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Strawberry Fields Forever?
by Bill Gross of PIMCO,
As John Lennon forewarned, it is getting harder to be someone, and harder to maintain the economic growth that investors have become accustomed to. The New Normal, like Strawberry Fields will take you down and lower your expectation of future asset returns. It may not last forever but it will be with us for a long, long time.
The Bank of Canada Has Barked, But Will It Bite?
As Canadian consumers have increased their mortgage debt and bid up housing prices, the potential for a disorderly unwinding of these imbalances rightly concerns the Bank of Canada. PIMCO believes that the banks next policy move will be to raise interest rates, but with the traditional aim of fighting inflation rather than reducing home prices and consumer debt. We expect the Bank of Canada to continue tightening mortgage credit and using moral suasion to damp the housing boom and discourage consumers from taking on more debt.
Deja Vu All Over Again
If the eurozone is to endure, it will require reduced economic differences among countries and larger common fiscal capacity. Emerging market central banks are likely to remain in wait-and-see mode while looking to the U.S. for clarity on the fiscal negotiations and domestic macro prints for signs of moderation in both inflation and activity. While central banks in advanced economies have not traditionally used explicit policies to target exchange rates, the European debt crisis may change all that.
After the Election, Fiscal Cliff Outcome May Surprise
Our base case for a fiscal cliff resolution continues to be a lame-duck mini-deal that would reflect about 1.5% of GDP in fiscal contraction in 2013 (vs. nearly 5% without a deal). But the dynamics of polarization and partisanship that played a role in past dysfunctional negotiations may have gotten worse. On a more optimistic note, it is widely known that second-term presidents are largely interested in their legacies spearheading noteworthy, bipartisan and lasting accomplishments for the history books.
What Would Happen at the Fed Under a Romney Presidency?
by Josh Thimons of PIMCO,
Between now and the election expect markets to continue to reflect the changing election probabilities. Expect Treasury yields to climb if Romneys probability of victory increases due to fear of what he will do when it comes to Fed nominations. However, any substantial rise in Treasury yields based upon a Romney victory is likely to be a buying opportunity, because Fed policy will be accommodative regardless of who controls the White House.
Time To Vote!
by Bill Gross of PIMCO,
So I pulled out my magic lamp that for some reason works only every October 22nd, and rubbed until the Genie appeared in his red and white checkered cloak with a 10-inch diameter Flavor Flav clock hanging ceremoniously around his neck. Being a rather forward, although not disrespectful Genie, he immediately said, "Mr. G, instead of the yield on the 10-year Treasury, perhaps this year you should wish to know who is going to win the Presidential election?"
Muddling Down the Middle
by Josh Thimons of PIMCO,
PIMCO expects that the debate over the fiscal cliff will end in fiscal consolidation, but not a fiscal catastrophe. Unfortunately, while the Fed's monetary policy actions have been, by and large, successful in achieving its intermediate-term goal of increasing asset valuations, they have not been effective in influencing real economic outcomes. Our forecast for the drag on GDP from the fiscal cliff in the coming year is roughly negative 1.5%. Improvement in the housing market will only fill a small part in that hole.
Blurring Lines: Positioning for Developed and Emerging Market Realignments
The demographic, financial and political lines separating developed and emerging countries are increasingly blurred, and we believe bond investors will need to adapt. Not only do investors need to take a more holistic approach to analyzing and investing in sovereign debt, they also need to reconsider their strategic thinking regarding benchmarks and their tactical approach to seeking returns. PIMCO Global Advantage Strategy utilizes a GDP-weighted benchmark and capitalizes on PIMCO's global resources to create a portfolio designed to reflect the evolving international opportunity set.
Lender of Last Resort Move Crucial to Regional Stability
by Andrew Balls of PIMCO,
While the ECB's engagement as a lender of last resort is crucial, Europe's big four governments must provide political commitments supportive of ECB policy to counter the lingering threat of a Greek exit, address convertibility risk, and build a more stable union. However, this will require sustained growth. Faced with capital flights from the periphery and lowered credit ratings, the key challenge remains crowding-in private and foreign official investors to buy peripheral sovereign debt.
