Inflation and the Economic Road Ahead

It's obvious to me that the Fed wants out of QE,PIMCO founder,CEO and chief investment officer Bill Gross told CNBC.What we're seeing is an end to QE in October or November,and then a focus on the policy rate,a discussion that focuses on inflation rather than employment.*
Mohammed El-Erian's departure was a surprise to us.We're not exactly certain where he's going.We're disappointed that he's not gonna continue in a successor role to me.Mohammed and I have been good friends for 14 years.We're neighbours;he's just down the street.As to why he's leaving,I basically can't tell you.That's best left to him.
I don't think it had anything to do with performance.Perhaps like an architect he's moving to another house.We understand that he does want to take a break.He's gonna end up somewhere at a higher level.We now have six deputy CIOs under the structure Mohammed created.This is a sharing of ideas that will function more quickly and more responsive to the market.*
Global financial markets are still highly levered.The emerging markets are slowing down,and developed markets are responding.Mexico to me is still the best of the emerging markets.Its wages in the auto sector are just 15% of the US.Mexico is a hold that's just been caught up in the rest of the emerging markets.*
There's always a risk of inflation going forward.We're in an artificially enhanced market that won't necessarily give returns higher than inflation.I think we're fairly valued at 15 times earnings.We're OK as long as growth remains at least 2-3%,and I think it will,"the bond king" Bill Gross said.*
The Fed's key inflation gauge rose slightly in December.The PCE went from 1.1 to 1.2%,well within the Fed's stated goal of 2.0%.Personal income was flat,but personal spending increased at 0.4%,double the estimated increase of 0.2%.

Should You Invest in the PIMCO Total Return Fund

The policy rate is the key going forward,said PIMCO founder and co-CIO Bill Gross,the "Bond King."We at PIMCO think it's gonna stay low for a long,long time.We think that unemployment of 6.5% is their target.We think the policy rate is the key, and has to stay down there to anchor and keep other rates low.*
Every week that we keep the government shut down subtracts 0.10% from GDP.Ultimately,the possibility of default is a million to one.The uncertainty going forward is not good for the Treasury rate.Every month,the Treasury brings in 300 billion dollars,and pays out 45 billion.It wouldn't even think about defaulting.*
The Total Return Fund suffered rather significant outflows,but September was a magical month,and investors are coming back.*
As for overseas investing,Brazil has particular problems in terms of its infrastructure and pension payments.It's not the paradise many investors had thought,Bill Gross observed.*
Despite outflows for five consecutive months,PIMCO's Total Return Fund is regarded as a core bond holding by many.It is the world's largest mutual fund.It saw 5.4 billion dollars of outflows in September,and 28.7 billion of outflows year to date.That's -10.1% of assets under management.This decline in popularity is pegged to a Wall Street notion that the Federal Reserve will soon begin hiking rates-a belief that hasn't been supported by the continuing slow pace of the recovery from the financial crisis and the drag of fiscal uncertainty.
The fund closed at 10.82 a share on Monday,down 0.09%.Nonetheless,Morningstar Associates gives it an outstanding five star rating.The fund has very low expenses of 0.46%,and bonds are still considered an essential element of a balanced portfolio.Over the long term,you are better off having significant exposure to the bond market.Among bond mutual funds,Total Return remains the clear favourite.*
PIMCO Total Return Fund(PTTRX),PIMCO Total Return ETF(BOND)

What Investors Should Look For

It's getting very confusing,said Mohamed El-Erian,CEO and co-CIO of PIMCO.What you're having at the Fed fundamentally is,difficult decision-making in uncertainty and changing leadership.1.Not a really good feel for the economy 2.Trying to get the market focused on the journey,but the market is focused on the destination.Put on top of that the change in leadership.*
It's really important to act on what you know for sure.1.You know they can't hike rates;the economy just isn't strong enough.2.You don't know about tapering,and we're stuck in a low level growth equilibrium of 2%,and high unemployment with low inflation.We don't see the demand for the high liqiudity.The transmission mechanism is blocked.*
Look for the safest fixed income,the front end of the curve,up to five years.On the equity side,companies that will continue to take cash out and distribute through dividends and buybacks.*
Our assumption is,Congress will not create yet another self-manufactured crisis,Mr.El-Erian added.He is a long time associate of PIMCO founder Bill Gross,"the Bond King,"and formerly managed the Harvard endowment.

