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Pimco founder Bill Gross told the Financial Times Friday that he believes a U.S. recession recently got underway. “If I had to be bold I'd say we began a recession in December,” Gross said adding he believed the recession would last till April if the government reacted boldly to stimulate growth. If it didn’t, a longer downturn was possible. Gross believes the Fed should cut rates all the way down to 3% to combat what he sees as stagnant U.S. economic growth. He criticized current government inactivity in the face of growing financial risks saying, “What needs to be done is something fairly radical compared to Republican orthodoxy, which means spend money and absorb the deficit as opposed to pretending that you're fiscally conservative.” He also criticized the hedge fund industry calling it a “con” and likening it to “an unregulated bank.” Pimco, one of the world’s largest fixed income asset managers with $750 billion under management, stopped investing in mortgage-backed securities in 2006 and has outperformed the market during the second half of this year as a result.

Friday’s Ahead of the Tape column in the Wall Street Journal contrasts nicely with some of Gross’ assertions. Author Scott Patterson points out that while overall S&P 500 operating profits are expected to fall 7.7% Y/Y in Q4, if you remove financials from the picture, earnings of the remaining companies are expected to rise 11.6% Y/Y. This “suggests a broad spillover hasn't happened yet.” If financials can sort out their current mess and the broader economy avoids a recession, big ‘ifs’, Patterson believes we “could end up with respectable underlying earnings and a big post-write-off rebound in financial profits” in the coming year.

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Source: Bill Gross: U.S. Already in Recession