Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the sharpest investment brains around. His monthly newsletter, this month entitled “Let’s Get Fisical”, therefore always makes for thought-provoking reading.
The following are excerpts from the January newsletter:
“Explaining the current state of global fiscal affairs is often confusing – it’s much like Robert Palmer’s 1980s classic song where he laments that ‘She’s so fine, there’s no telling where the money went!’ Where government spending has gone is not always clear, but one thing is certain: public debt is soaring and most of it has come from G7 countries intent on stimulating their respective economies. Over the past two years their sovereign debt has climbed by roughly 20% of respective GDPs, yet that is not the full story.
“Some of governments’ mystery money showed up in sovereign budgets funded by debt sold to investors, but more of it showed up on central bank balance sheets as a result of check writing that required no money at all. The latter was 2009’s global innovation known as ‘quantitative easing’, where central banks and fiscal agents bought Treasuries, Gilts, and Euroland corporate ‘covered’ bonds approaching two trillion dollars. It was the least understood, most surreptitious government bailout of all, far exceeding the US TARP in magnitude.
“If 2008 was the year of financial crisis and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of ‘exit strategies’, during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder ‘which’ government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries.
“If exit strategies proceed as planned, all US and UK asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009. It seems no coincidence that stocks, high yield bonds, and other risk assets have thrived since early March, just as this ‘juice’ was being squeezed into financial markets. If so, then most ‘carry’ trades in credit, duration, and currency space may be at risk in the first half of 2010 as the markets readjust to the absence of their ’sugar daddy’. There’s no tellin’ where the money went? Not exactly, but it’s left a suspicious trail. Market returns may not be ’so fine’ in 2010.”
Click here for the full article.
Source: Bill Gross, PIMCO – Investment Outlook, January 2010.
