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Kings of the Wild Frontier
by Bill Gross of PIMCO,
The U.S. has averted a debt crisis, but there remains a stain on our reputation.
Nothing in the Congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit. In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at net present cost. Aside from outright default, there are numerous ways a government can reduce its future liabilities. They include balancing the budget, unexpected inflation, currency depreciation and financial repression.
America Will Avoid Default But There's A Lot More to Do
by Mohamed A. El-Erian of PIMCO,
Politicians are taking an important step this weekend to remove the threat of a debt default and to focus more credibly on problems facing the economy. We should thank them for that. But we should also remind them that their work is far from done. Washington should waste no time in redoubling efforts to remove the multiple policy uncertainties and structural impediments that stand in the way of restoring America on the path of high growth and plentiful job creation. Anything short of that will imply further economic and social deterioration, and a greater erosion of America's global standing.
Why Global Debt Dramas Recur
by Mohamed A. El-Erian of PIMCO,
Neither Europe nor America can sustain the sort of economic recovery that would make a meaningful dent in their debt dynamics. As a result, different governments are opting for different approaches, including harsh austerity, financial repression and, in one case, a potential debt restructuring.
De-levering pressures will be with us for years, and governments will mix and match from the menu of options. Accordingly, periodic debt dramas will recur. And we all need to understand the dynamics and the likely choices governments will make going forward.
Could a U.S. Debt Downgrade Trigger a Financial Crisis?
by Neel Kashkari of PIMCO,
A downgrade of U.S. credit could spark a new financial crisis. Would the impact be as great as when Lehman Bros. failed? Treasurys have been defined for decades as the risk-free financial instrument; faith in them is far stronger than it was in debt of Lehman. U.S. Treasuries are a $14?trillion market. Lehman had approximately $600?billion of liabilities before it failed, less than 5% of the size of the Treasury market. These factors suggest that a U.S. downgrade has the potential to be as bad, or perhaps worse, than the Lehman shock.
The 'how' undermines the 'what' of the debt ceiling debate
by Mohamed A. El-Erian of PIMCO,
I am confident that Washington will find a way to compromise on a mini-deal, rather than a grand bargain, that raises the debt ceiling and avoids a debt default. They may even manage to evade a downgrade of the nations vaunted AAA credit rating, though this is more uncertain. But fiscal solvency is not merely a function of deficits and debt. It is also highly sensitive to economic growth: The lower an economys growth rate, the higher a budget deficit is likely to be, the larger the debt accumulation, and the greater the need for yet another round of fiscal austerity to safeguard solvency.
Eurozone Leaders are Fighting Contagion, But is it Too Little, Too Late?
by Andrew Balls of PIMCO,
European politicians and bureaucrats may want to focus on their summer holiday plans rather than the eurozone sovereign crisis, but with Italy and Spain facing ongoing contagion they may have to forget their holidays and get to work. When the eurozone leaders finally got around to their summit on July 21, they no doubt hoped that the announcement of a new bailout plan for Greece and plans to expand the role of the European Financial Stability Facility (EFSF) would buy them some time. Unfortunately, that has not happened.
Is There Equity Beta in Oil?
Oil exposure can increase equity beta in an investment portfolio.
Historically, correlations between oil prices and equity prices have varied widely, depending on economic conditions.
Determining whether oil price movements are driven by changes in supply or demand can help identify when the correlation between oil and stock prices is likely to be high or low.
Investors can then know when exposure to oil is tilting their portfolios toward higher or lower equity beta.
How to Orchestrate an Orderly and Credible Restructuring of Greeces Debt
by Myles Bradshaw of PIMCO,
?Identifying how much solvency relief Greece needs is complicated, not least because there is no magic debt ratio that is sustainable.
Identifying how much political capital might be bought in European Union creditor countries and beyond is more straightforward.
Contagion risks are positively correlated with any benefits Greece might experience from a potential restructuring.
Secular Outlook: Implications for Investors
As the economy undergoes important realignments, investors will need to rethink their traditional approaches to managing their portfolios. As the lines between interest rate and credit risk become blurred, finding sources of safe spread becomes even more critical. More, not less, discretion is warranted when navigating volatile global markets, avoid sectors affected by financial repression and hedge against inflation and/or adverse tail events. We believe investors need to look at risk factors rather than traditional asset classes when making asset allocation decisions.
