PIMCO Releases 2012 Economic Forecasts; Presenting The Wall Street 2011 Market Forecast Track Record

Tyler Durden's picture

Here are the just released 2012 forecasts by Bill Gross, via Bloomberg and the WSJ:

  • PIMCO: U.S. TO GROW BETWEEN 0% AND 1 % IN 2012

Of course, Jim Cramer's response is to ignore this forecast and instead to listen only to "hot hand" analysts who have been correct in the recent past.

Curiously here is how the Wall Street permaclown brigade saw the now unchanged in all of 2011 market, back in December 2010, courtesy of John Lohman.

full Pimco forecast:

PIMCO Cyclical Outlook: Deleveraging, Austerity and Europe’s Potential Minsky Moment

  • ? As things stand today, it is more likely that the ECB will leap to a rescue only when it is too late. Absent any increase in private or external sources of aggregate demand, the eurozone economy will likely experience a recession in 2012.
  • Chinese deleveraging and rebalancing could mean much slower Chinese growth and a smaller impact of Chinese aggregate demand on the global economy.
  • We expect the global economy to grow by 1% to 1.5% in 2012. This is significantly slower than the 2.5% growth rate achieved in 2011 and the 4.1% rate achieved in 2010. 


The year ahead will likely be very challenging for the global economy. Growth faces several hurdles that we believe collectively will impose a sense of greater uncertainty and increased volatility on financial markets. These hurdles include the need for accelerated balance sheet deleveraging, slowly creeping but surely rising risks of financial and economic de-globalization, and the constant drum beat of re-regulation, particularly in developed country banking systems.


