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PIMCO Prepares For Global Inflation, Sees QE3 If "Recovery Sputters"
As was first disclosed by Zero Hedge, PIMCO trimmed its Treasury holdings in February to zero. While many speculated that the reason is concern for global inflation, we now have the confirmation courtesy of a rhetorical Q&A with Saumil Parikh released by the Newport asset management giant. In a nutshell: "Setting aside immediate oil shocks, we believe global inflation has cyclically troughed and we see a secular upswing in inflation, which naturally will put upward pressure on interest rates. We see three key global factors as potentially adding to inflation over a long horizon: (i) The degradation of sovereign balance sheets and the structural inflexibility of fiscal deficits. (ii) Emerging markets used to export disinflation to the developed world, but over the secular horizon we see them as exporting inflation. (iii) As populations age, they tend to save less and consume more. Demographics may thus become an inflationary force globally, though possibly this risk will be balanced somewhat by demographics in emerging nations. In the near term, we anticipate most, though not all, global central banks are likely to err on the side of allowing inflation to rise above stated or implied targets during 2011. In the U.S., if the economic recovery sputters, the Fed could expand quantitative easing. But further deficit accommodation would pose inflation risks. Obviously nothing new here, and just a confirmation that in order to preserve the Wealth Effect, Bernanke will be forced to put the global Genocide (And Printing)Effect into overdrive.
Each quarter, PIMCO investment professionals from around the
world gather in Newport Beach to discuss the outlook for the global
economy and financial markets. In an interview, senior portfolio manager
Saumil Parikh discusses PIMCO’s cyclical economic outlook for the next
six to 12 months. Parikh, who leads the forums, is a managing director,
generalist portfolio manager and member of PIMCO’s Investment Committee.
Parikh also comments on investment strategies that PIMCO is
applying to manage risk and deliver returns amid global uncertainty and
shifting growth dynamics.
Q: Could you discuss the economic recovery in the U.S. and whether PIMCO believes it will be a lasting rebound?
Parikh:
I would first note that, as a baseline, PIMCO continues to foresee a
multi-speed global recovery over the next few years, with advanced
economies facing muted growth and unusually high unemployment, while
systemically important emerging economies continue gradually to close
the global income and wealth gap. This forecast is governed by more
favorable initial conditions of debts and deficits in emerging markets
as well as by the loss of capacity for fiscal stimulus in certain
developed nations.
Having said that, there are certain cases where the cyclical outlook
deviates somewhat from the secular outlook. Nowhere is this
juxtaposition between the secular (three to five years) and cyclical (a
year or less) more evident than in the U.S. The country is experiencing a
cyclical economic rebound, but its strong durability is uncertain.
While endorsing the resilience and innovation of U.S. citizens and the
economy, there are concerns about the country’s ability to achieve in
the short-term “escape velocity” due to the legacy of the global
financial crisis and other structural headwinds.
Currently, governmental revenues are not growing fast enough to close
deficits in a pro-growth manner, and the private sector continues to
deleverage. As a result, the national savings rate has continued to
decline as opposed to rise as is customary during a self-sustained
recovery. Meanwhile, on the margin, political winds are changing and the
next fiscal policy surprise could be contractionary – as opposed to the
expansionary tax-cut deal of late 2010. And, further, we are concerned
about the potential economic drag if oil prices remain elevated.
Bottom line: On a cyclical timeline, and also taking into account the
external environment, we continue to forecast a 3.0%–3.5% real U.S. GDP
growth rate for 2011, with risks tilted toward slower growth in 2012.
Q: And will the Federal Reserve extend quantitative easing?
Parikh:
We do not anticipate that the Fed will add to the total quantity of
Treasury purchases this year. If it were to change course, it could
taper off the purchases (e.g., so instead of ending abruptly in June,
the Fed starts buying less in April or May and stretches out purchases a
few months beyond June).
Q: What is PIMCO’s outlook for Europe?
Parikh:
The cyclical outlook for the eurozone and U.K. economies contrasts
starkly with that of the U.S. Notwithstanding the favorable developments
in Germany, several countries there face headwinds to growth via
national austerity measures and the resulting fiscal drag over our
cyclical horizon.
