Pimco’s Bill Gross is nervous:
1) The current rather mild U.S. recovery has been driven by asset appreciation/consumption and not employment or capex growth.
2) Future growth is dependent on additional asset
appreciation in real estate and stocks if Asia continues to absorb much
of our investment and many of our jobs.
3) Recent asset appreciation has been set ablaze by
several fiscal/monetary pumps displayed on page 2 with 5-year real
rates being the central driver/gasoline can.
4) Tax cuts are a thing of the past and 5-year TIPS yields can theoretically decline only 60 basis points or so more.
5) The reason why intermediate/long TIPS have an interest rate floor is that if we approach potential deflation, investors risk losing money on a government guaranteed investment. The same concept applies to homes, stocks, and other inflation-adjusting assets without
6) The Fed may soon be out of fuel, despite hints of
Bernanke-style helicopter money. Stocks and houses are already at low
yields and high prices reflective of European economies nearing
Japan-style liquidity traps.
Bill Gross | July 2005