New Investment Outlook by Bill Gross June 2013

by Joe Oliver, Forex Trading-Pips

 

Bill Gross founder, managing director and co-CIO of PIMCO has just released his New Investment Outlook for June 2013

Key Takeaways: 

1) Financial markets require “carry” to pump oxygen to the real economy.

2) Carry is compressed – yields, spreads and volatility are near or at
historical lows.

3) The Fed’s QE plan assumes higher asset prices will revigorate growth.

4) It doesn’t seem to be working.

5) Reduce risk/carry related assets.

 

Excerpted New Investment Outlook  from Bill Gross: 

Without the assumption of “carry,” or return over and above the fixed, if mercurial, yield on an economy’s policy rate (fed funds), then investors would be unwilling to risk financial capital and a capitalistic economy would die for lack of oxygen.

This “carry” constitutes the beating heart of our financial markets and ultimately our real economy as well, since profits on paper assets are inextricably linked to profits in the real economy, which are inextricably linked to investment and employment. Without these, the wounded heart dies and shortly thereafter the body. But there comes a point when no matter how much blood is being pumped through the system as it is now, with zero-based policy rates and global quantitative easing programs, that the blood itself may become anemic, oxygen-starved, or even leukemic, with white blood cells destroying more productive red cell counterparts.

In the process of reaching and stooping, prices on financial assets have soared and central banks have temporarily averted a debt deflation reminiscent of the Great Depression. Their near-zero-based interest rates and QEs that have lowered carry and risk premiums have stabilized real economies, but not returned them to old normal growth rates. History will likely record that these policies were necessary oxygen generators.

Central banks – including today’s superquant, Kuroda, leading the Bank of Japan – seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment. That theory requires challenge if only because it doesn’t seem to be working very well.

Low yields, low carry, future low expected returns have increasingly negative effects on the real economy.

Perhaps, in addition to a fiscally confused Washington, it’s your policies that may be now part of the problem rather than the solution. Perhaps the beating heart is pumping anemic, even destructively leukemic blood through the system. Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution.

…..more at Wounded Heart

 

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