Long/Short Investing: Bon Apptit
by Geoffrey Johnson of PIMCO,
Long/short equity is a distinct investment approach that seeks to reduce downside risk while still capturing much of the equity markets upside potential. By removing the long-only constraint, long/short managers have an expanded opportunity set with the potential to generate returns and mitigate risk from both long and short investment ideas. Long/short equity strategies have a lower long-term volatility and risk profile than the market as a whole and have captured a good percentage of price movement in up markets and a smaller percentage in down markets.
Inflation Regime Shifts: Implications for Asset Allocation
Investors who are concerned about inflation should focus on increasing their exposure to asset classes that provide a positive beta to changes in inflation. We believe that asset prices are much more sensitive to inflation surprises than actual inflation levels themselves. Given the current macro environment, investors face the possibility that low growth and high inflation may coexist. Commodities provide a levered response to inflation. Investors can hold a relatively small amount of commodities to hedge a much larger portfolio.
High Yield and Equities Mind the (Equity) Gap
by Hozef Arif of PIMCO,
High yield bonds returned 12% through September, even as corporate defaults continued to rise, albeit gradually. While the default rate is an important market metric, it has been a lagging indicator of high yield bond total return performance. Investors should closely monitor equity markets for signals on where high yield spreads may go.
Keep up the pressure the US jobs crisis is not yet over
by Mohamed El-Erian of PIMCO,
The monthly US employment report has evolved steadily: once a lagging indicator of the underlying state of the economy, it is now seen more as a leading indicator of economic, political and social trends. Friday's data tell us, for once, rather good news.
Collective Action Clauses: No Panacea for Sovereign Debt Restructurings
Beginning next year, collective action clauses (CACs) will become mandatory for sovereign bonds issued by European countries under U.K. law. CACs, which allow a supermajority of bondholders to agree to changes in bond payment terms, became popular following Argentina's default in 2001 and even more so after the financial crisis of 2008. On balance, the introduction of CACs in European government bond markets in 2013 is positive for investors.
Overtime, Then (not so) Sudden Death
by Jerome Schneider of PIMCO,
The FDIC's unlimited insurance coverage on demand deposits is set to expire on December 31. While the expiration by itself might not be a game changer, it adds to the uncertainty that looms over liquidity strategies as global interest rates continue to be squeezed. We believe that actively managed short-term strategies that dynamically adjust to market conditions are viable solutions, with more attractive risk and return characteristics than money markets.
Thrown in Over Their Heads: Understanding 401(k) Participant Risk Tolerance vs. Risk Capacity
by Stacy Schaus, Ying Gao of PIMCO,
Our analysis suggests as investors in target-date strategies near retirement they become more attuned to market swings. We believe 401(k) plans cannot succeed if participants jump out of markets at the bottom and possibly miss a rebound. Plans need to have tolerable downside risk, so participants can ride the market waves. The way to manage target-date assets, in our view, is to focus first on the risk capacity of participants relative to meeting an income goal. We ask, how much of one's final income will need to be replaced in retirement?
Pottersville
by Tony Crescenzi of PIMCO,
The excessive use of debt fueled by money printing was the pathway to the global debt crisis. Fed Chairman Ben Bernanke, an expert on the Great Depression, understands the ravages of debt deflation and his every action has been to prevent it from occurring. Greater care must be taken in the future to ensure that our fiat based, fractional reserve system does not run amok. This is why regulators are demanding that banks raise capital, reduce their proprietary trading activities, and shift their business models closer to a utility-style model.
Damages
by Bill Gross of PIMCO,
How could the U.S. not be the first destination of global capital in search of safe (although historically low) prospective returns? Studies by the CBO, IMF and BIS (when averaged) suggest that we need to cut spending or raise taxes by 11% of GDP and rather quickly over the next five to 10 years. Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow, and the dollar would inevitably decline.
QE and the Equity Market: Is the Fed Driving or Along For the Ride?
by Patrick Lawler of PIMCO,
Federal Reserve officials have said several times that among other benefits, its quantitative easing (QE) programs have helped boost U.S. equity prices. Based on our analysis, QE has not been the driving force behind rising equity prices in recent years. How does the Federal Reserve measure the success of its asset purchase programs, or quantitative easing (QE), since the 2008 financial crisis QE1, QE2, Operation Twist (OT) and QE3?
