Gross Sees Global Economy Dangerously Close to Deflation – BloombergBusiness 08-07-15

Salient to Investors:

Bill Gross at Janus Capital said:

  • The global economy is dangerously close to deflationary growth. Any whiff of deflation and things tend to reverse and go badly.
  • The CRB Commodity Index is lower than in 2008 when Lehman went bankrupt.  Oil, metals and crops have plunged due to the decelerating Chinese economy and gluts in multiple markets.
  • Commodity markets give a truer picture of the economy because they are subject to real-time supply and demand.
  • The Fed will raise by 25 basis points in September as it is mentally committed to moving before year-end, and despite the BoE voting 8-1 to keep its key rate at a record low until next year. A Fed 50 basis point increase would scare the market.

Read the full article at http://www.bloomberg.com/news/articles/2015-08-07/bill-gross-says-global-economy-dangerously-close-to-deflation

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One Hundred Years of Bond History Means Bears Destined to Lose Bloomberg 12-08-14

Salient to Investors:

  • The longest-dated Treasuries yield less than half the 6.8% average over the past five decades but are in line with the norm for the prior half-century.
  • David Jones said the notion that Treasury yields are too low is shaped by players who began their careers in the wake of runaway inflation in the 1970s and 1980s. Jones said we have come full circle, and may be in more normal territory than we thought we were.
  • Economists and strategists predict 3% GDP growth and long-term T-yields at 3.88% in 2015, compelling the Fed to raise rates in Q2, 2015.
  • Lacy Hunt at Hoisington Investment Mgmt said lackluster demand and inflation will keep yields low for years to come as the US contends with record debt levels. Hunt said that over time, bond yields are driven by inflationary expectations – so with all inflationary expectations out, we are going down to 2% on the long bond over the next several years.
  •  GDP growth has averaged 1.8% a year since 2009 versus almost 4% in the seven expansions dating back to the 1960s.
  • Based on bond yields, inflation expectations over the next 30 years have fallen below 2 percent and reached a three-year low of 1.96 percent at the end of last month.
  • Ray Stone at Stone & McCarthy Research Associates said forecasters have continued to anticipate higher borrowing costs partly because recent history has been marked by periods of elevated inflation – what prevailed before the 1970s is probably more indicative of the norm.
  • Bill Gross at Janus sees at least a halt of asset appreciation engineered upon a false central bank premise of artificial yields.
  • In July, Paul Tudor Jones said the bubble in debt globally will burst.
  • Stewart Taylor at Eaton Vance Mgmt said we are in a transition period between secular bull and bear markets in bonds.
  • JPMorgan Chase estimates European and Japanese central banks will buy $1.1 trillion of debt in 2015 to support demand.
  • Jennifer Vail at US Bank Wealth Mgmt said the structural shift related to globally low yields is driving a lot of money into our market.
  • A price war between OPEC and U.S. shale oil drillers is likely to keep inflationary pressures tied to energy from building.
  • David Robin at Newedge said that as long as inflation stays a non-story, we are not going back to those elevated yield levels.

Read the full article at http://www.bloomberg.com/news/2014-12-08/one-hundred-years-of-bond-history-means-bears-destined-to-lose.html

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Pimco’s Gross Says Weak Credit Creation Jeopardizes U.S. Growth – Bloomberg 09-03-14

Salient to Investors:

Bill Gross at Pimco said:

  • Insufficient credit creation with 2% economic growth jeopardizes US growth because our credit-based financial economy depends on an ever-expanding outstanding level of credit for its survival.
  • If the credit growth is more than 4.5% a year, then private and public sectors must create $2.5 trillion of new debt per year to pay for outstanding interest.
  • Artificially low interest rates and artificially high stock prices offer historically unacceptable risk relative to return unless the policy rate is kept low, now and in the future, and the Fed does not overstep its interest rate line.
  • Longer term, economic growth depends on investment and a return of capitalistic animal spirits.

Fed funds futures indicate a 50+% chance the Fed will raise rates to at least 0.5% in July 2015.

