Around the Street
Bill Gross: Say Goodbye to the Risk-Asset Rally
Bill Gross, PIMCO
Asset appreciation in U.S. and other G-7 economies has been artificially elevated for years. In order to prevent prices sinking even lower than recent downtrends averaging 30% for stocks, homes, commercial real estate, and certain high-yield bonds, central banks must keep policy rates historically low for an extended period of time. If policy rates are artificially low, then bond investors should recognize that artificial buyers of notes and bonds (quantitative easing programs and Chinese currency fixing) have compressed almost all interest rates. But while this may support asset prices—including Treasury paper across the front end and belly of the curve—at the same time it provides little reward in terms of future income. Investors, of course, notice this inevitable conclusion by referencing Treasury bills at 0.15%, two-year notes at less than 1%, and 10-year maturities at a paltry 3.40%. Absent deflationary momentum, this is all a Treasury investor can expect. What you see in the bond market is often what you get. Broadening the concept to the U.S. bond market as a whole (mortgages plus investment-grade corporates), the total bond market yields only 3.5%.
To get more than that, high yield, distressed mortgages, and stocks beckon the investor increasingly beguiled by hopes of a V-shaped recovery and "old normal" market standards. Not likely, and the risks outweigh the rewards at this point. Investors must recognize that if assets appreciate with nominal GDP, a 4%â5% return is about all they can expect even with abnormally low policy rates. Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets—while still continuously supported by Fed and Treasury policymakers—is likely at its pinnacle. Out, out, brief candle.
Michael Englund, Action Economics
[The] drop in the Conference Board's consumer confidence measure [to 47.7 in October from 53.4 the month before] ... took the markets by surprise—though with hindsight it joins downside surprises in most of the other October confidence gauges to signal a remarkable and potentially disturbing pause in the usual cyclical climb for these measures. We will need to watch the trajectory for these surveys closely in November to assess the degree to which this pause signals downside risk for the already bleak holiday sales outlook.
Beth Ann Bovino, Standard & Poor's
The August S&P/Case-Shiller home price index (20 cities) fell 11.3% over last year, with the pace of decline continuing to decelerate from the -12.3% pace seen in July. It was also better than our expectations for a 13% decline. Nineteen of the 20 metropolitan areas showed improvement in their annual rate of return. Moreover, 17 of the 20 cities saw month-over-month price increases, led by San Francisco (+2.6%). The 20-city price index is up 1.2% over July—but still 29.3% below its 2006 peak.
The better-than-expected data offer another signal that home prices are starting to stabilize, to help support markets today.
David Joy, RiverSource Investments
The advance estimate of third-quarter gross domestic product will be released [on Oct. 29] with a widespread expectation that the economy grew for the first time since the second quarter of 2008. Consensus estimates for the pace of growth center around 3.0% at an annualized rate.
While positive growth will be welcome indeed, the components of that growth also will be important. Consumer spending certainly will be boosted by the "cash for clunkers" program, but what level of spending otherwise occurred is uncertain.
The impact of changes in inventory levels, government stimulus spending, and relative stability in housing activity will provide insight into the underlying health of the economy. Doubts persist regarding the strength of final demand. Many point out that, so far, evidence of strength mostly exists on the supply side of the economy, driven by special circumstances and targeted stimulus. Proponents of an economic "double dip" scenario argue that private demand will not be sufficiently robust once this stimulus, both fiscal and monetary, is exhausted and withdrawn.
[The Oct. 29] report will begin to clarify some of these questions, but it will not answer them. It is far too early in the recovery to know either the strength of the consumer contribution over time, or for how long monetary policy will remain as accommodative. At the very least, the report should show that the recession has indeed ended. How robust and how lasting the recovery will be will remain uncertain.