In our detailed forum discussion about the internal dynamics of
Europe, the core economies are expected to achieve at- or
above-potential economic growth due to strong initial conditions of
competitiveness and a significant tailwind from emerging market external
demand. Also, PIMCO sees a non-trivial probability of fat tails on both
ends (positive or negative) for the European economy in 2011, depending
on whether the sovereign crisis affecting Greece, Portugal and Ireland
can be successfully quarantined before spreading to Spain and Italy.
Q: Turning to Japan, many of us have watched the incredible
images of the events and the tragedy inflicted there. Certainly others
are commenting on the humanitarian needs; perhaps you could discuss the
impact on Japan’s economy and if there is hope on that front?
Parikh:
The images are devastating and point to the massive calamities that
have hit that country. Japan’s immediate focus is rightly on the
enormous human suffering and on rescue operations, as well as containing
nuclear-reactor risks.
Japan’s leaders have moved swiftly to stem fallout from the
earthquake and tsunami on all fronts, including economic. Within days of
the disaster, the Bank of Japan injected a record 15 trillion yen ($183
billion) into the world’s third-largest economy.
Japan’s economic growth rate will likely fall in the immediate
aftermath of the natural disasters, but reconstruction activities should
have a stimulative impact on growth over time. The loss of inventories
and supply-chain disruptions could cause inflation to rise temporarily
from very low levels.
Much will depend on the extent of the damage to Japan’s infrastructure. We are hoping for the best.
Q: Dramatic events are also sweeping the Middle East – is the region a threat to the global economic recovery?
Parikh:
Certainly we are concerned that the sharp rise in global oil prices,
and the threat that supply uncertainties could spur further increases,
could lead to negative global growth consequences. A truly severe oil
shock could shift our global GDP outlook from a soft landing to a more
significant downturn with sharply stagflationary effects.
We
continue, as with much of the world, to monitor and evaluate the
situation closely. The risks are very asymmetric given the starting
point of oil prices in 2011.
Q: Let’s shift to emerging markets. Does PIMCO still see them as drivers of global growth?
Parikh:
We expect real economic growth in the major emerging economies of
China, Brazil, Russia, India and Mexico to remain at a solid rate during
2011, but lower than 2010 due to fading monetary and fiscal policy
tailwinds and some pockets of overheating.
In terms of composition, we see growth across the major emerging
markets becoming more balanced, with less reliance on the inventory
cycle as well as net trade and capital investments, and marginally more
reliance on domestic final consumption as an engine for growth.
The main challenge for the major emerging economies in 2011 is
managing the risk of greater overheating in the domestic economies. We
judge idle capacity to be negligible and cyclical inflation and
cost-push pressures on the rise to a degree that could threaten
corporate profits, leading to a larger-than-expected slowdown. Once
again, and similar to the U.S. outlook, the level and volatility of oil
prices are a major cyclical risk to the emerging market growth outlook.
Q: What is PIMCO’s outlook on inflation and interest rates if
the situation in the Middle East does not lead to a severe oil shock?
Parikh:
Setting aside immediate oil shocks, we believe global inflation has
cyclically troughed and we see a secular upswing in inflation, which
naturally will put upward pressure on interest rates.
We see three key global factors as potentially adding to inflation over a long horizon:
- The degradation of sovereign balance sheets and the structural inflexibility of fiscal deficits.
- Emerging markets used to export disinflation to the developed world,
but over the secular horizon we see them as exporting inflation. - As populations age, they tend to save less and consume more.
Demographics may thus become an inflationary force globally, though
possibly this risk will be balanced somewhat by demographics in emerging
nations.
In the near term, we anticipate most, though not all, global central
banks are likely to err on the side of allowing inflation to rise above
stated or implied targets during 2011. In the U.S., if the economic
recovery sputters, the Fed could expand quantitative easing. But further
deficit accommodation would pose inflation risks.
Q: Finally, could you discuss how PIMCO is applying its global outlook to its investment strategies?
Parikh:
Let’s begin with inflation, which is a topic clients often ask us
about, and how that applies to our investing decisions. Since we see a
secular bias to global inflation, we expect fixed income yields to
gradually rise; we believe the 20-plus-year secular duration tailwind
that previously anchored portfolios is over.
So we have taken down duration in our strategies, moving to shorter
maturity securities. For example, while we still have faith in the
credit quality of U.S. Treasuries, we feel yields on longer-dated notes
and bonds are likely to rise as the Federal Reserve ends its
quantitative easing and investors price in growing inflation risks.