Read the full article at http://www.bloomberg.com/news/2014-09-03/gross-says-growth-undershooting-as-credit-creation-disappoints.html

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Gross Says Central Banks Must Sway Investors for Assets to Rise – Bloomberg 03-04-14

Salient to Investors:

Bill Gross at Pimco said:

  • If central banks can convince investors that their policies can reproduce the old normal economy, then risk assets will have higher future returns and outperform cash, trickling down to respectable growth rates and lower global unemployment.
  • Central banks must shift to qualitative forward guidance from quantitative guidance focused on unemployment rate thresholds that are about to be breached.
  • Central banks must have credibility or else the entire array of asset prices at the extremities is at risk.
  • Carry trades in numerous forms should be profitable in 2014.
  • As QE ends in the US, liquidity in corporate bonds will be challenged and if inflation appears then assets may indeed be mispriced.

Economists expect US GDP growth of 2.9 percent in 2014.

Read the full article at http://www.bloomberg.com/news/2014-03-04/gross-says-central-banks-must-sway-investors-for-assets-to-rise.html

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China Retains 7.5% Growth Target for 2014 – Bloomberg 03-04-14

Salient to Investors:

Yao Wei at Societe Generale said it will be very challenging to achieve everything promised in Li’s work report and that something has to give in speeding up reform, fighting pollution, managing debt risk, keeping the same growth target.

Dong Tao at Credit Suisse said it would take lots of public spending to achieve 7.5 percent growth in 2014 given how weak the investment interest is in the private sector.

Bill Gross at Pimco said in February that China is the mystery meat of emerging-market countries because nobody knows what’s there.

Stephen Green at Standard Chartered said a 7.5 percent growth target indicates that China is much readier to loosen policy if we see further evidence of slowing. 

Read the full article at http://www.bloomberg.com/news/2014-03-05/china-retains-7-5-growth-target-for-2014-as-challenges-mount.html

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Crisis Gauge Rises to Record High as Swaps Avoided – Bloomberg 02-26-14

Salient to Investors:

The spread between the 2-yr China sovereign yield and the similar-maturity interest-rate swap, a gauge of financial stress, last week reached the widest in Bloomberg data going back to 2007.

George Soros and Bill Gross have drawn parallels between the situation in China and that in the US before the 2008 financial crisis. Nomura said Li’s efforts to curb leverage by driving up borrowing costs need to be handled carefully to avoid wrecking confidence in the financial system.

Patrick Perret-Green at ANZ Banking sees increasing parallels between China and the US in the run-up to the global financial crisis – Shibor-repo is similar to Libor-OIS, shadow banking is subprime, credit spreads are widening as they did in 2007, and money growth is softening as tightening bites.

Wee-Khoon Chong at Nomura said there is a big flight to quality: in times of stress, you sell credits, sell longer-dated bonds into shorter ones and you are going to the government bond market. Chong said if the default situation gets out of control, yields are going to fall a lot, and forecasts the central bank will cut reserve-requirement ratios for lenders to 19 percent this year from 20 percent as higher borrowing costs cool economic growth.

Bin Gao at Bank of America Merrill Lynch said a consistent rally in sovereign debt will be more likely if we see more defaults in shadow banking or credit products, which will lead to flight-to-quality flows and likely PBOC easing.

Yii Hui Wong at BNP Paribas said increased money-market turmoil and the outlook for slowing growth are serving as catalysts for a rally in government bonds as banks increase buying – the rise in the short-end will spread to 5-yr notes. Wong said offshore investors take a longer-term view, and do not feel that the government cannot handle the situation because it is still a very controlled economy. Wong said government bonds at these levels are very attractive.