Earning 'Extra Credit' Through Short-Term Strategies PIMCO
by Jerome M. Schneider of PIMCO,
Given renewed concerns over liquidity and credit, investors can potentially do better by considering actively managed short-term strategies that invest beyond traditional U.S. money-market guidelines. The current credit situation in Europe is different from that in both 2008 and 2010 because initial liquidity conditions in the short-term markets are better. In our view, investors should evaluate potential investments within the wider scope of relative value opportunities and not simply for the incremental yield they may offer above risk-free returns.
Are There Any Rungs Left on the Housing Ladder?
by Rod S. Dubitsky of PIMCO,
Headwinds to housing demand, and thus the overall market, could last for years.
It appears that limited mortgage availability and vulnerable consumer health are restraining demand.
Also weighing on the market is regulatory uncertainty over the future structure of mortgage finance and the resolution of foreclosure overhang.
We believe the housing market, considered to be a key driver of the economic recovery, will generally remain weak for the foreseeable future.
Are Emerging Markets Ready to Lead the Global Economy?
by Lupin Rahman of PIMCO,
We forecast emerging economies will expand at a faster pace than advanced economies over the secular horizon. The challenge for emerging market central bankers is to remain ahead of inflation expectations and retain credibility on inflation targeting. We feel they are well positioned for this. We believe global investors remain significantly underweight emerging market assets. We expect this underallocation to decrease, providing multiyear support for the asset class.
Europe Must Consider Radical Options
by Mohamed A. El-Erian of PIMCO,
Europe has been applying a liquidity solution to a solvency problem. The approach, which has bought time, is near exhaustion as it has failed to improve debt sustainability, restore access to markets and put in place the conditions for sustainable growth. Time is approaching for a radical change, with policymakers potentially facing two options. They could opt for greater fiscal union to include cost-effective guarantees and transfers, rather than just loans, in exchange for individual countries sacrificing a significant amount of national sovereignty.
What a Multi-Speed World May Mean for Equities
Equity investors may look in unfamiliar places as they navigate potential shifts in the global economy. An apparent rebound in risk tolerance since the financial crisis has supported higher equity valuations. Emerging market economies appear to be undergoing a mid-cycle rebalancing. We view this as a welcomed cyclical adjustment rather than the end of their growth cycle; long-term fundamentals remain intact. We believe advanced economies should continue to see headwinds to growth, and that potentially means investors may be generally willing to pay lower multiples to earnings.
America Needs a Grand Bargain, But All It?s Getting Is a Mini Deal
by Mohamed A. El-Erian of PIMCO,
To address its economic woes, America needs to transition from a series of ad hoc measures to a more holistic policy approach. Aided by President Obamas personal and highly visible involvement, politicians are likely to meet the August 2nd debt ceiling deadline. A "grand bargain" can serve as the catalyst for unifying diverse policy actions into clearer, more comprehensive drivers for growth and medium-term fiscal sustainability. This would intensify pressure on other systemically-important parts of the world-particularly Europe and China-to join the US in striking their own grand bargains.
America and Britain's Economic Policies Will Soon Be Similar
by Mohamed A. El-Erian of PIMCO,
?By imposing austerity programs,t he U.K. is hoping to free up resources that can be devoted to pay down debt. The U.S. is hoping to create resources to pay down debt via economic growth ? an approach that can have disappointingly narrow feasibility. Other options include restructuring or defaulting on debt, inflating out of it and imposing financial repression by paying creditors less than they deserve.
Is Europe?s Debt Crisis a ?Lehman Moment? for America?
by Mohamed A. El-Erian of PIMCO,
Europe?s debt problem is a headwind for what remains a disappointing U.S. economic recovery.
There is now broad-based recognition of America?s persistent economic weakness. The Federal Reserve has been forced again to revise downwards its growth projections for both 2011 and 2012.
In order to avoid a repeat of the total Lehman paralysis in the face of an external shock to the U.S. economy three conditions must be met: a banking system that remains robust, no disruptions to money market funds and limited blockage to the plumbing of the country?s payments and settlement system.
The End of Currency Wars?
by Richard Clarida of PIMCO,
International capital is flowing to countries with good growth prospects and to countries with central banks confident enough to raise interest rates.
Certain nations are placing controls on capital or intervening in currency markets with an eye to maintaining economic competitiveness.
We see central banks in the U.S. and the U.K. winding down monetary stimulus that has exacerbated the situation. Also, we see potential for emerging market currencies to appreciate, and that may give developed nations a boost.
