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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: patron_anejo_por_favor who wrote (34887)6/27/2005 5:30:12 PM
From: ild  Read Replies (4) of 110194
 
Investment Outlook
Bill Gross | July 2005

Fire!

pimco.com

Summary
Let me summarize my main points:

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 government guarantees.

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.

If the asset pumps run dry and the kerosene cans empty, the inevitable path of the U.S. economy will reflect slow growth at best and recession as a realistic alternative. Inflation then would return to low 1% levels in the ensuing years and be pressing the deflationary crossover line. Nominal Treasury paper would enter the 3-4% zone for 10-year maturities and lower still for shorter intermediates. Such an analysis argues for capturing yield via duration extension now in the face of admittedly artificially low current yields. If Rome burns, long maturity bonds will rule the day and that day may come sooner than many imagine possible.



William H. Gross

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