Global balance sheet deleveraging will play the dominant role in PIMCO's current cyclical economic outlook. Front and center in this regard is the rapidly progressing sovereign debt crisis in the eurozone, the debt deflationary feedback loop associated with it, and the quality and quantity of policy responses applied to contain it. As goes the eurozone deleveraging, so goes the global economy over the next six to 12 months.
The eurozone is facing an accelerated reversal of imbalances accumulated over several years after the creation of the euro. These imbalances are the product of differing real trends in productivity, labor flexibility, and national savings and investment rates across the member nations of the eurozone. Prior to the implementation of the single European currency, current members had individual currencies and individual control of their respective money supply, making it relatively easy to absorb real economic differences via relative currency value changes and inflation differentials. Today, however, those countries that adopted the euro do not possess the same degree of flexibility needed to smoothly diffuse frictions along these fault-lines. With one common currency and one common central bank, but individual fiscal agents and differentiated trends in economic performance and governance, the full burden of reversing sovereign deficit and debt imbalances falls onto the shoulders of only the fiscal agents. And as we see it, fiscal agents have one option and one option alone: deleverage the government balance sheet by practicing secular austerity.
To judge the impact of eurozone deleveraging on the global economy, we must answer three questions. First, how much austerity will the eurozone impose upon itself to restore the balance between debtors and creditors? Second, will eurozone sovereign haircuts or defaults remain a part of the deleveraging process? And third, what role will the European Central Bank (ECB) play in controlling the depth, breadth and velocity of sovereign debt deleveraging?
Stress Testing the Plan
Eurozone governments are about to legislate a plan of significant fiscal austerity over the coming years. By PIMCO estimates, austerity programs across both healthy and unhealthy balance sheet countries in the eurozone will pose a drag on growth to the tune of 1.5 to 2 percentage points over the next 12 to 24 months. This means that, absent any increase in private or external sources of aggregate demand, the eurozone economy will likely experience a recession in 2012. Indeed, PIMCO expects the eurozone economy to shrink by 1% to 1.5% in 2012.
Eurozone sovereign haircuts and defaults will likely remain a part of the deleveraging outlook. The acceleration of the European Stability Mechanism (ESM) and the introduction of collective action clauses on newly issued sovereign debt under the ESM mean that future haircuts, write-downs and private-sector subordination are still possible -- and probable. This, in turn, means that eurozone banks -- which have been the chief private-sector financiers of eurozone sovereigns -- will need a substantial amount of new capital to maintain their own balance sheets and provide ongoing credit to the real economy for growth. This new capital will be needed primarily to fill the ex ante equity hole generated by now “risky" sovereign credit exposures. It will also be a necessary condition for maintaining an effective monetary policy transmission mechanism to the eurozone real economy. If eurozone banks remain under-capitalized for much longer, their borrowing costs could climb too high for credit growth, and they would be forced to deleverage private credit commitments at a time when eurozone sovereigns are attempting to do the same with fiscal policy.
To be clear: The eurozone economy cannot bear a concomitant deleveraging in sovereign and banking system balance sheets, given an already weak growth outlook.
The ECB, therefore, must play the critical role of deleveraging police in the year ahead. Only the ECB has a balance sheet large enough, credible enough, and flexible enough to prevent the eurozone sovereign and banking system deleveraging from turning into an uncontrolled Minsky Moment (referencing economist Herman Minsky and referring to the inflection point when investors must sell assets to pay off debts, pushing down asset prices across the board). An acceleration of the debt deflationary feedback loop will be the odds-on outcome if the ECB continues to play coy with its own balance sheet. The ECB must, at some juncture in the not so distant future, become a lender of last resort to eurozone sovereigns. And, equally important, it must do so with a transparent and credible plan such that private sector demand for eurozone sovereign debt is crowded back in before it is permanently destroyed. 
But what will it take for the ECB to make this leap from a bankers' banker to a sovereigns’ banker? To begin to answer this question, we have to consider the mandate of the ECB and the "game of chicken" being played between European fiscal agent and the ECB.
The ECB’s Evolving Mission
First, the ECB has a clear mandate of maintaining price stability and nothing else. In the best traditions of the German Bundesbank, the ECB maintains fierce independence from fiscal policy and financing sovereign deficits and does not believe it is responsible for shaping cyclical real growth outcomes (unlike the U.S. Federal Reserve). A key question, however, is whether the ECB's mandate is symmetrical around low and stable inflation? Will the ECB act aggressively to combat deflation, as it does to combat above-target inflation when the time comes? And if it will, what tools will it be willing to use, especially if policy rates are already at the zero-bound and the transmission mechanism of policy is broken? At this point, the rate of inflation in the eurozone is too high for the ECB's liking and is thus likely to prevent the ECB from taking any dramatic steps to pre-emptively combat the forward deflation risks arising from a deteriorating economic outlook across the eurozone.
Second, the ECB is engaged in a dangerous but necessary game of chicken with eurozone fiscal agents, which prevents it from becoming a transparent and credible lender of last resort to eurozone sovereigns. On the one hand, with the credit transmission mechanism broken and bank balance sheets stressed, the ECB recognizes that it must prevent sovereign bond prices from falling too far. On the other hand, the ECB remains fearful of introducing secular moral hazard into the process of enhancing fiscal unity and stability across the eurozone by pre-emptively financing fiscal deficits. This game cannot continue for too much longer. If it does, we believe either the deteriorating economic prospects for the eurozone will accelerate the feedback loop to its Minsky Moment, at which point sovereigns and banks will enter a race to try to out-deleverage the other; or the ECB will take pre-emptive action to become a transparent and credible lender of last resort to sovereigns thereby stabilizing the eurozone banking system and the eurozone economy. As things stand today, it is more likely that the ECB will leap to a rescue only when it is too late. As a result, the odds of a European Minsky Moment are uncomfortably high now.