We continue to focus on attractive opportunities in other areas in
the U.S. and across the globe, including foreign currencies and credits.
There are lots of opportunities in this global marketplace. Finally, we
are tempering our near-term enthusiasm for U.S. corporate bonds with a
long-term outlook that the U.S. economy must eventually address fiscal
deficits, rising rates and the potential for higher oil prices and those
could all be negative factors for U.S. companies and the bonds they
issue.
Thank you, Saumil.
»
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Warren Buffett full interview
http://dawnwires.com/investment-news/warren-buffett-i-believe-in-the-world-recovery-irrespective-of-japan-full-interview/
The system is perpetually and repeatedly insolvent. It requires constant bailouts until it fails, that's QEn...
with n being the point where everyone's had enough.
There needs to be no doubt that QE3 will be necessary. He will need to screw all the folks buying on QE speculation now by letting the markets tank back down. Then there will be no question in the wisdom of the federal reserves decision to reinitiate QE3, after a brief pause in June to allow the markets to bleed out. either way, it needs to happen.
where n goes to infinity
what if Ben threw a QE party and nobody came though? Even "Tyler Durden" now admits "the stock market will go higher."
Yay! More qualitative teasing
What "recovery" sputtering?
I'm confused.
-Housing is recovering?
-Food stamp participation is going down?
-U-6 isn't at 18% anymore?
What fucking recovery are we talking about? Someone wake me up from this horrid nightmare.
http://www.dchealth.dc.gov/doh/cwp/view,a,3,Q,573170,dohNav_GID,1787,doh...
http://tinyurl.com/63gnom6
"IF?" how about when
drive around business/office complexes - every other building is for sale/lease - empty
where are all the people that use to work in these offices
Clearly, if printing a mountain of currency hasn't fixed the problem - perhaps two or THREE mountains of currency will do the trick!
Right! What these central bankers seem to forget is that the scarcety of an item determines its value, thus, the dollar, the yen everywhere make them worthless!
evidently not in the realm of central banking...
You can't beat the Market!
The MARKET is tooo BIG!
Go long on green ink, printing presses and cotton paper
In spain inflation is real close to 60%
that sounds bullish...
Bernochio will tell the world today what they want to hear. The US is on its way to an extended period of sustained growth and there is no sign of inflation, the worst is over. Watch that nose grow!!!
neutron beams are great for green shoots!!
Why the junk???
You think it's GOOD fr Japan that the reactor vessels have holes in them allowing neutron beams to be detected?
If this think "blows"...even if it doesn't (Tokyo water is ALREADY unfit for children)...what happens when 40 million FINALLY wake up and realize they MUST leave to survive? This thing is still getting worse...and tokyo is ALREADY becoming unfit for habitation. Japan is TOAST...might as well let China annex what's left...as with Hong Kong.
So, what happens to the world when Japan dies?
growth forever!! spend spend spend spend spend
Perhaps we'll finally have a place to put our radioactive waste. ;-)
TPOG
What kind of "GDP growth" is this guy talking about? QE3 will bring about a destruction of our currency via inflation, the cost of commodities will continue to rise, and people will start scaling back their spending. I know a lot of people have been forced into household austerity due to the rising cost of everything. How does this ass hat expect economic growth to occur when people stop buying things from an already supply-excess market?
Bernanke and Mugabe must be related in some way... they are both delusional and they both like the printing press.
Mark Anthony could not have said it better. Send him to cut off their Cicero like heads.
Seeing poor people starving the world over doesn't make you feel that much more 'wealthy'?
In my fam, we call it 'The Last Man' effect: well at least I'm not as bad off as that guy...
Ah yes, lovely inflation. Light Crude on the NYMEX is slowly creeping it's way back to 106. I can't wait till next week when that starts hitting at the gas pumps again. F me. How much can you stretch a paycheck? I'm not sure, but mine is getting pretty inelastic at this point.
No paycheck? No need for the gas pump!
I question the premise that as the population ages they consume more. Income declines so the percent of spending to income rises but I believe the "actual" dollars spent declines and the distribution of whatever spending occurs changes.
Spoken like someone who doesn't feed kids or plan on sending them to college. As for the those aged even more, think healthcare costs (just because they aren't paying for their drugs or hospital beds and ventilators themselves doesn't mean someone else isn't on their behalf).
you speak a lost language - does it translate to BTFD?
