By Bill Gross – Originally published at Investment News: The following is the commentary of Bill Gross, managing director and co-CIO at Pimco, for the month of September. For a complete archive of his commentaries, click here.
“Just an old-fashioned love song, comin’ down in three-part harmony.” –Three Dog Night
In many ways the global economic crisis is like a marriage gone bad. As the Three Dog Night sang years ago, global economies have functioned harmoniously for many years, but suddenly the love songs have become strident and cacophonous, the policy coordination morphing into a war of the roses as opposed to a giving of them. Instead of three-part harmony we are now experiencing, at a minimum, tri-party disharmony, teetering on the brink of “divorce,” which in economic parlance means a possible “developed economy” recession – a downturn from which reconciliation may be difficult due to a lack of policy options and cooperation. But I get ahead of myself. Let’s first ring the wedding bells, then take you through an explanation of three separate global marriages and how each of the partners have grown apart.
Oh those feisty Europeans! Always fighting like a dating couple and then finally resolving their differences by saying “I do” sometime in the 1950s with the creation of the Common Market and the European Economic Community (EEC). In doing so, France and Germany said “never again,” and even though they didn’t like each other (read “hate”) they decided to make economic lurv in the hopes that they wouldn’t destroy the continent again. It later turned into a formal union, a European Community (EC), where they invited lots of witnesses to the ceremony and created instant family members, if that’s metaphorically possible. Twenty-seven of them, including Italy, Spain and the U.K. were now relatives despite some liking pasta and others preferring horrid cuisines featuring Shepherd’s Pie or fish and chips. The marriage progressed to the point of a smaller monetary union sometime in 1999, but critically, without a common budget. Husband and Wife – Germany and Greece – decided to have a joint bank account, but with separate allowances and no oversight. Greece could issue bonds at nearly the same yield as could its Northern hard-working neighbors, but were free to spend it any way they chose. This was an economic version of an open marriage where one party gets to have all the fun and the other worked nine-to-five and came home too exhausted for whoopee. Well sometime last year, global lenders said enough is enough and soon the whole cheating European Union (EU) was at each other’s throats, hiring lawyers and threatening to break up. Calmer heads prevailed when the ECB decided to make nice and use its checkbook. Last week Angela Merkel and France’s Sarkozy sort of got engaged for at least the second time, nixing expanded funding for their Southern neighbors and placing the burden even more on the ECB. Who knows where it goes now, but let’s put it this way – Germany and France are sleeping in a king-size bed while the rest of its EU family are sleeping in separate bedrooms. As a result Euroland faces economic contraction.
This impending divorce in America is not about sex or sleeping around, but more about romancing the now stone-cold notion that anyone could be a millionaire in the good old U.S. of A. if only they worked hard enough. Our Statue of Liberty proclaimed “give us your tired, your poor…” and sent many of them West to build a little house on the prairie or strike it rich in the goldfields of Sacramento, California or Skagway, Alaska. Many of them did and a century later, the option-laden fields of Silicon Valley provided modern-day examples of rags to riches fairytales come true. But this odd couple marriage of rich (and poor hoping to be rich), now seems on rather shaky ground. Instead of boundless opportunity, the nursery rhyme describing Jack Sprat – who could eat no fat – and his wife – who could eat no lean – appears to be the starker of the two realities. There are the poor and there are the very rich, with the shrinking middle class resembling Mr. Sprat rather than his wife.
During this country’s recent economic “recovery,” real corporate profits increased by four times the amount of working wages in dollar terms, and, as the chart below shows, are 50% higher than at the turn of the century while wages remain relatively unchanged, something that has not occurred since this country’s nuptials were concluded over three centuries ago. Is it any wonder that preliminary battlefield skirmishes in Wisconsin and Ohio between labor and capital promise to spread across every state of this land? (Not Texas!) Is it any wonder that Republican orthodoxies favoring tax cuts for the rich and Democratic orthodoxies promoting entitlements for the poor threaten to hamstring any constructive efforts to reduce unemployment over the foreseeable future? We are witnessing romantic love turning into a spiteful, bitter clash between partners in name only.
The Asian Miracle
Confucius say, “Can there be a love which does not make demands on its object?” While not a marriage, there has definitely been a love affair between Western consumers and their Chinese producer “objects” for several decades now. Read More…
SmartStops comment: Investing in today’s 21st century markets demands dynamic, intelligent risk management. Economic impacts to governmental policies and published economic numbers are fluid. No longer is it sufficient to just allocate amongst your holdings based on beta.
July 25, 2011
As negotiations on a debt-ceiling deal broke down again over the weekend and leaders of both parties now plan to unveil their own debt ceiling plans, Mohamed El-Erian, co-CEO of PIMCO—the world’s largest bond fund manager—is warning that even with a debit limit deal in hand, the United States’ AAA rating is still at risk
El-Erian (left) said in a blog posting for The Huffington Post that while he believed the nation’s leadership would “stumble into a short-term compromise over the next few days—one that raises the debt ceiling and avoids a debt default” more importantly such a plan “leaves the AAA rating extremely vulnerable and does little to lift the damaging clouds hanging over the U.S. economy.”