With Housing Fragile, the Risks of Public Policy Error Are High
by Scott Simon of PIMCO,
We are seeing signs of what we have long suspected: There never was a housing recovery. The market is in an arguably fragile state that we believe is far easier to break than to fix. If we ended government support, mortgage rates could rise significantly, because home loan investors would need to be compensated for greater credit risk, and loan availability could decline. Those two factors would put downward pressure on home values.
Sunlight on U.S. Banks
by Mark Kiesel of PIMCO,
Among global banks, we believe U.S. banks are in a stronger position to absorb deterioration in the macroeconomic environment in Europe. U.S. banks also look attractive given their profitability, improving asset quality and capital position. Global banks vary dramatically in their asset quality and ability to meet capital requirements over time. As a result, we believe financial markets will continue to reward the strongest and safest banks and penalize the weakest. While we remain cautious on the U.S. housing market, U.S. banks appear to have the resources to manage further weakness.
?Attractive Yield Opportunities Remain in Floating Rate Loan Markets
by Elizabeth MacLean of PIMCO,
We believe the general trend toward more diversified capital structures may be positive for investors in the loan market.
Recent changes in loan market investor mix have had and will likely continue to have a positive impact on loan spreads.
In addition to price, leverage and other quality measures in new issues also generally remain attractive.
Covered Bonds: Strong Demand, New Regulations Create Global Momentum
Basel III?s long-term funding and liquidity coverage requirements could boost demand, create technical support for valuations.
The EC has proposed an exemption excluding covered bonds from private sector participation in post-insolvency burden sharing.
The Covered Bond Act could alter the way regional banks in the U.S. rely on the Federal Home Loan Bank (FHLB) system for funding.
Five To-Do's for the IMF's New Managing Director
by Mohamed A. El-Erian of PIMCO,
Circumstances have catapulted Christine Lagarde into the role of leader of the IMF: the world?s most influential and fastest-responding multilateral institution. Lagarde will need to hit the ground running if her tenure as IMF managing director is to be an inspiring story of institutional transformation. She should waste no time in establishing a legitimate selection process for the next managing director that is truly based on merit. She must strengthen the analytical robustness of the IMF?s response to debt crises, and prepare the Fund?s balance sheet for the risk of future impairment.
Higher Commodity Prices and the End of Economic Growth Without Inflation
by Mihir P. Worah of PIMCO,
Global inflationary patterns may shift amid higher commodity prices.
We expect commodity prices to be generally rising going forward, though with volatility and differentiation among commodities.
Emerging markets going through a particularly commodity and energy intensive phase of growth may affect what developed-world consumers pay for commodities.
Currencies are another factor. If developed-world policymakers attempt to make their economies more competitive via a cheaper currency, that could lead to higher inflation for those that are net importers.
On Governments as Portfolio Managers
by Mohamed A. El-Erian of PIMCO,
Energy markets are focusing intensely on the price impact of today?s International Energy Agency decision to release oil supplies.
Governments (and central banks) getting pulled deeper into markets as portfolio managers, as opposed to regulators and supervisors.
Policymakers are trying to differentiate between good and bad inflation ? namely, enhancing the former and countering the latter.
A New Era of Global Financial Repression
by Scott A. Mather of PIMCO,
Investors need to be especially alert to increasing financial repression. Any sovereign policy that interferes with free market activity and the pricing of debt or currency can be thought of as financial repression. Repressionary policy rates percolate through the global financial markets and affect asset prices across the risk spectrum. Many emerging market countries use repressionary tactics to capture a larger share of global growth.
Can U.K. CPI Really Get Back to Its 2% Target?
?U.K. CPI (Consumer Price Index) will likely continue to be buffeted by food and energy inflation. To generate the conditions necessary to bring inflation down more aggressively would put even greater pressure on U.K. households. The Bank of England is right to be cautious on raising the Bank rate given the current state of the economy.
What's Weighing Heavily on the Markets
by Mohamed A. El-Erian of PIMCO,
Balance sheets and other structural problems will repeatedly impact headlines (and weigh on markets) unless policymakers alter their course. European policymakers and the IMF have spent the last year treating Greece?s predicament as a liquidity problem as opposed to what it is: a solvency and growth crisis. By ignoring the basic issue of Greece?s solvency, some previously pristine balance sheets are now contaminated. In the U.S., political dithering (and bickering) is complicating the country?s ability to deal effectively with structural impediments.
