Tags: Pimco | Gross | Recession

Pimco’s Gross: Recession Risks More Likely Than Sluggish Growth

Monday, 03 Oct 2011 02:35 PM

Recession may become more likely than an extended period of sluggish growth and high unemployment rates, says Bill Gross, founder of Pimco, the world's largest bond fund.

Since 2009, Gross has said the U.S. and other developed economies were entering a period of what he calls a "new normal," a period marked by lackluster economic performance but still one of growth.

Now it's worse, but not too late to change.

"Sovereign balance sheets resemble an overweight diabetic on the verge of a heart attack," Gross writes in a monthly investment outlook posted on Pimco's website.
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"If global policymakers could focus on structural as opposed to cyclical financial solutions, new normal growth as opposed to recession might be possible."

Structural solutions would include adapting labor markets to a more globalized economy and to new technologies while preparing developed economies to handle increased savings as opposed to increased consumption as populations age.

But for now, policymakers must prepare for possible economic contraction, since despite interest-rate cuts and other expansionary measures, demand remains weak, and positive productivity rates don't reflect the whole picture in the labor market.

Recovery hinges upon stronger demand.

gross200.jpg
Bill Gross
(Pimco file photo)
"Near zero percent interest rates have allowed profit margins to widen even in the face of anemic end demand," Gross writes.

"As well, 'productivity' has remained high, but only because of layoffs and the production of goods and services with fewer people. While that is a benefit to capital, it obviously comes at a great cost to labor."

The economy has yet to officially slide back into recession, but the debt-ceiling impasse and European debt woes have hurt confidence in consumers, the very motor of U.S. growth.

Some say the recession is imminent.

"What is a bad economy is about to get much worse," says Lakshman Achuthan, co-founder of the Economic Cycle Research Institute, according to MarketWatch.

"We are seeing the weakness spread widely," Achuthan says, adding "there’s a contagion…that’s not going to be snuffed out. The nature of a recession is not a statistic. It's a vicious feedback loop. Sales fall, production falls, income falls and that depresses sales. We're in that, and it's going to run its course."

The problem, other experts say, is that U.S. households will need time to pay off the debts they ran up during the credit and housing boom in the early 2000s.

As they pay down those debts and spend less, the economy will remain stuck in the doldrums for years and markets will soar and tank.

That makes stock picking a tough task, according to analysts at Deutsche Bank.

In other words, forget the buy-and-hold advice that has served as the golden rule for the last several decades.

"The next decade will likely be one where buy and hold will generally be a fairly poor option in developed markets," Deutsche Bank analysts write in a letter to clients, MarketWatch reports.

"There will be large cyclical rallies punctuated by recessions and funding crises."

In the meantime, expect markets to remain volatile, swinging up one day and plunging the next.

Amid such bipolar trading, look for dividend-paying stocks, experts say.

"Stay defensive, be in low beta stocks, and achieve returns through dividends," says Mark Tepper, a financial advisor with Strategic Wealth Partners in Seven Hills, Ohio, according to CNBC.

Low-beta stocks are those that are less volatile but offer less reward on the upside.

"High dividend stocks may be seen as more stable, but they will not grow as quickly in a recovery," says Ben Sullivan of Palisades Hudson Financial Group in Scarsdale, N.Y., CNBC adds.

"[If you] try to defend against one thing right now, you position yourself for future failure."

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Recession may become more likely than an extended period of sluggish growth and high unemployment rates, says Bill Gross, founder of Pimco, the world's largest bond fund. Since 2009, Gross has said the U.S. and other developed economies were entering a period of what he...
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2011-35-03
Monday, 03 Oct 2011 02:35 PM
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