Chinese Growth Levels Off as U.S. Deleveraging Continues
Moving from Europe to Asia, China has joined the U.S., the eurozone, Japan, and the UK in some form of balance sheet deleveraging. However, we expect Chinese deleveraging to be rather benign as long as policymakers use their substantial financial resources to manage the process over time. China for the last two years has engaged in an accelerated program of domestic investment via rapid credit creation in its domestic banking system. This has provided the global economy with a substantial and much-needed boost to aggregate demand at a time when developed economies were all undergoing private sector deleveraging. But this source of global aggregate demand is slowing significantly now. 
Due to a combination of issues ranging from excess capacity, rising income inequality and bank capital stresses that will require a slowdown in the rate of credit creation, China is likely to slow future domestic investment in favor of a more balanced and stability focused growth model. China is likely to use its substantial public financial resources to address imbalances between domestic investment and consumption, between capital and labor shares of national income, and to slowly re-capitalize its banking system as non-performing loans crystallize to losses. The major implication for the global economy is that the process of Chinese deleveraging and rebalancing could mean much slower Chinese growth and a smaller impact of Chinese aggregate demand on the global economy. PIMCO expects the Chinese economy to grow by just 7% in 2012, significantly below consensus expectations of 8% to 8.5% real growth.
And what of the States? The U.S. economy continues to make steady progress in private sector deleveraging, but little to no progress when public sector balance sheets are included. U.S. households and banks have generally reduced debt either via defaults or orderly recapitalizations, and many companies have benefitted tremendously from a weaker dollar and strong growth in global trade via the emerging market economies. Despite the progress made to date, the process of U.S. deleveraging is not nearly complete. This is especially the case given that the U.S. government continues to run large structural deficits to support private sector aggregate demand, and that demographically driven unfunded liabilities are starting to crystallize onto public balance sheets at a faster rate.
Were it not for the brewing crisis in the eurozone, and the expected slowdown in aggregate demand in China (and other emerging economies), the outlook for the U.S. economy might have been relatively sanguine for the year ahead. In 2011, U.S. GDP grew by a modest but decent 1.5% to 1.75%. But with global headwinds gathering -- and U.S. expansionary fiscal policy becoming much more difficult to maintain -- we think the U.S. economy will only manage 0% to 1% growth in 2012. This is substantially below the industry consensus expectation of 2% to 2.5% growth.
Turning from deleveraging to de-globalization, we believe the most important component of this creeping process is occurring in global finance. Global imbalances between savings and investment have long been sustained via cross-border intermediation across an integrated global banking system. European banks have played the major role in this process, with American and Asian banks being perhaps a degree less important. We have discussed the potential impact of European bank deleveraging on the eurozone economy, but have not spent much time on how they might impact the global economy in a direct way. The eurozone banking system is 2.5 times as large as the U.S. banking system, in part because it plays an important role in intermediating global savings. At $41 trillion in total balance sheet assets, the impact of a eurozone banking system deleveraging would dwarf the effect of any successful re-leveraging of the U.S. banking system, which is only about $16 trillion in size. The race to higher capital ratios combined with sovereign stresses means that the global banking system will likely turn inward and the process of cross-border savings intermediation could slow substantially in the year ahead. This is yet another hurdle for global growth.
A second component of de-globalization is the glacial but observable increase in trade skirmishes between the U.S. and China. There have been a series of tit-for-tat tariff increases lately, and the U.S. political machine has begun to increase calls for a more transparent and open Chinese economy only to be summarily rebuffed by Chinese officials. This glacial trend is an important one to watch, as trade between U.S. and China has been a very important source of strength for large portions of the global economy.
Finally, the cyclical outlook would not be complete without a mention of MF Global and the implications thereof on financial re-regulation.  We have long suggested that the developed world financial system has begun a gradual  process of returning to "utility banking,” a boring destination where the financial system largely separates deposit taking and loan making from the riskier endeavors of leveraged finance and asset price speculation. MF Global is likely to spark an acceleration in this process, only because it has shown that the regulatory changes planned (and yet to be fully implemented) after the collapse of Lehman Brothers in 2008 have done little to protect investors from concentrated financial system risks. We expect to see changes in the regulatory architecture of capital markets that may reduce system-wide liquidity, increase financial transaction costs and de-risk balance sheets even further. Think of this as an incremental source of friction to global growth in the year ahead.
In sum, we expect the global economy to grow by 1% to 1.5% in 2012. This is significantly slower than the 2.5% growth rate achieved in 2011 and the 4.1% rate achieved in 2010.  The risks to this forecast lay to the downside, which speaks to the question of inflation expectations.  We expect global inflation to slow to 2% in 2012 from 3.1% in 2011.