Falling Off the Fiscal Cliff?
When we look at how the fiscal debate is likely to play out, rather than how it should play out, our base case is the fiscal cliff will likely be resolved in a short-term deal before the end of the year, making what was a cliff more like fiscal black diamond still dangerous, but not likely to land the economy in a body cast.
No Free Lunch? The Real Impact of Lower Rates in Brazil
The Brazilian government wants to keep interest rates low but also guard against inflation; so the authorities have moved down a path of "macro-prudential" measures, with a broad range of implications for equity investors. In reality, as the cost of capital in Brazil falls, the returns and cash flows from regulated businesses are coming under pressure. In this environment, we find that consumer businesses are the most appealing, especially if growth accelerates.
PIMCO'S Cyclical Outlook for Asia: Structural Slowdown Shaping Near-Term Growth Dynamics
Rather than a hard landing for China, we foresee a structural downshift that could be called a "New Normal with Chinese characteristics." Australia has considerable scope for additional rate cuts and more expansionary fiscal policy to address regional weaknesses. The Japanese economy will be affected by weak economic growth in China, which will add more pressure for the Bank of Japan to respond.
The Volatility Risk Premium
Amid elevated global macroeconomic uncertainty and market turbulence, investors are searching for ways to diversify portfolios with non-traditional asset classes. Volatility risk premium strategies aim to capture a return premium over time as compensation for the risk of losses during sudden increases in market volatility. We believe investors seeking to diversify their equity risk exposures should consider adding volatility risk premium strategies to their portfolios, albeit with appropriate diversification across major option markets, active risk management and prudent scaling.
Australias Second-largest Export It Isnt Coal
With growth in China now moderating, and the price of commodities and Australias terms of trade now declining, many investors are questioning how the Australian dollar has managed to remain well-supported. The explanation lies mainly in the changing structure of the funding of the current account deficit. Going forward this will likely have important implications for monetary policy in Australia if the decline in national income growth is not offset by a similar decline in the Australian dollar.
The Cure for Baldness
by Neel Kashkari of PIMCO,
Rarely does one find market commentators offering moderate, balanced investment advice these days. More likely one will find extreme headlines designed to capture maximum attention.
We believe it is worthwhile to take time to craft an investment strategy that can withstand a range of market outcomes.
In a lower-return world, we look to buy companies that are attractively priced and that can grow faster than the market as a whole, and we actively manage downside risks.
PIMCO Cyclical Outlook: Building Rickety Bridges to Uncertain Outcomes
by Saumil Parikh of PIMCO,
Without structural change aided by well-planned fiscal policy, we are afraid the nominal bridges of monetary policy will fail to reach their desired outcomes. The probability of a deflationary left-tail outcome emanating from the eurozone has declined substantially in the short run, yet outright economic growth in the eurozone will remain elusive in 2013.The much-publicized "fiscal cliff" is set to hit the U.S. economy on January 1, 2013, and could reduce U.S.
The Lending Lindy
by Bill Gross of PIMCO,
Our entire finance-based monetary system led by banks but typified by insurance companies, investment management firms and hedge funds as well is based on an acceptable level of carry and the expectation of earning it. In a New Normal economy where lenders dance to the Blue Danube instead of the Lindy, how should we move our own feet? Carefully, I suppose, and with recognition that historic returns are just that historic.
The ESM: Saviour, Super SIV or End of the Road?
by Andrew Bosomworth of PIMCO,
So long as the fundamental issues about the future of the eurozone remain unsolved, the extra supply of ESM bonds will likely drive up the borrowing costs of its weaker stakeholders. Without a cap on or exit clause from additional capital calls, the ESM could lead northern eurozone countries down a difficult and unsustainable path.
