Posted on 10/27/2009 10:40:05 AM PDT by TigerLikesRooster
Pimco's Gross calls top of rally in risky assets
Almost all assets appear overvalued, bond investment giant warns
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) - Bill Gross, managing director at fixed-income giant Pimco, called the top of the recent rally in stocks and other risky assets on Tuesday.
"The six-month rally in risk assets -- while still continuously supported by Fed and Treasury policymakers -- is likely at its pinnacle," Gross wrote in his monthly market commentary.
The U.S. economy and most other developed economies became too reliant on rising asset prices, rather than the production of goods and services, in recent decades. When the financial crisis hit, governments and policymakers had to slash interest rates and take other more dramatic action to prevent asset values plunging, Gross explained.
"Almost all assets appear to be overvalued on a long-term basis," Gross wrote. "Policymakers need to maintain artificially low interest rates and supportive easing measures in order to keep economies 'on the right side of the grass.'"
(Excerpt) Read more at marketwatch.com ...
Ping!
Gross is right in my estimation on this. He is right more often than wrong but he got lucky on his home loan exposure compared to what it coulda been.
(former PIMCO private managed account holder)
Stick to bonds Bill.
How is that prediction of Dow 5000 holding up?
He completely missed the bottom this year.
The DOW peaked at 14K and bottomed out somewhere in the 6,000 range.
Crashing 57% vs instead of the 64% he called for. That makes him a major idiot.
“Almost all assets appear to be overvalued on a long-term basis,” Gross wrote. “Policymakers need to maintain artificially low interest rates and supportive easing measures in order to keep economies ‘on the right side of the grass.’”
Succinct and almost certainly correct. Right now, I’m almost completely in cash and mulling going to an inverse leveraged ETF on S&P later this week.
He is FOS. The support from the government has been what’s enabled to market to blow another mini-bubble.
Funny..I went almost completely to cash over the last five days of trading. I guess great minds just think alike..besides the market seems to go up 100 then down 100..or something like that. It seems to be signaling the top and a correction is on the way.
This a better title:
Pimpco’s head Pimp, Gross calls for more of what got America in trouble thanks to Fanny/Freddie and the democrats.
“He is FOS. The support from the government has been what’s enabled to market to blow another mini-bubble.”
I see what you are saying in that regard. What I should have said is that he is right that almost all assets are overvalued. His policy prescription that Obama should keep inflating the bubble is not correct.
“Funny..I went almost completely to cash over the last five days of trading. I guess great minds just think alike..”
Heck, I’m just trying to stay near the surface of the water :) And I’m willing to sacrifice the last 10 or 20% of capital gain to do that. When the market moves down this time, I think it will be hard and fast—the current investor exuberance will evaporate quickly and a bunch of stop-loss orders are going to hit all at once. I don’t want to be anywhere near it when that happens.
[“Policymakers need to maintain artificially low interest rates and supportive easing measures in order to keep economies ‘on the right side of the grass.’”]
Kudlow (CNBC) ran a good discussion on this yesterday with Rick Santelli, David Goldman, and Eamon Javers-Politico. The stock market went down Monday, while the dollar strengthened. Defaults on bad loans have been increasing in recent months and banks holding these loans are in trouble (another toxic asset bubble?). So bank stocks took a hit.
One opinion was that the dollar strengthening was a reaction to a temporary drying up of liquidity. But the Fed can’t let this continue, because it will cause another slump (this would put Bernanke under intense political pressure). So, they will keep easing and the decline of the dollar would resume.
Politically, Obama is looking at the 2010 election cycle and Bernanke is looking at long term inflation danger. However, majority opinion seemed to be that the Fed zero interest rate policy would extend until after the 2010 election.
One worrisome news item brought up by David Goldman was that over the weekend, in a meeting of Asian countries, it was proposed that they form a free trade zone and currency arrangement (without the U.S.) due to concerns that the Asian countries will not be able to maintain their export economies due to a continuing weakening dollar.
Kudlow remarked that the rising U.S. stock market has been linked to the falling dollar (it is good for U.S. exports, and makes Asian imports more expensive to the U.S. consumer). Goldman feels that that game is over and the stock market will decline from here.
If the Asians are serious about their Asian free market zone, it would be very bearish for the dollar and U.S. stock market.
“One opinion was that the dollar strengthening was a reaction to a temporary drying up of liquidity. But the Fed can’t let this continue, because it will cause another slump (this would put Bernanke under intense political pressure). So, they will keep easing and the decline of the dollar would resume.”
It’s not clear to me that more money in the system will continue to prop up the bubble in asset values. The graphs I have seen on money velocity and lending to businesses are scary. The brakes went on last fall and have not let up at all. The private savings rates are also very high by historic standards.
Same with the mortgage market. 4.5% interest rates have not been enough to restore home prices. What is shocking is how little home prices have gone up despite almost free credit. The problem is that real estate is still overpriced. Additional money sloshing around won’t get people to buy an asset that has a very significant chance of further big declines in value.
I’m just one example of that. I have a bit of money saved up over the years. None of it is in equities now because I think it’s a mugs game in the near term. If I could do it realistically, I would consider renting instead of owning my house (not practical at this point).
Multiply that by millions of people and it doesn’t doesn’t matter how much money is sitting in peoples accounts, it sits there because zero return is better than big negative returns. Every major asset class may well be cheaper a year from now.
The problem is an asset bubble that is very widespread across a lot of different asset classes.
In fact, you could view cap-and-trade as an attempt to create a new asset class where the elite can protect against declines in their asset values because the gvt can control the supply by raising the energy costs to the public.
He didn’t predict Dow 5000 at the top, he predicted it with the Dow around 7000. Nice Try. Some of us on this site actually manage money for a living and follow predictions a little more closely than most.
“but he got lucky on his home loan exposure compared to what it coulda been.”
I had been wondering about that. But now he’s ringing the bell for a market top, and he’s right.
SDS?
SDS is what I will buy if it really looks like a top.
I’m an amateur at this, but out of self defense I try to follow the markets. So here are my comments, which are in general agreement with your remarks.
“It’s not clear to me that more money in the system will continue to prop up the bubble in asset values.”
When the dollar is falling relative to other currencies it can be good for American exports, because it makes American goods cheaper for foreign consumers, and makes foreign imports more expensive to Americans. This encourages the purchase of U.S. goods by both American and foreign consumers. American manufacturers therefore benefit at the expense of foreign producers. So far, this U.S. stock market rally has been assisted by the falling dollar.
On the downside, from the perspective of a foreign investor, the market value of securities denominated in dollars diminish when the dollar falls relative to his own currency. At some point, the continuing dollar weakness could discourage foreign investment in the U.S. This would be detrimental to the demand for the dollar by foreign investors, leading to a dollar rout. Foreigners will have no more interest in US securities. (Just an obscene thought but would this also mean a fire sale on our land and natural resources?)
“The problem is that real estate is still overpriced.”
The way I have heard it stated was that the demand for houses remains weak because people are now trying to get out of debt (pay off credit cards) rather than take on more debt. That’s equivalent to houses being overpriced. What I think is scarier is the fact that that home loans with artificially low interest rates are still being pushed on low income people is by the U.S. government. The more prudent of those among the working poor are the ones who will refuse to be suckered into buying “affordable housing” mortgages. That leaves the worse of the bad credit risks as “sub-prime” buyers.
The Dow should have gone down to that level with the S&P in the neighborhood of 500. The only reason it didn’t was due to the government stepping in and banks and financial houses playing games with the market. Denninger has been all over this.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.