Read the full article at http://www.bloomberg.com/news/2014-02-26/crisis-gauge-rises-to-record-high-as-swaps-avoided.html

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Gross Says Job Gains Mean 50% Odds of December Fed Taper – Bloomberg 12-06-13

Salient to Investors:

Bill Gross at Pimco said:

  • Payroll growth in November signals at least a 50 percent chance the Fed will taper in December as it clearly wants out, but must be careful given the tepid growth of 2 percent.
  • The median analyst predicts the Fed will taper to $70 billion from $85 billion at its March 18-19 meeting.
  • Pimco remains focused on buying debt with shorter maturities because they are less susceptible to higher interest rates – the 2-yr yield has been relatively stable for a long time.
  • The Fed will keep its target rate for overnight funds in a range of zero to 0.25 percent until 2016.

Mohamed El-Erian at Pimco said most on the FOMC are worried about being experimental for so long, so this strong jobs report makes the normalization process easier.

Read the full article at http://www.bloomberg.com/news/2013-12-06/gross-says-job-gains-mean-50-odds-of-fed-tapering-in-december.html

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Treasury Yields Fall From Highest Since September Amid Fed Bets – Bloomberg 12-06-13

Salient to Investors:

Paul Montaquila at Bank of the West said the jobs number was expected but not a blockbuster number, and the steady diet of better numbers are not enough to give the market the clarity they want.

Sean Simko at SEI Investments said the market was pricing in a jobs number like we got, and does not change the picture of the Fed tapering.

34 percent of economists now believe the Fed will begin tapering this month.

Bill Gross at Pimco the pace of payroll growth in November signals at least 50 percent chance of Fed tapering this month as it is clear the Fed wants out. Gross said the Fed still has to be careful given growth at only about 2 percent.

Scott Minerd at Guggenheim Partners said the market is fairly priced and the Fed will be on hold at least until January to see more data – tapering will likely begin in March.

The 14-day relative strength index for the benchmark yield at 66 is approaching the 70 threshold that signals it may have risen too much and be about to change direction.

Read the full article at http://www.bloomberg.com/news/2013-12-06/treasuries-fall-as-gain-in-u-s-jobs-spurs-bets-on-stimulus-cuts.html

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Gross Says Central Bank Cash Influx Raises Global Assets’ Risk – Bloomberg 12-03-13

Salient to Investors:

Bill Gross at Pimco said:

  • The unprecedented cash added to the financial system by central banks is raising the risk of a slide in global asset prices.
  • Global economies and their artificially priced markets are increasingly at risk, but the unwinding may occur gradually.”
  • The Fed, BoJ, ECB and BoE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high-quality assets.
  • Investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth.
  • Pimco is focused on shorter-maturity Treasuries, mortgage and corporate debt that will benefit by the Fed keeping its target rate for overnight loans near zero for several years.
  • Monetary and fiscal policies have not produced the real growth that markets are priced for, so investors at the margin will begin to prefer the comforts of a less risk-oriented migration.
  • Expect constant policy rates until at least 2016 in the US.
  • Front-end load portfolios and don’t fight central banks, but be afraid.

Read the full article at http://www.bloomberg.com/news/2013-12-03/gross-says-central-bank-cash-influx-raises-global-assets-risk.html

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Gross Says Market Mispricing Eventual Fed Target Rate Increase – Bloomberg 10-02-13

Salient to Investors:

Bill Gross at Pimco said:

  • If you trust only one thing, trust that once QE is gone and the policy rate becomes the focus, that fed funds will stay lower than expected for a long, long time. The market and the Fed are wrong is forecasting fed funds will be 1 percent higher by late 2015 and another 1 percent higher by December 2016.
  • The Fed will increasingly focus on forward guidance as a policy tool when it tapers, so investors should buy Treasury debt with shorter maturities, volatility sales explicitly priced in 30-yr agency mortgages, and TIPS, and avoid longer-term Treasuries.
  • The US and global economy may have to get used to financial repression and low policy rates for decades to come.
  • Now that more certainty and liquidity have been restored, it is time for the policy rate and forward guidance to assume control.

The median Fed estimate see the fed funds rate target at 2 percent at the end of 2016, and 4 percent when we reach full employment and stable prices.

Read the full article at  http://www.bloomberg.com/news/2013-10-02/gross-says-market-mispricing-eventual-fed-target-rate-increase.html

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