Tags: Bill Gross | asset | prices | Pimco

Pimco's Bill Gross: The Stock Market and Asset Prices Are 'Bubbly'

By    |   Wednesday, 30 October 2013 11:41 PM

Bubbles are brewing throughout financial markets, as the Federal Reserve continues to embark on its massive easing program, says Bill Gross, co-chief investment officer at Pimco.

"All asset prices are bubbly, bond prices, stock prices," he told CNBC. "To the extent that any of them can be sustained is the ultimate test in terms of tapering" the Fed's bond purchases.

The brewing bubbles aren't just about the Fed's quantitative easing (bond buying) and near-zero short-term interest rates, Gross says.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

"The Fed is in charge of regulatory policy, and to the extent that buying $1 trillion a year is a rather blunt instrument in terms of perhaps bubbling stock prices, they're [also] in charge of margin requirements," Gross said. And margin debt has hit record highs.

The $1 trillion refers to the Fed's purchase of Treasurys and mortgage securities, which totals $85 billion a month, or about $1 trillion a year.

"To the extent they [Fed officials] want to simmer down equity prices, they don't have to attack it through tapering. . . . They can raise margin requirements," Gross said.

As for the bubbles, "the bond market is bubbly because the policy rate of 25 basis points is artificially suppressed," Gross said. He's alluding to the federal funds rate target of zero to 0.25 percent.

Historically the target would be 2 to 2.5 percent, Gross says. "That creates a bubble in other bond prices," he said.

"Is that bubble going to be popped? In our opinion, no, because that policy rate of 25 basis points will be guided forward by the Yellen Fed for the next two, three, perhaps four years." Gross was referring to Janet Yellen, whom President Barack Obama has nominated as the next Fed chairman.

As long as the fed funds rate target stays at its record low, "then these low yields, for four [-year Treasurys], fives, 10 and 30s will probably be sustained," Gross said.

As for the stock market, which is perched near record highs, it "depends on the growth rate of the economy," Gross said.

"If these [Fed] policies can generate 2 or 3 percent [economic] growth, up until this point it has only been 2 percent, profits can expand."

Otherwise, "stocks might have a more difficult problem," Gross said.

He predicts the Fed will begin to taper its quantitative easing early next year. "Ultimately, $1 trillion a year in asset purchases can't be sustained," given the problems that could cause for the Fed's balance sheet, Gross said.

The Fed announced at its policy meeting Wednesday that it will continue its $85 billion of monthly bond buying for now.

"Wait-and-see seems to be the prescription for the day,” Scott Anderson, chief economist at Bank of the West, told Bloomberg. "They’re on hold given that the data haven’t moved in their direction."

He predicts a tapering of QE won't come until March.

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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Bubbles are brewing throughout financial markets, as the Federal Reserve continues to embark on its massive easing program, says Bill Gross, co-chief investment officer at Pimco.
Bill Gross,asset,prices,Pimco
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2013-41-30
Wednesday, 30 October 2013 11:41 PM
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