Gawd I hate interviews like this. Not a single itsy bitsy piece of information in it.
which hand are you watchin?
The recovery that isn't. Just bouncing off the bottom.
Sees QE3 If "Recovery Sputters
Hey everybody.....we're in a recovery!!!
Unless Benny wants riots in the US, and people looking for him like a fugitive, he better keep his QE3 in his pocket. People are getting very tired and restless about this scam, its driving prices up on people, but not helping anyone otherwise, and actually is cutting into their dollar.
The bald-headed a$$hole banker better watch what he does from here on out. This QE experiment has gone on just a little too long, and gone a little too far. Let him go play games and gamble someone else's money for a change. Nothing he has done shows one shred of evidence that it is good for the economy. It has only been good for his banker buddies and the ponzi on Wall Street.
He better back off this QE trip he is on.
There is no choice other than forcing a crisis and bring in the SDRs.
Your rulers betrayed your country and it's economy a long time ago for their empire. You thought it was your empire but it will turn to ashes in your mouth.
Yes JKR, people are very angry about the decline in their purchasing power, but the main premise that needs to be understood is that if The Bernank stops printing into QEinfinity, collapse surely follows.
So, you either decide to join one of two camps: the 'Bring It On' camp which includes a sharp, sudden collapse or the 'Slow and Steady' camp which would allow a person to move their assets around to make gains while the collapse unfolds over a few more years.
You forgot to add "That's Johnny Neutron to you mofo!"
I read that as pimpco Trimmed It's Treasury Hedge to Zero.
In other words, Pimpco Got a Brazilian.
ORI
the last black swan has come ... Liz Taylor just died... it's all over now
One hours silence please for the woman in Ivanhoe and Cleopatra...
How does inflation rise with the eurozone , Japan and the US on the verge of default?
'verge'... the keyword in your post. The azz hats can remain solvent for a long time... This house of cards was not built in a day and it will probably not collapse in a day. It has been collapsing since 2008 and is still 'just approaching the cliff'...
The Black Swan of Japan will hasten the collapse, especially if Tokyo must be evacuated.
How long till supply chains, Just In Time Inventory, collapse?
Exactly. And who do the emerging
markets sell to? Themselves. Not
friggin likely.
Pimco said nothing,such kind analises no one need,its just confirmed that people in ISrael had cut on food spending for this year compare with other year regardless population growth-about 3% for last two months and in Israel situation with food much better that anywhere,tomatoes ,cucumbers,salary,avocado,potatos most in range 1-2$ and no one rush into buying kilograms,situation in country where most food excluding grain stuff ,cheap telling something.Pimco and many others ,specially FED try to put us into inflation,because their revenies is growing from our stupidness,but the message is simple-cut on your spending,most americans such idiots that can not stop buying food in crazy quantitives,it a habit whi FED use.Human mentality hard to change habits formed by 20-30years,for example in Wisconsin average person weight in 100+ kg.Remember where the most prices of commodities formed-Chicago,Philadelphia,NY-its all american traders control and its a Policy now to hold those prices bullied up to squeeze all you have that in deflation cycle ,which is allready started you could not do anything,but cover your debits which you in hunger do now under FED mafia preasure.Stop spending,take money from your 401k plan regardless anything-this money would be nothing very soon as pension funds have obligation to buy products which is out of your control,times of trust ended,do not trust no government source info,be in cheack yourself,cut on car-buy bicycle if you can,use bus,train,drive less and eat less,most have abesity simptom,so kill two things in one time,do not buy more that you need-cause you throw later half,excluding stabilizator bullied food which not spoils even after year in frigirator
So, global inflation has troughed... with food riots? That was the good spot? Don't tell the Egyptians, or they'll go Libyan on us.
PIMCO says we should prepare for a "secular upswing" in inflation? Don't tell these geniuses at PIMCO, but even Glenn Beck beat them on that call by 2 years.
Hey you dumbshits! QE1, QE1Lite, QE2 caused the fucking inflation that we're experiencing. So what is the fucking cure? More of the same insane shit that caused inflation. There is no other term other than FULL FUCKING RETARD (FFR) to describe QE3. When people (sheeple) begin to find out that they are on the hook for FFR actions, there will be a bloody revolt. This won't end nicely.
