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Posts Tagged ‘PIMCO’

Pimco’s Mohamed El-Erian Sees Threat to UK, USA Sovereign Debt Ratings

March 19th, 2010 Comments off

While much of the world’s business press is focussed on the Greek debt crisis, the threat to the euro and the possibility of the IMF entering the fray, the co-chief investment officer of Pimco, the world’s largest  manager of bond funds,  has offered insights on what he sees as an even greater threat to the global economy. Dr. Mohamed El-Erian reacted to the recent assessment that came from the ratings firm Moody’s, which suggested that the United States and the United Kingdom faced a growing threat to their AAA debt ratings, as their public finances accumulate ever larger deficits.

According to El-Erian , “there has been a very sharp increase in debt to GDP in the United States, over 20 percentage points. That was unthinkable. What Moody’s is saying is that unless we see a credible medium term fiscal adjustment program, there is a risk debt indicators will get to a level that is incompatible with a AAA rating.”

What are the odds that we will see  “a credible medium term fiscal adjustment program” from the UK and US political establishment? Not good, in my view, which means a ratings downgrade for US and UK sovereign debt is inevitable, making insolvency an increasingly likely scenario for these two economies.

Obama’s Economic Crisis Team is Full of Green Shoots

July 9th, 2009 Comments off

Larry Summers, Timothy Geithner and Ben Bernanke may be fated to go down in history as the three horsemen of the global financial and economic apocalypse. Though Fed Chairman Bernanke was inherited by the Obama administration, Geithner, Summers et al were the chosen economic team of the Obama administration. In effect, their selection was the single most important decision made by President Barack Obama  in response to the Global Economic Crisis. Regrettably, thus far their performance has been found wanting. Most disconcertingly, many of their public statements are Bush 43 redux, a smorgasbord of overly-optimistic platitudes utterly dichotomized from economic realities. Perhaps the one phrase that is most likely to haunt the Obama administration is one uttered originally by Ben Bernanke in the spring; those perennial “green shoots” that the Fed Chairman could see sprouting amid the recessionary quicksand engulfing the global economy.

Like a barbershop quartet, other senior Obama economic policymakers and advisors sang the happy melodies of these enigmatic green shoots. This happy talk was not without its effect; in large measure the bear market rally on Wall Street, what others have referred to as a “dead cat bounce,” was a by-product of investor optimism fuelled by the green shoots serenade flowing from the banks of the Potomac.

As Yogi Berra would say, “it’s déjà vu all over again.” George W. Bush’s economic team was also full of joyful verbiage, until the floor literally collapsed from under them with the disintegration of Lehman Brothers. In the case of the Obama economic crisis management team, however, this theory of hope triumphing over reality has been executed with even more creative dexterity. With all credible mathematical indicators revealing that most of the largest U.S. banks are functionally insolvent, the Treasury Department concocted a totally cosmetic set of so-called “stress tests” to “prove” that these insolvent banks were, actually, “solvent.” In addition, by forcing changes in the FASB rules through political intervention, some of these banks were even able to show a profit in their Q1 results.

The June unemployment numbers, however, are throwing a cold dose of reality in the direction of the pontificators of ephemeral green shoots. With the publicly released U3 Labor Department jobless report showing the level of U.S. unemployment having risen to 9.5%, and the less publicized but far more accurate U6 report showing actual unemployment and underemployment now at a staggering 16.5%, it is quite clear that the American economy, along with most of the planet, is still undergoing a painful contraction. The fact that one in six Americans is either unemployed or trapped in low-paying part-time employment due to the lack of full-time positions, is a far more significant economic indicator than short-term gyrations on Wall Street or periodic upward anomalies confronting an otherwise downward economic trend.

Amid all the green shoots fantasizing, it must be recalled that the United States economy depends on the spending of the U.S. consumer for more than 70% of its aggregate demand. The real significance of rising unemployment, exchanging full-time jobs for part-time employment and the fear factor inhibiting spending by those who think they may lose their jobs, is a radical contraction in consumer spending. It is this reality more than any other that is weighing heavily on the nation’s economic superstructure. Not only is joblessness rising. After years of American consumers spending more than they earned, they have now shifted radically towards a high level of savings. Transitioning from a negative savings rate, the U.S. wage earner now banks nearly 7% of his/her declining take- home pay, despite virtually zero interest being offered to savers due to the Federal Reserve’s zero interest monetary policy.