Asia This Day:Bernanke Succession;Syrian Framework

Asian markets were cheered by developments in the US and Geneva Monday morning,sending the MSCI Asia Pacific index up 0.55%.The withdrawal of former US Treasury Secretary Larry Summers from consideration to head the Federal Reserve is being seen as a definite plus by Asia,as it will supposedly make the tapering of supportive Fed policies a little less severe.
We're seeing the rally as being based on Summers being a litle more agressive on tapering,said Philip McNicholas,ASEAN economist at BNP Paribas.Broadly speaking,we do see down side risks to the region with this tapering.We actually think Malaysia is more sensitive.Malaysian markets are closed for a national holiday today.
In the Philippines,the government is being more effective in its spending.That process is still ongoing and showing improvement.Overall,the fundamental story is still there.In Indonesia,the government was able to implement fuel price reform in June.We do think that Thailand can ride this out.
Markets are expecting the Federal Reserve to make an announcement on tapering this week.Mr.Summers' prospective nomination to be Fed Chairman had become highly politicised,and even Democrats opposed him in an open letter supporting the nomination of Janet Yellen,who has become the consensus candidate.
Bill Gross of PIMCO tweeted that Summers' exit makes Monday a huge day for the risk-on trade,i.e.,the buying of equities.
Another positive influence on world markets is the agreement in Geneva on Saturday of a framework for Syrian chemical weapons disarmament by the US and Russia.This will now go to the UN for the final formulation of a Security Council resolution spelling out the details.The framework gives Syria one week to provide a complete inventory of its stockpile;stipulates the first inspection of the weapon sites in November;and the destruction of all the weapons by mid-2014.
US forces will remain on standby in the region to back the agreement up with military action.

What Bernanke's Testimony Means

The stock market is at all-time highs,but markets tend to seize on what they want to hear and run with it.A case in point is Federal Reserve Chairman Ben Bernanke's testimony before Congress last week,which was assessed by Mohmamed El-Erian,CEO of leading asset manager PIMCO.This testimony is rather dovish,Mr.El-Erian said.Bernanke was saying that 1.The unemployment situation is unsatisfactory.2.Don't worry about inflation;it is too low.3.We have a number of instruments we can use. He's trying to strike a difficult balance between confidence and excessive risk-taking.The journey is full of ifs.The market extrapolates this to the destination.Markets are different from the Fed.They want to know where we are going,and when we're going to get there.1.The unaddressed cost and risk of unconventional policies.2.You've convinced other central banks to follow you,but does it make sense if everybody does it? The underlying economy is still fragile.The fundamentals with the technicals would call for lower yields from here.1.The real economy is weak.2.Banks have reduced risk exposure,so their ability to earn is less.It will be interesting to see how sustainable their earnings are. Mr.El-Erian,who formerly managed the Harvard endowment, is also co-Chief Investment Officer of PIMCO,along with founder Bill Gross.

Bill Gross:New Normal Seen Persisting in the New Year

Bill Gross,co-founder of Pacific Investment Management Company,or PIMCO,sees stubbornly high or even increased unemployment for 2013,resulting in weak fixed income and stock returns and a surge in gold prices.Mr.Gross issued his firm's "Fearless Forecast" for the new year recently.It shows basically that the economy will trundle along in the new normal as defined by PIMCO:high unemployment;slow growth;and orderly deleveraging by developed countries.
GDP growth will be 2% or less on account of globalisation,deleveraging and demographic headwinds.Stocks and bonds will return less than 5%.The market will also lack the tailwind of the Fed's quantitative easing.The future price tag of Fed policies will be in the form of inflation and devaluation of currencies,relative either to themselves or to the prices of commodities in less limitless supply,such as oil and gold.
Future growth must come from investment in education and infrastructure.It has to be less consumption-oriented.It takes a determination and a  primal-spirited momentum to put this economy back in the hands of the private sector.
Mr.Gross manages the company's iconicTotal Return Fund,which returned a strong 10.5% in 2012.The economy and global economy are limited,he pointed out.PIMCO is a two trillion dollar firm.We'll cross our fingers and we won't be totally confident,but we think we can do it again,the"Bond King"predicted.
PIMCO Total Return Fund Instl(PTTRX)

Crunching the Market:PIMCO

Reacting to a mildly favorable jobs report,Bill Gross of PIMCO said the unemployment we've been seeing is a structural issue.It's gonna be very hard to replace those 8.5 million lost jobs.Many of them were in real estate,construction and mortgages-areas at the heart of the financial crisis.To posit a vibrant,positive economy based on the jobs report is off-base.
The economy,the asset markets have been reflated by the government,Mr.Gross explained.Now a lot of that has been halted,and some has been withdrawn.The private wallet and the will that must take over are being questioned by the markets.The minute that government check disappears,the private market is standing all alone.PIMCO thinks the transition to final demand is different this time than it was for other recessions.Instead of levering,we're delevering;instead of deflating,we're inflating.The new normal taking shape,a protracted period of slow growth and high unemployment,is a sea change,not a readjustment.

