Bill Gross: U.S. Already in Recession

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.

Sources: Financial Times, Wall Street Journal
Additional Reading: Can the Central Banks Cure What Ails Us? ● Where are the Financial Markets Headed?

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Comments

[vboring]

lower interest rates lead to higher inflation which leads to higher housing interest rate premiums which leads to deeper housing problems which leads to deeper consumer problems.

[Jack Swanson]

All I can say is while Bill Gross is a great bond fund manager, he is very self serving. He will say anything to make things better for the bond market, like he did according to this article. In the deepest darkest days after 9-11, he said the stock market was going to completely crater, and he called for lows much lower than ever happened. Smart guy, but the most self serving guy out there. His comments serve usually as a great contrary indicator

[e-mail]

[Bruce Merrifield]

Wishful thinking won't make it happen....

[droskoph]

Bill's right. The government is more like a Ministry of Disinformation. It is they that praise numbers even though they're distorted by oil, if their interest is served. It's a game to keep the lemming-like public consuming, regardless of their debt level. We're on the cusp of a six-sigma event due to our accelerating need to keep consumers rabidly consuming. Now, the government will issue checks to keeps the engine turning and hope things work out. maybe they will but the odds off success are diminishing.

[Will Rahal]

I have to agree with Bill.

I have illustrated some graphs involving the ratio on Non-Durable Goods to Durable Goods Consumption and how this ratio behaves into Mid -Recessions in the past.
The level of this ratio now is compatible with past recessions.
See this graphically in
wrahal.blogspot.com

[globalview99]

Outperforming the market during the 2nd half of this year is no great feat; although the market's been on a roller coaster since August its just now re-approaching the levels attained during July. Gross' comments and the article is just another example of the media distorting the market and more grist for the fearful and greedy.

[gordon]

financialsense.com's wrapup yesterday showed the BLS used the 3rd lowest GDP deflater( INFLATION IMPUT PRICES) in the last 43 years(since they began the data) to arrive at the 4.9% GDP for the 3rd Q,, did anyone on this site point that out? Or did I miss that? California today reports 900 jobs created in November, after losing 14K in October. It's only a matter of time before consumer spending (which increased .1% over income again) will mean less business spending. Unless, that is,you think REFLATION will be a success in fueling consumer debt-spending by arresting falling home values and refinancing a million+ mortgages to FHA, where they will do fraudulent appraisals and ignore stated incomes. I hope, perhaps using the Freedom of Information Act, in 6 months we can get data on how many of these deadbeats still default anyway, after the Teaser-Freezer-2007-Holiday-Giveaway by politicians.

[jopocop]

Some great stocks are in a recession already, so low that it is hard to see them going much lower. They have come down since July, despite the DOW being only 600 points down since July. I really don't care if a recession is here, money can be made anyway with great stocks, already beaten down and thrown away as people scramble to exit. Just dollar average a little on these and you will be rewarded handsomely later on.