Shortly after the most famous PIMCO alum, Bill Gross, unleashed today's dose of doom and gloom when he warned that market risk is the "highest since before the 2008 financial crisis" and warned that “instead of buying low and selling high, you’re buying high and crossing your fingers,” his replacement and current PIMCO CIO, Dan Ivascyn shared a similar dour outlook on the economy at the Bloomberg Invest summit, where he predicted that U.S. growth will "likely be in the mid-2% range and, given the current global fiscal and geopolitical risks, the 10-year Treasury could fall as low as 1.5%."
The reason: policy failure by the Trump administration and the Republican-controlled Congress, which Ivascyn said are unlikely to produce sweeping tax or regulatory reform and that infrastructure spending will also be muted.
“You’ll probably get some tax reform and it will more likely resemble a tax cut as opposed to broad-based reform,” Ivascyn said on Wednesday. Tax changes will likely be “well pared down by what’s been proposed” because Congress will be focused on revenue, he said adding that with infrastructure, “we’re even more pessimistic. There may be something done symbolically, but it’s going to be a lot smaller than the $1 trillion that’s been mentioned.”
Of course, it is likely that the PIMCO chief investor is merely piggybacking on recent price moves in the bond market, and just like it was trendy a few months ago to make outlandish forecasts about how high yields will rise (a famous 6% forecast comes to mind) now it's the opposite; Ivascyn - like Gross - may also be simply talking his deflationary book, although having outperformed 99% of Bloomberg in the past three and five years, he may have a point.
So what does he see? Another bloodbath for bond shorts for one: “Yields can go very low, certainly 1.5 percent,” Ivascyn said in a Bloomberg interview on Wednesday. “There absolutely are scenarios where U.S. yields can go well below 2 percent -- any type of shock to the global economy, any type of geopolitical event that leads to deflationary fears returning.” He also warned that investors’ return assumptions need to come down.
Echoing similar sentiment from other cautious fund managers, Ivascyn recently said that investors have become too complacent amid steady gains in asset prices and should consider taking profits to set aside cash for buying opportunities during a market correction, according to a May 31 Pimco report on the outlook for the next three to five years. PIMCO also said that "there’s a 70% chance of a recession within five years", which however for traders is about as useful as saying there is a 100% chance stocks may go up. or down.
* * *
Other participants of the Bloomberg Invest summit were similarly gloomy.
“The level of complacency about where markets are today is pretty scary,” the TPG co-CEO said Wednesday. “People are just sort of assuming it’s OK, that it is what it is, and I have to say that I’m a little bit concerned about it.”
While pointing to stabilizing factors such as better-capitalized banks and lower leverage in investments, Winkelried drew parallels to conditions before the 2008 financial crisis, such as high valuations and cheap debt. “A lot of that stuff has come back, but nobody is talking about it,” he said. “I’m always amazed, but it’s always been the case, at how short the memory of the market is.”
In a similar vein, Jonathan Beinner, the CIO of fixed income at Goldman Sachs Asset Mmanagement, said he’s "concerned" that people are underestimating the risk of market fluctuations at a time when companies are taking on more debt. Speaking at the same Bloomberg summit, Beinner said investors previously considered it low when the VIX was at 15. Lately it has been solidly below 10.
"That is basically saying that the potential outcomes are a tighter band, not a wider band, and that looks pretty worrying. We don’t think it’s justified, certainly not to the level where it is.”
Beinner said he’s optimistic about the U.S. economy but concerned that companies have issued so much debt ahead of expected increases in interest rates. The International Monetary Fund warned earlier this year that ballooning debt levels could threaten financial stability, because it could become harder for companies to service their obligations. Beyond the risk of companies adding leverage, often to fund stock buybacks, “you have a lot of bonds out there,” he said. “There’s been a huge amount of issuance, that’s a worry as well.”
And yet despite this pervasive worry and growing doom and gloom, a recurring theme of the US equity markets is that nobody wants to be the first to start selling. In fact, as Goldman pointed out recently, the very reason why volatility is so low - the biggest red flag for many of the abovementioned billionaires - is because turnover at hedge funds has collapsed to record lows.
If the gentlemen above want to see higher volatility, and see their warnings realized, the solution is simple: all they have to do is sell.