Real Estate Resiliency: the REIT Model Proves its Mettle
by Josh Olazabal, Amit Arora of PIMCO,
REIT unsecured debt has been one of the best-performing sub-sectors in the entire investment-grade credit area. When insurance companies began to look at REIT unsecured debt, they asked for the same type of covenants associated with property-level mortgages. These requirements have coalesced into a standard REIT covenant package. We believe low default rates and relatively high recovery rates make the sector attractive over the long term particularly for buy-and-hold investors.
'Japanification'
by Scott Mather, Dirk Jeschke of PIMCO,
The same dark forces that Japan has been battling could continue to infect the developed world. During Japan's banking crisis deflationary expectations became embedded in the economy early on, preventing real short-term rates from remaining negative and thereby clogging monetary transmission. One of the chief explanations for the outbreak of deflation in Japan was the difference in the structure of the labor market.
Europe's Unstable Hammock
by Mohamed El-Erian of PIMCO,
This summer I have been asked a lot about Europe -- not so much by economists but by others concerned that the lingering crisis there would make their daily economic life even more challenging. In responding to these questions, I have often struggled to summarize in a few sentences the causes of Europe's existential crisis, let alone what is likely to occur next (including elements of a solution) -- that is until I tried to use a hammock.
The ECB Is Too Tight Absolutely and Relatively
by Scott Mather, Dirk Jeschke of PIMCO,
Looking at measures of the quantity of money and its transmission into the real economy reveals that ECB policy is quite tight. Growth hardly stands a chance under this scenario. Relatively tight monetary policy would perhaps be understandable if the eurozone were threatened by inflation. However, inflation is low and falling in the Eurozone. The ECB may be playing a game of chicken with European policymakers. If true, this is a dangerous strategy.
The Chinese Hangover: As Infrastructure Spending Drops, So Does Demand for Chinese Steel
by Raja Mukherji of PIMCO,
The Chinese steel industry today shows many signs of serious economic difficulties brought about by the unprecedented size and speed of industry expansion. However, as the country's focus shifts away from public investments and toward tax cuts, it will be difficult for China to absorb this overabundance of domestically produced steel. Ripple effects of this oversupply may include softening iron ore prices, a possible drop in the Australian dollar, and potentially weaker global steel prices.
Preparing Portfolios for Inflation
by Ronit Walny, Kevin Winters of PIMCO,
Although disinflation has seemed the more likely scenario in recent years, PIMCO expects inflation to accelerate from recent levels over the next three to five years, but double-digit rates are unlikely. An understanding of the constituents of the Consumer Price Index can help us design portfolios that seek to better defend against inflation. The core building blocks of such portfolios are commodities, Real Estate Investment Trusts and Treasury Inflation-Protected Securities.
A Second Wave of Capital Flight Reaches Eurozone Core
by Thomas Kressin of PIMCO,
During the first phase of the euro crisis, private capital flowed out of the "peripheral" countries to the core of the eurozone, but this shift had no adverse impact on the euro. Now, investors are taking their capital out of the eurozone altogether. The euro threatens to fall further, possibly leading to serious concerns about a devaluation spiral.
Diamonds in the Rough
by Mark Kiesel of PIMCO,
The demand for most high-quality, income-producing assets continues to exceed supply due to a weaker growth outlook and aggressive policy action by global central banks. Yet we are still finding numerous opportunities globally through our bottom-up research that targets areas around the world where fundamentals are supportive and the outlook remains constructive.
Real Assets Replication: Solving the Capital Call Conundrum
Risk factors help to identify the fundamental value drivers of real assets and explain differences in the reported returns of public and private equity investments that hold substantially similar assets. By combining the fundamentals of real asset valuations with the statistical tools required to unlock the component risk factors of asset classes, it is possible to replicate the returns of private real asset investments using liquid publicly traded instruments.
Remarks to the NBER-Sloan Conference on the European Crisis
by Mohamed El-Erian of PIMCO,
We believe that this intersection between what economists and policymakers know - is a critical one to get right, and not only for a long-term investor like PIMCO. You see, unless there is a strong economic anchor, policymakers (and their political bosses) will lack the conviction and foundation needed to take difficult decisions and explain them well to citizens. So it is crucial for both sides to know what is known - and also to recognize, to the extent possible, the known unknowns.