A debt deal, he said, “will come down to the wire,” however, “the resolution will likely be temporary, and the damage will be real and long-lasting—both of which render an already worrisome situation even more difficult going forward. Indeed, by illustrating so vividly to the whole world what is ailing America, the weekend’s political theatrics should make us all worry even more about the world’s largest economy.”
El-Erian went on to say that America’s “already-fragile economic psyche and its global standing have taken a material hit. Forget about ‘animal spirits’ for now.” Instead, he wrote, “worry even more about an economy that is already having tremendous difficulty sustaining an acceptable growth momentum, and that already suffers from an unemployment crisis that is increasingly protracted in nature. Analysts will now scramble to again revise down their projections for growth, and up those for unemployment.”
Second, he warned. “The debt and deficit issues that are at the root of the debt ceiling drama are, unfortunately, a small part of a much larger set of structural impediments to employment, investment and wealth creation.” The housing sector is still languishing, he continued, “credit intermediation is uneven, infrastructure investment is lagging, job skill mismatches are increasing, and income and wealth inequalities are worsening.”
SmartStops commentary: There are critics of his calls, but Roubini in July 2006 predicted a “catastrophic” global financial meltdown that central bankers would be unable to prevent. The collapse of Lehman Brothers Holdings Inc. in 2008 sparked turmoil that led to the worst financial crisis since the 1930s. Of course predicting the markets future is challenging to say the least, with so many factors at play. Its why investor’s methodology must evolve to have protection ready for themselves at all times. You can’t survive our markets any longer by deploying a buy and hold methodolgy.
‘Perfect Storm’ warning for stocks
A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.
There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini said in a June 11 interview in Singapore. Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.
“There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”
Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.
Despite a series of tightening monetary measures in 2010, China’s economy grew by an astonishing 9.8 percent in the fourth quarter pushing it ahead of Japan as the world’s second largest economy, while fueling concerns that more needs to be done to fight inflation.
According to Aaron Back and Jason Dean at the Wall Street Journal, China’s economy grew at an annual pace of 10.3 percent in 2010, crushing its 9.2 percent growth in the prior year. Furthermore, China reported a 31 percent increase in exports and a 38 percent increase in imports as the Chinese economy demanded more raw materials, machinery and consumer goods from producers around the world. Read More…
In an attempt to ease concerns and fears that rising inflation could damper economic growth, China raised bank reserve requirements for the third time in the last five weeks, influencing the Global X Financials ETF (CHIX), the iShares FTSE/Xinhua China 25 Index Fund (FXI), the SPDR S&P China ETF (GXC) and the Guggenheim China All-Cap ETF (YAO).
The Chinese Central Bank raised the reserve requirement ratio by 50 basis points after earlier data showed a rise in property prices for a third straight month, an increase in both exports and imports, significant increases in M2 money supply and jumps in new lending by financial institutions despite government efforts to stem the flood of liquidity into the nation’s economy. Read More…
As inflationary concerns continue to loom in China, the nation’s government is making moves to curb to fight this rise in prices, which could potentially influence the iShares FTSE/Xinhua China 25 Index Fund (FXI), the Global X China Financials ETF (CHIX), the SPDR S&P China ETF (GXC) and the Claymore/AlphaShares China All-Cap ETF (YAO).
In the month of October, the consumer price index in the world’s second largest economy rose to 4.4 percent year over year driven primarily by a 10.1 percent rise in food prices. This increase in prices has resulted from an influx of money supply in the Chinese economy due to the nation’s expansionary monetary policies which enabled its banks to increase lending. Read More…
At the recent G20 meeting in South Korea, the Group of 20 finance chiefs agreed to move towards a more market-determined exchange-rate system that reflects underlying economic fundamentals and refrain from competitive devaluation of currencies, potentially impacting the Market Vectors Chinese Renminbi/USD ETN (CNY), the WisdomTree Dreyfus Chinese Yuan Fund (CYB).
China’s successful economy has enabled it to implement destabilizing use of its fixed exchange rate which has further enabled the world’s second largest economy to build an export capacity. Furthermore, China’s restraint of its Yuan and the weakness of the US dollar against other currencies have forced other emerging nations to temper gains in their own floating currencies to remain competitive, states Simon Kennedy of Australian News. Read More…
Nearly five months ago, the Asian Development Bank started a major drive to promote the use of solar power throughout the continent which could eventually lead to positive price support in the Guggenheim Solar ETF (TAN) and the Market Vectors Solar Energy ETF (KWT).
Under this initiative, the Asian Development Bank aims to put in place solar power projects with a total capacity of 3,000 megawatts by 2013, pushing capacity to six times what it currently is. The solar move is especially taking place in India, where the government has committed $20 billion to its solar program in hopes of having 20,000 megawatts of grid-connected solar energy by 2022 and nearly 200 megawatts of off-grid solar energy by 2013. Read More…
As China continues to witness exponential economic growth, its real estate sector is following and the Chinese government is taking measures to curb the real estate boom potentially influencing the Guggenheim China Real Estate (TAO), the iShares FTSE EPRA/NAREIT Dev Asia Idx (IFAS) and the Guggenheim China All-Cap (YAO).
China’s Finance Ministry recently announced that it will speed up the introduction of a trial property tax in certain cities before implanting the levy across the nation. The Ministry further stated that the tax rate will be 1 percent for units that are 90 square meters or smaller and will end an income-tax exemption on profits from the sale of real estate reinvested within one year. Read More…