The American consumer is scared, and is not being seduced by talk of green shoots emanating from Washington. With consumer spending undergoing significant contraction not only in the United States but in virtually all major economies throughout the globe, increasing pressure will bear on securitized investments based on loan portfolios directly or indirectly linked to consumer spending. Retail and shopping mall mortgages will witness higher levels of defaults, in conjunction with the already virulent afflictions  hammering sub prime and prime residential mortgages, commercial office space mortgages, consumer loans and credit card debt.

The Obama administration apparently believed that the original $700 billion TARP Wall Street bailout passed by Congress in the last weeks of the Bush administration, and President Obama’s $800 billion stimulus spending bill, would suffice to stabilize the economy and put the brakes on the free fall in employment numbers. However, jobs are still being shredded each month by the hundreds of thousands, while banks still suffer from balance sheets saturated with toxic assets. The FDIC has already closed more U.S. banks this year than in all of 2008.

As I indicated in a recent piece, there is already serious discussion occurring in the corridors of power in Washington on the necessity of a second stimulus spending package. This is an acknowledgement that the Obama economic crisis team, thus far, has been an abject failure. However, with so much money already having been borrowed by the U.S. government on a variety of schemes supposedly aimed at saving the economy, further large doses of public debt bring along very dangerous negative implications of their own.

In a recent column in the Financial Times of London, Mohamed A. El-Erian, chief executive and co-chief investment officer of PIMCO, the world’s largest bond trading firm, offered the following observation:
“The bottom line is a simple yet powerful one. The global crisis is morphing again. Having already contaminated (in a sequential and cumulative manner) housing, finance and the consumer, it is now threatening the potency and credibility of the economic policy making apparatus. As far as I can see, there are no first best policy responses that are readily available and easy to implement. Instead, the economy will continue to struggle, navigating both the adverse implications of last year’s financial crisis and the unintended consequences of the experimental policy responses. Given the inevitable socio-political dimensions, this story will play out well beyond the realm of the economy, policymaking and markets.”

Mohamed El-Erian is not offering green shoots, but he does speak the truth. Unfortunately, the truth is so bitter, it is unlikely that President Obama’s principal economic advisors will face up to the harsh and even brutal realities of the Global Economic Crisis until it is far too late for any policy response to be effective.

 

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

The U.S. is on a Fast Track to Bankruptcy

June 6th, 2009 Comments off

In less than a year we have seen the bankruptcy of financial and industrial behemoths once thought impregnable: Lehman Brothers, Chrysler and GM. Selectively employing the mantra “too big to fail” with companies such as AIG and Citigroup, the U.S. government has sought to reassure the American public that it is acceptable for other large corporations to endure the tribulations of Chapter 11 reorganization; that bankruptcy is actually a healthy business process that will restore profitability to large companies overwhelmed by debt and the consequences of the Global Economic Crisis. Yet, amid this Orwellian business vocabulary, the most essential question is perhaps being missed. Will the United States government be forced into bankruptcy?

If your reaction is one of incredulity, with the temptation to write off such a dire mega-financial event as a fringe-group fantasy, think again. Witness what some otherwise boring yet highly respected accountants and bankers have been saying recently about the exploding indebtedness of the United States.

David M. Walker served as the Comptroller-General of the United States from 1998 to 2008. In his capacity as the chief congressional financial watchdog, Walker warned long before the onset of the current financial and economic crisis that the nation faced more than $50 trillion in unfunded obligations due to Medicare and Social Security. Rather than allocating revenue to ensure these future liabilities were fully funded, Congress and the federal government have done exactly the opposite. Not only has no funding provision been made for these two major entitlement programs; while Medicare and Social Security have been in surplus their revenue stream has been used to artificially deflate the actual government deficit. Unfortunately, this shell game will come to an end in only a few years, when both programs enter into extreme and growing deficits of their own. And the figure of $50 trillion in unfunded liabilities, separate and apart from the U.S. government’s official national debt of more than $11 trillion, is already outdated by a cascading avalanche of dire financial news.

Richard W. Fisher, President of the Dallas Federal Reserve, delivered a speech to the Commonwealth Club of California back in May, and revealed that the authentic national debt of the United States, using generally accepted accounting principals, was nearly $100 trillion! Putting this surreal as well as apocalyptic number in perspective, Fisher said, “With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four, over 25 times the average household’s income.”