Cult Figures
by William Gross of PIMCO,
The long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return since 1912. The legitimate question that market analysts, government forecasters and pension consultants should answer is how that return can be duplicated in the future. Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.
What Next for Spain?
by Myles Bradshaw of PIMCO,
As part of its bank recapitalization program, Spain has ceded fiscal sovereignty, and this is a positive step toward resolving the euro debt crisis. We believe its eurozone partners should now make good on their summit agreement to use European Financial Stability Fund and European Stability Mechanism instruments in a flexible and efficient manner.
The Longest Yard
As the global slowdown progresses, we can expect central banks to deploy more policy tools without limits to stem the pace of deleveraging. In Europe, quantitative easing using ESM bonds could prove to be another bridge that buys politicians more time, but does not solve the root problem. We expect real economic growth in China to be muted. While some stabilization is possible later this year, it is hard to foresee a sustained recovery.
Equity Implications for a Modest-Return World
by Andrew Pyne of PIMCO,
With equities likely to see modest returns over the secular horizon, we believe that capturing alpha will be critical for investors seeking to meet target portfolio returns. Equity valuations appear reasonable, but volatility is likely to remain elevated amid slowing global economic growth and macroeconomic risks. As macro events drive markets, the probability of fundamental mispricing increases, providing opportunity for active managers to add value.
Secular Outlook: Implications for Investors
by William Benz of PIMCO,
For investors, the biggest challenge now is moving from a world of normal distributions, with expected occurrences around the mean, to one of bi-modal distributions where more extreme scenarios prevail. Key institutions, including governments and central banks, were previously stabilizing forces but are now helping to accelerate underlying, destabilizing trends in the global economy and financial markets.
One More Dance
by Neel Kashkari of PIMCO,
We are witnessing a synchronized slowdown worldwide that is beginning to affect corporate profits. The most likely right-tail event is the Federal Reserve launching another round of quantitative easing. We dont believe liquidity alone can engineer sustainable, real economic growth in the context of a secular deleveraging cycle. But we acknowledge that equity portfolios would likely benefit should the Fed keep the music playing a little longer.
Low Interest Rates Are Not Enough
by Mohamed El-Erian of PIMCO,
Welcome to what could be called "GGIRC," the great global interest rate convergence whereby interest rates steadily converge to zero in many countries around the world, both advanced (other than the crisis European economies) and emerging (other than the persistent financial basket cases). In theory this is a good thing for a global economy. In practice, however, the situation is much more complicated and not so benign.
The Upside of Low Interest Rates for Pension Plans: Issuing Debt to Fund Pension Liabilities
by Jared Gross, Seth Ruthen of PIMCO,
Issuing debt allows a sponsor to de-risk without waiting for market events or cash contributions to reach the level of funding that triggers a shift in asset allocation. There are a number of ways in which a sponsor may benefit from replacing inefficient debt (in the form of a pension deficit) with the tax and accounting advantages of marketable debt.
Investing off the Beaten Track in an Uncertain Global Economy
by Dan Ivascyn of PIMCO,
The global economy remains in a multiyear period of global deleveraging; it will be an uncertain and, at times, volatile process. The substantial uncertainty and volatility affecting interrelationships across different markets are providing relative-value opportunities. Alternative strategies can be enticing, but the decision to use them needs to be fully informed and weighed against all the options.
Europe Risk Preparedness
by William De Leon of PIMCO,
PIMCO's risk management process is dynamic and flexible, allowing us to evolve to understand, quantify and manage risks in broad scope and at the portfolio level. We are particularly focused on preparation for multiple potential scenarios, from a one-country redenomination to a full break-up of the eurozone into 17 separate currencies.
Rethinking Asset Allocation
by Curtis Mewbourne of PIMCO,
As risk and return characteristics evolve, we believe investors need to adapt the way they think about using asset classes. Asset classes are likely to be affected by the situation in Europe and, more broadly, by high debt levels in developed countries. The related political debate about austerity vs. growth is also critical. Fixed income investors should note whether countries control their own currencies and can monetize their debts. Those that can may be greater inflation risks.
Results 1,251–1,300
of 1,580 found.