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BandGap's picture

Well, devout Mayans everywhere are applauding.

Almost Solvent's picture

Thanks, captures that sinking feeling ...

AldousHuxley's picture

Here is what I have to say about PIMCO...

  • 2001, Paul McCulley, an economist at Pimco, the giant bond fund, predicted that the Federal Reserve would simply replace one bubble with another. "There is room," he wrote, "for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing. 


  • 2007, hired Greenspan 


  • 2009, hired Kashkari, former TARP chief


  • co-founder Bill Gross was professional blackjack player in Vegas
  • 2007 Pimco's Total Return fund top holdings are 40% in GSE mortages...Fannie Mae, Freddie Mac
  • Bill Gross was a fan of government bailout for Fannie Freddie creditors


  • most of Pimco's funds under management comes from public pensions....which comes from you taxes
  • pimco is owned by German insurer Allianz
Oh regional Indian's picture

*clap* But it's not so much about the Mayan's as it is about Maya. Illusion., The end of illusion/delusion.

Talking their book or otherwise, even these awful NUMBers sound really optimistic for next year. India's ISM number fell by almost 50% and a good 30-40% below expectation MOM last month.

And the reason the Rupee is being allowed to sink is that software exporters are hurting as business from US/Euro/Banking in general slow down. They have to keep inflated rupee earnings to justify ANY projections for India's growth. Software salaries are driving the BOOM. BOOM it is and BUST it will.

So yep, all going down hard, the can is now heeeavvvyyyy. 



BandGap's picture

The inflation numbers, in particular, appear to be bullshit.

PulauHantu29's picture

7% to 12% inflation by Williams....

Sounds about right from a consumer prespective. My oil (USO) has been there avergaing about that rise over the last few years.


ThrivingAdmistCollapse's picture

The global economy might well tank next year.  All the emerging market stock exchanges are tanking on the uncertainly.  We could definitely see an economic collapse in the next 6 months.

AbelCatalyst's picture

I think they're being conservative on their predictions.  My guess is if you bumped into these guys at a holiday party and they were a little lubricated and they shared what is truly in hteir hearts they see a much darker 2012 than they share publicly.  

jcaz's picture

7% isn't GDP-net positive for China- whoops.....

Irish66's picture

I'm going with 1150 for 2012

Pladizow's picture

How about S&P 12000 in 2012?

Hyperinflation Bitchez!

Printfaster's picture

What I like is that the oft maligned (here) Laszlo and his ruler:  Winning.

HedgeAccordingly's picture

Santa santa. Bring me some volume and some silicone. http://hedge.ly/sJYWiG

GOSPLAN HERO's picture

Comrade Obama will save us!

nobusiness's picture

They still have 8 days and now $650 Billion to ramp the market.

ucsbcanuck's picture

Not going to make predictions. Sick of making preds then getting hammered.

The Limerick King's picture



My 2012 predictions

Our freedom will meet new restrictions

Lies will be higher

Crap finds a buyer

And Kleptos will have no convictions

Potemkin Village Idiot's picture

So basically I see the last 3 years have been the same prediction & you just decided to take the day off...

Good for you! Everyone needs a day off...

Hedgetard55's picture

This term "lender of last resort". Is it the same as "money printer"? Please help.

fonzanoon's picture

So according to the biggest bond shop in the world 2012 will be very similar to 2011. Get used to bullshit statistics and more idiots telling you that we are slowly crawling out of this. Get used to banks fudging their earnings and the market celebrating it. Get used to Robo telling you about retail stocks performance and how during the rough spots people will cradle and soothe themselves in the arms of long term US treasuries.

Yup. Happy new year.

in-Credible Banker's picture

I am still unclear on why the doom and gloom among you all.  Everything is BEAUTIFUL baby! 



I mean - this truly is journalism at its very finest......right from AP!!!! 

Pladizow's picture

Managed Perception!

There were once 80+ independent US news sources, now there are 6.

All six rely upon AP & Reuters.

AP owned by Reuters, Reuters owned by Rothschilds.


Oh regional Indian's picture

That's crazy Pladizow. Single source of global news. Frightening when I think of MSM Viewersheep.

Viwersheep. Hah!


Thorny Xi's picture

AP is not owned by Reuters ... good grief!  " The AP is a cooperative owned by its contributing newspapers, radio and television stations in the United States, which both contribute stories to the AP and use material written by its staff journalists. Many newspapers and broadcasters outside the United States are AP subscribers, paying a fee to use AP material without being contributing members of the cooperative."

Potemkin Village Idiot's picture

cooperative of....?

newspapers owned by......?

radio owned by.....?

TV infiltrated with.......?

United States subservient to......?

Hey... When it bleeds all the way down to a dipshit like 'Matthew Berry' being a fantasy football 'guru' for ESPN, owned by Disney, you know the  tentacles are numerous...