It is in the context of an already fragile fiscal architecture that the Obama administration and Congress are unleashing a torrent of unprecedented debt. The rationale is that this must be done, or the economy will crater. For the sake of short-term moderation of the worst ravages of the Global Economic Crisis, an already disastrous fiscal posture is being stampeded towards unmitigated catastrophe. Yet, the political leadership still claims it is committed to fiscal responsibility and that once the economy recovers and strong economic growth is restored, the deficit will shrink as a proportion of the nation’s GDP. Does anyone still believe these political promises of a new era of fiscal discipline that surely awaits us just around the bend?

There is mounting evidence that America’s primary overseas creditors are no longer easily fooled. Their collective skepticism is mounting, as Treasury Secretary Timothy Geithner discovered recently on his beggar’s expedition to China. The policymakers in Beijing are shifting their sovereign fund investments from U.S. Treasuries to commodities as a clear indication of their growing concern about the staggering level of indebtedness of the United States. And they are not the only major global financial actors to manifest a growing level of unease at Uncle Sam’s ballooning debt.

The Co-Chief Investment Officer at Pacific Investment Management Company, otherwise known as Pimco, is Bill Gross. He is one of the most important individuals on the planet at this time of global crisis, as Pimco manages the world’s largest bond fund. It is through the bond market that sovereigns finance their national debt. This is what he had to say about the credibility of the Washington political establishment on its claimed intent to restore fiscal sanity:

 

“While policymakers, including the President and Treasury Secretary Geithner, assure voters and financial markets alike that such a path is unsustainable and that a return to fiscal conservatism is just around the recovery’s corner, it is hard to comprehend exactly how that more balanced rabbit can be pulled out of Washington’s hat.”

Undoubtedly, Mr. Gross is correct. There is no rabbit to pull out of a magician’s hat. Which leaves just three alternatives for resolving America’s fiscal imbalance: 1. Raise taxes exorbitantly and/or drastically cut government expenditures 2.Unleash hyperinflation to reduce the real value of the national debt-and destroy the value of the currency in the process 3.Default on the national debt.

Defaulting on the national debt, which in effect is a declaration of U.S. insolvency, would have tectonic ramifications for the entire global system. Financial and economic power, international relations and strategic alliances would be altered so radically, the world that would ultimately emerge would be vastly different from the one we know today. While its exact composition cannot be predicted, it is a rule of history that great powers that go bankrupt lose their great power status.

Do any members of the Washington political establishment actually reflect on the long-term implications of the untenable fiscal policies they have authorized with their votes? If there are, they are sadly too few in numbers.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com 

 

 

U.S. Economy Risks Hellish Prospect of Hyperinflation

May 24th, 2009 Comments off
The global financial and economic crisis arose out of radical deflation in the U.S. housing market, as the real estate asset bubble split asunder. With the collapse in housing prices came the contraction of another asset bubble; equities. The ongoing demand destruction has also deflated commodity prices from their recent peaks, giving rise to a collective view among economic policymakers that deflation represents the single greatest risk to the global economy.
In itself, deflation is a dangerous economic phenomenon. Historians of the Great Depression often refer to deflation in the 1930s as a contributing factor to the prolongation of that epochal downturn in the world’s economy. Looking closely at the dynamics of deflation, it is not difficult to see why this is a dangerous economic state to be in. When prices of major durable goods, especially homes, continue to decline, this inserts a strong dose of uncertainty into the human decision-making process. Not many consumers are likely to take out a mortgage on a home that they believe will actually decline in value right after the legal papers are signed. Or so the classical economic theory goes.
However, though not downgrading the danger of deflation, I believe policymakers are ignoring other factors regarding this economic and financial condition. Furthermore, the U.S. government and Federal Reserve in particular, are taking steps to “cure” deflation that will inevitably lead to hyperinflation, which in the long-term may prove far more destructive to the long-term health of the U.S. economy.
History demonstrates that deflation is not a permanent condition. Market forces, unencumbered by fiscal and monetary intervention, eventually restore pricing equilibrium. At a certain point prices of major durables such as homes are low enough to encourage new categories of consumers to enter the marketplace. As demand is restored, prices stabilize and then resume their upward ascent. It is all a question of time. However, key decision-makers in the United States are not paragons of patience. They want deflation cured immediately, which explains why the U.S. Treasury and Federal Reserve are hell-bent on policies that are guaranteed to be inflationary. The question is how bad will inflation ultimately be.
Massive quantitative easing by the Fed is pouring trillions of fiat U.S. dollars into the money supply, essentially conjured out of thin air. This is being done without transparency, the rationale being that frozen credit markets require a vast expansion of the money supply in an attempt to get the arteries of commerce flowing again. Similarly, the U.S. government is spending vast amounts of money it does not have, with the Treasury Department selling unprecedented levels of government debt in a frantic effort to fund the wildly expanding U.S. deficit. These two forces, quantitative easing and multi-trillion dollar deficits, are the core ingredients of an explosive fiscal cocktail that I believe will ultimately lead to hyperinflation.
What exactly is hyperinflation? Economists disagree on a common definition, so I will offer one myself. Double-digit inflation extending over a period of at least two years would arguably be a hyperinflationary period. It can get much worse, witness Weimar Germany in the early 1920’s and Zimbabwe at present. The most recent experience the United States had with this unstable economic condition was in 1981, when the annual CPI rate exceeded 13%. The cure was draconian; Federal Reserve Chairman Paul Volcker engineered a severe economic recession that created the highest level of U.S. unemployment since the Great Depression-until now. The federal funds rate, currently near zero, rose to above 20% under Volcker’s harsh discipline. Eventually high inflation was purged out of the system and economic growth was restored, however the monetary regimen was punitive for several years.