School Daze, School Daze Good Old Golden Rule Days
by Bill Gross of PIMCO,
The past several decades have witnessed an erosion of our manufacturing base in exchange for a reliance on wealth creation via financial assets. Fiscal balance alone will not likely produce 20 million jobs over the next decade. Government must take a leading role in job creation. A growing number of skeptics wonder whether college is worth the time or the cost.
Game Change for Bond Investors?
by Scott A. Mather of PIMCO,
Over the next three to five years, we argue that market behavior may be vastly different than what typical cyclical models would predict. Sovereign debt, which is at the core of our global financial system, is undergoing a seismic shift. Governments practicing financial repression may be transferring wealth from creditors (citizens) to debtors (governments) to the detriment of creditors, fixed income investors and savers.
The End of QEII: Gaining Clarity, Losing the Treasury?s Biggest Customer
?The Fed?s policies and its fat balance sheet are playing a powerful role in shaping financial and economic conditions around the world. The drain of a single dollar from the financial system will signal a reversal of Fed policy and thus have a major bearing on financial conditions. Depending on the speed of the economic slowdown, the Fed could decide to keep a level of discretion over when and what will be reinvested in its portfolio.
America?s Dangerous Debt Ceiling Debate
by Mohamed A. El-Erian of PIMCO,
?In today?s polarized environment in Washington, Republicans and Democrats are unwilling to compromise ?too early.? Such political paralysis on key economic issues is increasingly unsettling for the U.S. private sector, and for other countries that rely on a strong U.S. at the core of the global economy.
How Strategic Deficit Reduction Could Spur Growth
by Saumil H. Parikh of PIMCO,
Much of the evolution of our secular economic outlook for advanced economies will depend upon the degree and success of structural policy changes. To date, few such policies have been implemented. We think the U.K. is implementing what is probably the best combination of fiscal and monetary policies to address deficit reduction with an eye to structural issues. In the U.S., we see great economic benefit from shifting some public spending from consumption to investment ? for example, to the energy sector, where the U.S. has a large deficit vs. the rest of the world.
Understanding Recent Market Movements
by Mohamed A. El-Erian of PIMCO,
Despite massive fiscal and monetary stimulus, the U.S. economy has frustratingly failed to gain proper traction.
The U.S. economy faces structural impairments in housing, credit, public finances, and the functioning of the labor market.
The situation in Europe is another factor undermining market sentiment.
Structural problems require structural solutions that are adopted within a clearly communicated overall vision.
U.S. Must Move Beyond Financial Band-Aids
by Mohamed A. El-Erian of PIMCO,
Structural problems require structural solutions to improve the labour market, housing, credit and medium-term fiscal sustainability. Some analysts will encourage investors to look through these ?temporary and reversible? factors. We should not. The U.S. lost its edge in educating, training and retooling its labour force. This slippage has been extremely costly.
The Eurozone Needs a Plan B, as 'Quarantining' the Weak Is Too Costly
by Andrew Balls of PIMCO,
The eurozone?s peripheral debt crisis is morphing into a tussle between politics and economics and the strains are beginning to show. Greece and Ireland are on programs that are neither restoring stable debt dynamics, nor in keeping current investors engaged or attracting new ones. Portugal is now following the same approach. The better and more realistic approach for the eurozone as a whole might be to acknowledge the Greek plan is not working and move to Plan B ? address the need for a restructuring of Greece?s public debt and perhaps that of other countries too.
The Danger of Emerging Market Inflation
by Mohamed A. El-Erian of PIMCO,
If left unchecked, high and accelerating inflation in emerging markets will have growing adverse economic, social and political effects. In addition to undermining overall growth and resource allocation, emerging market inflation imposes a very heavy burden on the poor and erodes political unity. Emerging economies will tap multiple policy brakes as they seek to counter mounting inflationary pressures. And they will continue to grow, but not enough to pull up decisively the sluggish advanced countries.
Buy Cheap Bonds with Safe Spread
by Bill Gross of PIMCO,
If the government is going to artificially repress yield, then focus on the parts of a bond that are less repressed! Rather than outright default, many countries attempt rather successfully to keep nominal interest rates lower than would otherwise prevail. Over the long term, this ?financial repression? results in a transfer of wealth from savers to borrowers. Investors shouldn?t give their money away, and at the moment, the duration component of a bond portfolio comes close to doing just that ? because it doesn?t yield enough relative to inflation.