Pladizow's picture

To: Thorny Xi

Who owns Wikipedia where you cut and paste your info from?

And if what I say is wrong and what you say is right, then there are still only 2 sources.


MeBizarro's picture

Single largest shareholder of Reuters is the Thompson family in Canada since Thompson merged with Reuters.  Not the Rothchilds.   

SilverDOG's picture

1970 there were 95 "independent" news sources.

Now there are the magic (7) seven.

Everything is fine, read along now. Read along.


Unplug your TV and open your mind. TV is POISON.

Snakeeyes's picture

Bernake's plea for consumer spending is telling. Look at the charts of househhold debt and savings. To keep growth humming, he needs to enslave consumers to debt. Von Hayek was right, of course.

Bernanke’s Plea to Consume (Not Save) and the Conflicting Economic News: The Good, The Not-So-Good and The Expected (Housing)


Potemkin Village Idiot's picture

Why do you think they wanted Obama as President?

It succeeded in getting a whole demographic of people hooked on credit so they'd be hoodwinked into 'keeping up with the Obamas'... & therefore spend beyond their means...

DaveyJones's picture

the forecast of inflation

is suffering deflation

while the forecast of growth

is not sworn under oath

lizzy36's picture

Odd the Yosef would be high on the street.

Alas, she has has been awesome at monetizing (to the present day) being right from 1996-2000. 

Jlmadyson's picture

Ship is going down just a matter of time. 0-1% wow. At least these are some honest forecasts.

WonderDawg's picture

I'm not sure I'd call it honest. Wildly optimistic is more like it. Or downright bullshit. Recession/depression becomes undeniable in 2012.

Sudden Debt's picture

As long as europe is printing, the us will print and azia will print so I think 2012 will look a lot like 2011.

FoieGras's picture

And of course Pimco is dead right. Very low inflation. Hyperinflation NOWHERE to be seen in the G10. The bears who were screaming fire over inflation since 2007 were dead wrong for 5 years and counting now.

Tsar Pointless's picture

Hmm. Really?

So I'm just imagining things when I see the prices of goods in grocery stores?

And at the gasoline pump.

And with my utility (especially water) bills?

A jar of Miracle Whip nearly $5.50. A can of vegetables almost a dollar now. Used to be, when I was a young-un and working at grocery stores, you could get FOUR cans for a dollar when they went on sale.

This is not the inflation you were looking for, perhaps?

Killtruck's picture

Let's also not forget that hyperinflation, by its very definition, sneaks up on you and kicks the shit out of you with the speed of an angry gorilla-sized exponential function. Sure, it starts small, 1% here, 2.3% there (look around) regardless of cuts in interest rates...a year and a half later you're stuffed.

Maybe this joker forgot the </sarc> tag?

DaveyJones's picture

and don't forget...the jars are getting smaller

Kali's picture

4 cans for a buck?  Not even 3 years ago, especially during harvest season, you could get 10cans/dollar.  And what is up with water bills?  Everyone I talk to all over the country has seen their water bills skyrocket.  I know in my neck of the woods it was because of huge projects the EPA required for wastewater/stormwater management and DHS requirements for security and new lower levels of certain contaminants required for drinking water.  I started going back to baking my own bread, can't believe the outrageous prices for "good" bread, not the ghetto sawdust stuff they sell for 99 cent/loaf.  If you have not noticed inflation, then you aren't doing the shopping in your family.

MeBizarro's picture

It isn't the retail prices of items that have increased that much but the cost per serving size & some of the substitution of cheaper products in the processed items you buy. 

Food prices in the US haven't increased nearly as much either as they have in other countries thanks to the US exporting inflation though the dollar.  Global food riots in '08 that caused massive global unrest & change and they were a key cause in the Arab uprising last spring especially in Egypt.

MeBizarro's picture

Miracle Whip is $5.50?  Vegetables are a dollar a can? BS even if live in CA or NY.  Miracle Whip is half that much and less if you coupon & buy on sale.  Vegetables can be had for 3/$1.00 if you wait for a sale and stock up. 

Dr. Engali's picture

Have you been to the grocery at all? How about a doctors visit? Paid a heat bill? Water bill..........