Bill Gross Raises Cash

Bill Gross,"the bond king,"has rebalanced the industry-leading bond fund,the PIMCO Total Return Fund.He raised cash to 7% of the fund in November from -7% in October.Mr.Gross also cut government securities to 51% from 63% in October,which was a five-year high.He sliced mortgage securities from 16% to 12%,the lowest on record.The Total Return Fund is up about 17% year over year,better than 55% of comparable funds.
Mr.Gross feels that the bonds will decline in value when the Federal Reserve,reacting to an improving U.S. economy,raises interest rates in 2010.He is co-CEO and co-Chief Investment Officer at PIMCO,along with Mohamed El-Erian.They have been adding exchange-traded funds to PIMCO's offerings recently.

Rally Likely At Peak

The recent stock market uptick is likely at its peak,according to Bill Gross,co-CEO and co-Chief Investment Officer at PIMCO with Mohamed El-Erian.We're seeing the new normal for the economy:slower growth,about half what it used to be.Mr.Gross admitted they try and keep their heads relatively small and shrunken in this business.Overconfidence is the spell of doom.
One may expect a very low return on assets,Bill Gross feels.We've re-normalized,although the price-to-earnings ratios tend to fake us out.To the extent that we see Gross Domestic Product growth at 2% in real terms,versus the old normal of 4%,assets will return less.We're living in an economy of deleveraging.Loans will be less available.Homeowners must put 20% down now,for example.There is a very significant shift in terms of risk preferences and regulation.
Mr.Gross' views are at least partially echoed by other observers of the financial markets.Christine Romer,Chairman of the White House Council of Economic Advisors,says the consensus for GDP growth is in the range of 2-3% for the next four quarters.

Gross Sees Limitations

Bond expert Bill Gross of Pimco thinks the Federal Reserve will cut short term interest rates to two percent,but there's a certain point beyond which it doesn't help the economy.Lower and lower interest rates produce a weaker and weaker U.S. dollar,causing global inflation.The bond markets on a global basis are afraid of inflation.U.S. Treasury bonds are perhaps the most overvalued asset in the world.Mr.Gross likes corporate bonds with AA or AAA ratings,such as General Electric(GE) or JP Morgan Chase(JPM).

Central Banks Seek Growth

Central banks are cutting interest rates in hopes of sparking flagging economic growth.The Bank of Canada was first last week,cutting its overnight rate a quarter of a point,from 4.5 to 4.25.As late as July,the BOC was worried about inflation.Now it is concerned about deflation and the prospect of a failing economy.The Bank of England followed suit.It cut its key rate to 5.5 from 5.75.Growth has begun to slow,though the upward risks to inflation still remain.Credit tightening poses a risk to the Gross National Product.Slowing demand growth will ease pressure on capacity.The European Central Bank left rates unchanged.That may amount to a concession,since the ECB has been a hawk on inflation,and might prefer to raise rates.Today at 2:15 PM Eastern,the Federal Reserve will issue its decision on interest rates.It is expected to cut as well.Bill Gross of PIMCO would like to see the Fed cut all the way down to 3%.To restart the near-recessionary economy,we will need that.The Fed needs to reduce steadily and significantly.There has been a breakdown of the modern banking system.The tangled web of subprime loans has created a shadow banking system.The banking system must be shored up.Home prices may fall another 10% over several years.The banking system exhibits a freezing up of liquidity and a reluctance to make loans to the vital part of the economy.The Fed must use all means to provide liquidity.Troubled Swiss bank UBS has written down another 10 billion of subprime securities,following an initial write-down of 3 billion.To cover this,it has sold a stake in itself to the government of Singapore and a secret Middle Eastern investor.Shares of UBS rose on the news.Longterm investors are building positions in such financial stocks,which are trading at a big discount,although they could well drop further before recovery.Similar holdings are HSBC(HBC) and Citigroup(C).