Wednesday, July 30, 2014

PIMCO's Bill Gross: "Goodnight Vietnam​"

It was a matter of happenstance I suppose – certainly not serendipity. Our meeting may have been an inevitable coming together, but it was certainly not initially welcomed by me. Happenstance is the better word. Fateful happenstance.
Serendipity rarely happens in a cab and it was in a San Francisco cab – not an Uber – where I confronted my ancient past. Sue and I were headed back to the Four Seasons after a brief glimpse of the city at dusk from the “Top of the Mark.” The driver appeared to be Vietnamese, and having had a margarita or two, I unfortunately stumbled into the emotional jungles of Vietnam to which I had come, and from which I had safely departed nearly a half century ago. “You’re Vietnamese,” I said, “how old are you?” “53,” he said. “I grew up in Da Nang and escaped when I was 8 with my mother, after my father and older brother were killed.” I subtracted 8 from 53 and quickly placed him in Vietnam at the same time I had been, in 1969.

“Have you ever been there?” he queried. “Well yes,” I stuttered, “about the time you left, but I was in the Navy” – an excuse that supposedly cleared me of direct involvement, but in reality was not the case. An awkward silence followed. I wanted to say, “I’m sorry for what we did. I/we shouldn’t have been there.” I desperately wanted to say that. But I didn’t. I missed my moment of atonement and we continued on to the hotel. Getting out I gave him a $20 bill for an $8 fare – a weak apology to be sure, and he knew it. “No,” he said, “that is too much, take back 5 dollars.” I did – apology accepted – flawed as it was. He and his mother had survived and moved on. Perhaps I have too. “Goodnight,” I said. Goodnight Vietnam ....

Don’t say “goodnight,” but say “good evening” to the prospect of future capital gains in asset markets. Investors won’t be getting much of them. Financial markets have had nearly a half century of peaceful (sometimes volatile) asset appreciation fueled particularly by the decline in real and nominal interest rates from 1981 onward. We know that bond prices go up when interest rates go down, but somehow have to be reminded of a similar effect on stocks, real estate and commodities. Almost all commonsensical and historical financial models tell us interest rates are a key asset price driver. But now – and since 2012 – we have reached the beginning of the end just as I did in 1969 – the dusk of asset appreciation – because it has lost its primary interest rate driver. And after nearly 5 years of U.S. near-zero percent policy rates and global quantitative easing, which have seen the Fed’s balance sheet – to name one – expand by nearly 4 trillion dollars, and those of the BOJ and the BOE increase proportionately more, the global economy is left to depend on economic growth for further advances, and it is growth that is now and has recently been historically deficient.

At PIMCO, Paul McCulley recently reminded us that structural global growth rates have come down due to a yawning gap of aggregate demand relative to aggregate supply. Economist speak, I suppose (and he’s a good one), for not enough willing or able consumers: 1) they have too much debt, 2) Boomers are getting older, 3) workers are outdated and outjobbed by technology, and 4) labor is overwhelmed by corporations with the power to contain wages at a lower rate than topline increases. Demand is deficient because consumers are experiencing their own Vietnam from a multitude of directions....

HT: DealBreaker 
Also via DealBreaker:
Man wearing plastic bags robs Kingman store