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Bill Gross is out with his latest investment outlook, a must read for any bond investor. This month Gross’s message is a simple one: economic growth depends on credit growth.
In his letter — called “For Wonks Only” — Gross leaves out his customary life lesson and gets straight down to business. Writing that, “A credit-based financial economy depends on an ever-expanding outstanding level of credit for its survival.”
Gross’s argues that if the outstanding debt of the U.S. carries an average interest rate of 4.5%, then credit growth needs to expand at that rate to pay for outstanding interest. Currently, we’re falling short of that.
But the Fed is, “underachieving that target in the U.S., which is the reason why GDP growth struggles at 2% real or lower and nominal GDP growth seems capped at 4.5% or lower.” Writes Gross. “Credit creation is essential for economic growth in a finance-based economy such as ours. Without it, growth stagnates or withers.”
Gross summed up his thoughts by saying. “Cross your fingers, credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring.”
Todays Other Top Stories
LearnBonds: – The hot air of bond bubble talk. – most pundits seem to be discounting the possibility that interest rates remain low for the foreseeable future. While I personally am not willing to predict that rates won’t go higher at some point – unlike others who seem keen on continuing to blast bonds – I admit I have no idea when that may be. I suspect “bond bubble” articles will continue to persist until bears give up or consider themselves right in the matter. That may be in six months…. but investors should keep an open mind to thinking that it may be, well, never.
Bond Buyer: – New Mexico deal raises eyebrows. – When RBC Capital Markets underwrote $727 million of gas supply revenue refunding bonds earlier this month for a New Mexico authority created by local governments that retain RBC as a financial advisor, some market participants raised their eyebrows.
Bloomberg: – Philadelphia’s please touch museum defaults on principal payment. – Philadelphia’s Please Touch Museum defaulted on its municipal debt for the third time yesterday as it failed to make principal payments, according to a filing.
Businessweek: – Munis may yet win regulatory approval as liquid assets for banks. – Some of the most-traded municipal bonds may still gain approval as easily sellable assets that banks can use to show they can weather a credit crunch.
Barry Ritholtz: – Are households smarter than institutional investors? – While rumors of an institutional rotation — selling equities and buying fixed income — swirl, we see the opposite behavior from households.
Barron’s: – There is no bond bubble. – (Subscription required) Sure, the Fed is going to hike rates, and bonds may have peaked. But the charts suggest that bubble talk is overblown.
Morningstar: – What today’s bond prices suggest about what lies ahead for stocks. – A high positive correlation between stocks and bonds is more the norm than a negative one.
MoneyBeat: – Cats and dogs living together? Bonds and stocks both rising. – At first glance, it doesn’t seem right: both stocks and bonds are rising this year. That shouldn’t be, should it? After all, if the market is buying risky equities, wouldn’t that automatically mean they are dumping safe-haven bonds? The converse argument holds, too; if the market is seeking the shelter of bills, notes, and bonds, aren’t they therefore selling equities?
Dr Ed’s Blog: – Demography having an impact on inflation and bond yield. – Global economic growth has slowed over the past few years. Economists such as Larry Summers are talking about secular stagnation. If this is happening, then demography may be the best explanation for it. The post-war baby boom generation is in their 50s and early 60s. People are living longer everywhere and burdening government budgets with social welfare spending on their senior citizens. The resulting budget deficits are financed with credit that is a growing liability for younger generations without creating any offsetting income-producing or productivity-enhancing assets.
Bloomberg: – Investors see no inflation buying bonds on ISM’s growth surprise. – Bond investors are showing little concern that inflation will accelerate even with the Institute for Supply Management’s manufacturing index unexpectedly rose to the the highest level in more than three years.
WSJ: – U.S. Government bonds sell off. – The roaring U.S. government bond market hit a snag following the Labor Day break. After lodging the biggest monthly rally since January, bond prices sank broadly on Tuesday, driven by an upbeat U.S. manufacturing release and a flurry of new corporate bond sales.
High Yield Bonds
IFR: – U.S. high-yield braced for up to US$10bn supply week. – The US high-yield market got off to a slow start after the Labor Day holiday with only one deal announced, but bankers are predicting as much as US$10bn of supply this week especially if a surge of investment grade deals perform well.
Market Realist: – Assessing high yield bonds as part of your fixed income portfolio. – The decadent offering of barbecued ribs at a weekend party is similar to that of high yield fixed income investments. By taking on greater risk of spilling sauce on your shirt you have the experience of a true summertime staple, and with high yield fixed income investments you are positioned for potentially higher income. Just like the ribs, you don’t want to overdo it too much on high yield; put a sensible amount on your plate to get a taste of the flavor and little extra yield potential, but not so much that it leaves you feeling queasy from too much volatility.
Market Realist: – Must-read: Use emerging market bonds for higher yield potential. – For those who want a little more adventure on their menu, there’s always the option of adding some unique flavors like spicy kebabs. This is the equivalent of adding some emerging markets fixed income to your bond portfolio. You may run the risk of a little heartburn, with occasional volatility and currency risk, but no cookout is truly complete without a little spice thrown into the mix.
Bloomberg: – Emerging-market distressed bonds have worst month in year. – Emerging-market distressed debt had its worst month in more than a year in August amid banking turmoil in South Africa and Turkey, a coal-industry rout and the conflict in Ukraine.
Bloomberg: – Worst market in memory to weigh on reinsurance rates. – The worst reinsurance market in memory looks set to carry into 2015, industry executives said.
Left Banker: – Double-digit distribution income portfolio: Part 1. Over 10% yield from a diversified portfolio. – High yield is an challenging and risky goal in the current income markets. I’ve constructed a model portfolio that generates double-digit yields with sufficient diversification to moderate risk to capital. The portfolio employs leveraged ETNs and closed-end funds to achieve these goals.
About.com: – How to capitalize on rising bond market volatility. – With the U.S. Federal Reserve set to raise rates from their abnormally low levels, bonds are likely to experience lower returns in the years ahead. As the environment gradually shifts, volatility is likely to increase since every economic data point and headline will be viewed through the prism of what it may mean for future Fed rate hikes. So how do you make volatility work for you rather than against you?
InvestorPlace: – 3 cheap, high-yielding CEFs to buy. – If you’re a conservative investor at or nearing retirement, income is probably high up on your hit list — and that’s why closed-end funds (CEFs)are worth looking into right now.
Morningstar: – 4 Top fund picks for aggressive foreign-bond exposure. – For long-term investors only: two intrepid world-bond funds and two emerging-markets bond offerings.
BNK: – TLT: Large outflows detected at ETF. – Looking today at week-over-week shares outstanding changes among the universe of ETFs covered at ETF Channel , one standout is the iShares 20+ Year Treasury Bond ETF (Symbol: TLT) where we have detected an approximate $59.4 million dollar outflow.
WSJ: – PIMCO’s flagship fund shrinks again. – (Subscription required) Investors withdrew cash in August for the 16th straight month from the PIMCO Total Return bond fund run by Bill Gross, the latest reversal for the giant fund and its high-profile manager.
JPM UST Active client survey has most net shorts since 6/2/14. All client survey has most net shorts since 7/28/14.
— Mike Jackson (@bondscoop) September 3, 2014
Munis still considered illiquid in the LCR rule but “staff recommends developing a new proposal for public comment…”
— David Schawel (@DavidSchawel) September 3, 2014
Rough back to school for bonds today – Good US econ data, receding ECB easing expectations, & good August bond performance prompt sell-off.
— AnthonyValeri (@Anthony_Valeri) September 2, 2014