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august pimco commentary


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another small gem from bill gross:


<<...My last month’s Investment Outlook commentary on the significance of wage and employment trends remains the key focus. Common sense tells us that consumer spending growth comes from highly employed, well-compensated labor, and we are far-far from even approaching that elemental condition. The fact is that near double-digit unemployment has resulted from numerous business models that are now broken: autos, home construction, commercial real estate development, finance, and retail sales. Construction of a new Humpty Dumpty capitalistic “oeuf” will be a herculean task.


Potion hunters, however, should also understand the following macro concept that will dominate the indefinite future, one which I will humbly try to explain in the next few pages in 500 words or less: Reflating nominal GDP by inflating asset prices is the fundamental, yet infrequently acknowledged, goal of policymakers. If they can do that, then employment and economic stability may ultimately follow.


To explain:

A country’s GDP or Gross Domestic Product is really just an annual total of the goods and services that have been produced by its existing stock of investment (capital in the form of plant, equipment, software and certain intangibles) and labor (people working). Over the last 15 years or so in the U.S. that annual production (GDP) has increased in nominal (real growth and inflation) terms of 5-7% as shown in Chart 1.  Not every year, certainly not in boom or recessionary years, but pretty steadily over longer timeframes, and consistently enough to signal to capitalists that 5% was the number they could count on to justify employment hiring, investment spending plans, and which would serve as well as a close proxy for the return on capital that they should expect. Nominal GDP is in fact a decent proxy for a national economy’s return on capital. If each and every year we grew by 5%, then that would be sort of like a stock whose earnings grew by the same amount. Companies and investors then would be able to estimate the present value of those cash flows, and price investment and related assets accordingly – a capital asset pricing model or CAPM based on nominal GDP expectations.>>


the rest here, with its somber forecast of a 'new mormal' of 3% US GDP growth going forward. no wonder economic forecasting is known as the dismal science.




are there any silver linings on the near horizon? the more optimistic pundits of the macro scene point to the inventory rebuild surely right around the corner. they cite the steep fall in inventories over the last 8 months to record lows as being unsustainable, ready to snap back like a coiled spring. but what does the inventory to sales ratio look like? well, its still hovering near recent highs of the last decade, as sales have been falling in lockstep with inventory drawdowns thanks to rising unemployment & a deleveraging consumer. logic makes one wonder if the much bally-hooed green shoots will wither before they bloom, but at times its psychology, not logic, that gets the upper hand & sways outcomes.


tho most of the experts/commentators i admire most are skeptical of 'green shoots' & cautious to gloomy on the near term prospects for recovery, this is one time i'm anxiously hoping they are collectively WRONG! this is getting scary, let alone painful. and its why i'm watching the well regarded guys at ECRI & their call of an imminant end to the recession amidst a synchronized global surge in their leading indicators. too bad its all 'proprietary' (blackbox). i'd like to a peek at their methodology. i'd hate to be pinning my hopes on someone that could be playing with tarot cards, for all i know.






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Posner had a great article, was in the the Atlantic(?) that suggested words are used in the wrong way. The end of the recession should be defined as when GDP gets back to the same absolute value as it was at the peak. Currently we are 7-8% below that value so that means if growth is 1% this year, 2% next year, 3% the year after and 3% after that, we are definitely looking at 3-5 years before the recession ends.

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