bullish scenario for equities as revenue growth is based on nominal GDP, meaning profit growth must come from trimming expenses and a secular increase in already high profit margins. Lower interest rates are the only other way to improve the net present value of future profit streams.

Pimco is dipping a toe into equities, however. Gross remains cautious on high yield, which he sees as fully priced (buyer beware) a.k.a. overvalued. Mortgage backed securities are also overpriced in his view. That leaves you emerging markets, corporates, and treasuries in the bond area.

So the Fed will be on hold because they need to see at least 4-5% steady nominal GDP growth, something unlikely to occur before the end of 2010, Gross says.

Video below.

Comments

[Gary A:]

I see debt deflation. And I also believe that China will have to tax the capital coming into their country because of the carry trade, just as Brazil did.

They do not want a bunch of worthless dollars buying up their precious assets. I think Americans should boycott this carry trade by driving less and using fewer resourses here. hubpages.com/hub/The-R...

Nov 16 12:45 AM

[acttang:]

talking his positions again... ever since he unloaded his position in agency mbs, those things have been on a tear, smashing a pie in his face. he would've been much more respectable if he could make money from the market (like john paulson does), instead of by being the market.

Nov 16 12:46 AM

[Gary A:]

I am happy he got out. Let the crazies pump those worthless pieces of paper.


On Nov 16 12:46 AM acttang wrote:

> talking his positions again... ever since he unloaded his position
> in agency mbs, those things have been on a tear, smashing a pie in
> his face. he would've been much more respectable if he could make
> money from the market (like john paulson does), instead of by being
> the market.

Nov 16 12:47 AM

[bob adamson:]

The challenge for the governments and central banks of the major economies now will be to maintain their stimulus initiatives until their domestic and the global economic recoveries are well grounded in economic activity that is not dependent on the stimulus itself, reform their banking and credit granting sectors and their international trade relationships so that the debt bubble that set the stage for the current crisis can be resolved adequately and do these things in timely ways that allow them to recover their freedom of action in fiscal and monetary matters as soon as practical and reasonable.

While the monetary policies and consequent situation to which Mr. Harrison refers can not be rapidly changed without serious threat of re-igniting deflationary pressures, it is a vital assumption that these recoveries and reforms can be achieved without undue delay because the current stimulus programs are unsustainable except on a short term exceptional basis and the danger is that the economy will become dependent on the continuation of these stimulus policies. It will be a difficult transition and it hopefully will be clearly underway before the end of 2010. Mr. Harrison’s article illustrates the difficulties in beginning this transition.

Nov 16 01:17 AM

[Dotcom:]

I've owned VFIIX (GNMA) for a long time. I'm still getting over 4% yield. I am also seeing the price go up & up & up. When the yield goes below 3%, I will sell, collecting the high NAV price. Same as with Long Term Treasuries at the end of last year. What's wrong with that?

Nov 16 11:53 AM

[Gary A:]

My prediction of Chinese capital restraints for hot money has now become close to reality as it has been reported that the Chinese are considering the restraints.

And if the Chinese revalue their currency up that would play into the hot money play. This is just a scam from Wall Street hot money to get these assets to be worth even more.

Nov 21 11:46 AM

[Moon Kil Woong:]

No one can be sure when the Fed will lift rates but we can be sure we will see QE drained in advance. Thus it's best to watch that rather then speculate on the when. We will know before it comes.

Nov 23 07:35 AM