One question: When that black swan finally lays its eggs on the stock market and all that QE money flowing into it to prop it up is lost, will the Fed be needed anymore?
Yep,
The cure is for the FED to stop intervening and forcing a recovery. Let it occur naturally. Let these ponzi markets fall where they are going to fall, and then grow from there. Fake growth, fake market climbs only accelerate the problems.
Makes sense so it will never happen
Vote out every incumbent
Demand the end of corporate welfare, corporate tax loopholes and price subsidies
that's the beauty of QE. Having "destroyed the economy to save it" they now must "attack that beast-man called the equity markets" because "it's done nothing but go up on this so called news." Now will "the next Chairman" please "ignore...that....balance...sheet...thingy."
But, but, Obama said there was no inflation, and he picked 10 of the Sweet 16 teams correctly, guys.
I think it's great thet Fearless Leader is 10/16 in the NCAAs. It shows he's finally somewhat competent at something.
I stil laugh at Belushi's SNL Liz Taylor skit years later.
Ok... I need some help here... This PIMCO analysis is missing out on the "scale issue" of POMO. Hasn't the Fed shot their load already? Or at least most of it? Before the last POMO announcement on March 10th didn't they spend $450B of the $600B already? Then the March to April POMO was $100B ... so what is left to take this to June? $50-70B?? maybe ?
Who cares about June 27th when they have only $50B to stretch over 10 weeks and been spending like a sailor the first few months of QE2 .. What am I missing?
"(ii) Emerging markets used to export disinflation to the developed world, but over the secular horizon we see them as exporting inflation."
fiat bitchez - blame it on 3rd worlders
I no longer know what the guys at
Pimco are smoking. So, the developed
countries all sputter while the
emerging markets are completely non-cyclical and continuing growing? With
exactly who as their customers? Not themselves because they save all their money, eat noodles, and live in shoeboxes as a preference. And not us, cause our consumers are broke. I call bullshit.
You know what Pimco is? Early.
If the globe manages to survive the next 5 years,
this is a good forecast for 2016.
Wasn't that the same company that said repeatedly there will be no QE3?
Bill Gross couldn't find his a$$ with both hands. Check Lacy Hunt at Hoisington Mgmt. His fund has been long 30 year zeros since 1994 - his performance just blows away every other long only manager. Its not for the faint of heart, but they believe in the Japan analog. Sure we have commodity inflation, but at the end of the day, we've got 20 more years ofpain from deflating house prices. There's nothing the Bernank can do about it. You can't push on a string.
Tyler,
Does this mean that you will change your thesis with respect to a market correction in late March/ early April? It seems that Bernanke has pulled it off again; just extending the famous "Bernank put”. Basically, it states either we have a recovery, or more QE - and now that PIMCP says so, the street says the same thing, so perhaps there will be no stock market crash based on the notion of “who will buy when the FEDs stop”.
Doc
Doc,
I understand the premis of “who will buy when the FEDs stop”, but what happened last May 2010 when QE1 ended? 10yr was @ 4% and "someone" bought it all the way down to a 2.34% yield in Oct/10, and since then it has risen back ever sicne QE2 the 10yr was 3.74% yeild on Feb 7th 2011 - now 3.33%. So it may seem counter-intuative but you could have the same thing happen this time.
I suppose nothing is impossible in politics, but Uncle Ben does not have a lot of support among the newly elected GOP congress, so I'd think that the likelihood of QE3 at this point is pretty slim. Also, now that Richard Fisher is on the committee, there is going to be more internal dissent even within the Fed. Fisher is on record that he would not have voted for QE2.
This guy is the Sultan of Doublespeak.
Can someone explain to me who is going to buy treasuries if the FED will not? If they do not buy the government ponzi breaks and they default. The government collapses, the federal reserve loses all legitimacy there is no power to back it up. The FED must keep feeding the monster or else it will die, collapse on top of the fed crushing it to death.
When the several major central banks each expand their currencies at roughly the same rage, we will see what I call 'co-inflation'. The result will be that the FX cross stays roughly in the range of 'normal' so as to not upset the little people who watch the experts of CNBC. However, we will also see the price of real assets in nominal terms rise, although different ones will rise at different rates as the 'liquidity' sloshes from one end of the market to the other.
Inflation is theft of private wealth by dilution.