The current monetary and fiscal policies being enacted by the key economic decision-makers in the United States are laying the groundwork for a far more dangerous inflationary environment than anything encountered by Paul Volcker. The explosive growth in the money supply and government debt is simply unsustainable without severe inflation. It must be kept in mind that the Federal government is not the only public authority engaged in massive deficit spending. Throughout America, state, county and municipal governments are faced with imploding tax revenues and lack the ability or political flexibility to cut services to a level commensurate with revenue flows. Both the Fed and the public sector are engaging in a reckless gamble; borrow like crazy in the hope that this overdose of economic stimulation will restore growth to the economy and normal tax revenues, leading to a decreased and sustainable level of public sector indebtedness.

If one believes that the policymakers running the Federal Reserve, Treasury and Federal government, the same architects of the Global Economic Crisis, are smart enough to now get everything right, perhaps we may escape the worst consequences of their turbo-charged fiscal and monetary policies. However, there are growing indications that global investors and the broader market are beginning to reach a far more sobering assessment.

In an interview with Bloomberg News, Bill Gross, co-chief investment officer of PIMCO (Pacific Investment Management Company) suggested that the coveted AAA credit rating U.S. government debt now benefits from will eventually be downgraded. “The markets are beginning to anticipate the possibility of a downgrade,” Gross said.

China, the major purchaser of Treasuries and holder of $1 trillion of U.S. government debt, is already on record as expressing concern for the integrity of its American investments, and has begun actively exploring alternatives to the U.S. dollar as the primary global reserve currency. These moves by China are not based on fears of expropriation of its U.S. assets, but focuses on the specter of hyperinflation destroying much of the value of assets denominated in U.S. dollars. No doubt China’s economic experts are well aware of the growing number of economists who are convinced that the U.S. will be unable to service its rapidly expanding debt burden without significant inflation. Inflation in monetary terms means the erosion of the intrinsic value of the American dollar.

What is most frightening about the policy moves being enacted by the Fed and Treasury is that their actions may not be a reckless gamble after all. They may have come to the conclusion that only hyperinflation will enable the United Sates to avoid national insolvency. In effect, they may be pursuing the exact opposite course undertaken by Paul Volcker in the early 1980’s. If that is their prescription for the dire economic crisis confronting the U.S., then one must conclude that Ben Bernanke, Timothy Geithner and Larry Summers have learned nothing from history Once the spigot of hyperinflation is tuned on, it becomes a cascading torrent that is almost impossible to switch off, and which in its wake inflicts inconceivable levels of economic, political and social devastation. Before it is too late, President Obama should put the brakes on his economic team’s dangerous gamble with the haunting specter of hyperinflation. If he fails to act in time, a hellish prospect may be his economic and political legacy.

 

For More Information on “Global Economic Forecast 2010-2015” please go to the homepage of our website, http://www.globaleconomiccrisis.com