Bill Gross of PIMCo on bonds and the economy
Arguing that the U.S. economy is bound to slow, Gross writes: "The slower economy should halt this mini-bear market somewhere close to 6.50% for long U.S. Treasury bonds and allow for positive total returns for the bond market from the fourth quarter onward."
Following a bizarre introductory anecdote that has to be read to be believed, Gross writes that the economy is bound for a fall, "maybe not down to floor level, which would indicate recession, but low enough to scare the living daylights out of those who are convinced our nearly nine-year economic recovery will never die."
Four factors will cause the slowdown, Gross says, "allowing interest rates to peak near current levels and eventually move lower." The first is long-term interest rates themselves, higher now than they have been in more than a year. Higher mortgage rates will slow the housing sector, while higher corporate bond yields will curb capital spending by businesses.
The second is lower stock prices. Gross estimates that the outsized stock-market gains of recent years are responsible for as much as $100 billion a year of consumer spending. With stocks stalling, he believes consumer spending growth will tail off, too.
Third, Gross says, the recent rise in oil prices will leave consumers "with less money to splurge at the movies or the mall." Finally, he says, most of the spending that companies will do to cope with Y2K has been done. "From now on, those tens of billions of dollars per quarter that have been spent to avoid a technological calamity will just not be there any more to stimulate the economy."
The market is deeply interested in what Gross has to say, according to Kevin Logan, senior market economist at Dresdner Kleinwort Benson. "He's been right when others were wrong," Logan says. "Since 1996, he's been contrarian and more right than wrong."
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