Secular Outlook: Navigating the Multi-Speed World
by Mohamed A. El-Erian of PIMCO,
It is a world that heals slowly and unevenly, and remains structurally impaired. Balance sheets, both across and within economies, are still out of equilibrium. We expect advanced economies will face sluggish growth and persistently high unemployment over the secular horizon. Emerging economies will achieve higher growth but face recurrent inflationary concerns. We do not expect policymakers to boldly address structural problems. By targeting negative real interest rates, they will pursue financial repression that undermines the ?real return? contract that savers expect.
Strauss-Kahn Allegations Are Consequential for the Global Economy
by Mohamed A. El-Erian of PIMCO,
Should Strauss-Kahn be forced to step down, this would catch the IMF with a selection process for the top position that is still overly dominated by politics.
The allegations facing Strauss-Kahn are serious and will take time to be investigated properly. In the meantime, they have caught Europe still without a sustainable solution to the debt crisis in its periphery.
The Caine Mutiny (Part 2)
by Bill Gross of PIMCO,
Low policy rates and the increasing negative real yields that they engender as inflation accelerates represent an immediate threat to investment portfolios. Bond prices dont necessarily have to go down for savers to get skunked during a process of debt liquidation. PIMCO advocates a renewed vigilance, stressing bond market alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies.
The End of QEII: It?s Time to Make the Donuts
With quantitative easing the Federal Reserve has in essence picked the pockets of Treasury bond investors throughout the world. Ultimately, the U.S. must own up to its past sins and let the deleveraging process play itself out. The U.S. must invest in its people, its land, and its infrastructure, as well as promote free trade, to achieve economic growth rates fast enough to justify consumption levels previously supported by debt.
Anchors Away?
by Richard Clarida of PIMCO,
Public expectations of future inflation are an important determinant of actual inflation. We really don?t know if longer-term inflation expectations are well anchored. We just know they tend to adjust slowly to actual inflation. The substantial economic costs of bringing down high inflation are largely due to the need to bring down inflation expectations. Most central banks that recently enacted unconventional monetary policies are seeking to exit from them.
Skunked
by Bill Gross of PIMCO,
Medicare, Medicaid and Social Security now account for 44% of total federal spending and are steadily rising. Previous Congresses (and Administrations) have relied on the assumption that we can grow our way out of this onerous debt burden. Unless entitlements are substantially reformed, the U.S. will likely default on its debt; not in conventional ways, but via inflation, currency devaluation and low to negative real interest rates.
Andrew Balls Discusses PIMCO?s European Cyclical Outlook
by Andrew Balls of PIMCO,
Europe?s outlook hinges on limiting contagion from the most troubled peripheral countries. The European Central Bank has signaled its intentions to start tightening, which could complicate the outlook for the more distressed countries. We think the Bank of England will begin to tighten rates over the summer. The UK outlook depends on the impact of fiscal tightening.
Understanding Japan?s Disasters
by Mohamed A. El-Erian of PIMCO,
Japan?s reconstruction challenge will likely be more difficult than after the Kobe earthquake. Negative wealth and income effects this time around will be more severe, and the recovery process will probably take longer and be more complex. Japan's disasters will add to the global economy?s headwinds.
PIMCO Cyclical Outlook: U.S. Economy, Global
by Saumil H. Parikh of PIMCO,
PIMCO continues to foresee a multi-speed global recovery over the next few years. The U.S. is experiencing a cyclical economic rebound, but its strong durability is uncertain. Several countries in Europe face headwinds to growth over our cyclical horizon. Japan?s growth rate will likely fall in the near term, but reconstruction activities should stimulate growth over time. We expect real economic growth in key emerging economies to remain at a solid rate during 2011, but lower than 2010.
World Near Tipping Point?
by Mohamed A. El-Erian of PIMCO,
Much of the potency of policy responses has been used up in the successful efforts since 2008 to avoid global depression. The longer the persistence of supply disruptions, the greater the risk of core inflation increasing. Questions about the end of quantitative easing in the U.S. pose a challenge for policymakers.
Japan Will Recover
by Mohamed A. El-Erian of PIMCO,
Japan has the ability to recover economically from these horrible natural disasters. Japan?s immediate focus is on the enormous human suffering, and rightly so. Attention also turns towards the extent of the damage to the economy and its reconstruction and rehabilitation plans. The good health of Japan is central to a robust global economy that generates lots of jobs and enhances productivity.
Results 1,451–1,500
of 1,561 found.