Chart

Bill Gross of Pimco

Reprint of Bloomberg article:

Oct. 27 (Bloomberg) -- Pacific Investment Management Co.’s Bill Gross said the six-month rally in riskier assets is likely at its pinnacle, with U.S. economic growth to lag behind historical averages.

Gross, a founder and co-chief investment officer of the world’s biggest manager of bond funds, made the forecast in a commentary posted on Newport Beach, California-based Pimco’s Web site. Pimco has called for a “new normal” in the global economy that will include heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

“Investors must recognize that if assets appreciate with nominal gross domestic product, a 4-5 percent return is about all they can expect even with abnormally low policy rates,” Gross wrote. “Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets -- while still continuously supported by Fed and Treasury policy makers -- is likely at its pinnacle.”

U.S. policy makers are in a predicament much like Japan faced in the last decade because they have to keep interest rates low to support asset prices in order to create growth while also worrying about the effects of excess liquidity, Gross wrote.

“The Japanese example over the past 15 years is an excellent historical reference point,” Gross wrote. “Their quantitative easing and near-zero percent short-term interest rates eventually arrested equity and property market deflation, but at much greater percentage losses, which produced an economy barely above the grass as opposed to buried six feet under.”

Gross wrote that economic growth in the U.S. will approach 4 percent in the second half of this year, although sustaining that rate of expansion is uncertain.

“The ability to sustain those levels once inventory rebalancing and fiscal pump-priming effects wear off is debatable,” Gross wrote.

To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

Fixing To Big To Fail

Washington getting continued heat on bank/brokerage subsidies, so legislation is going to be offered to address the" to big to fail " problem.

(NewYorkTimes) .Congress and the Obama administration are about to take up one of the most fundamental issues stemming from the near collapse of the financial system last year — how to deal with institutions that are so big that the government has no choice but to rescue them when they get in trouble.

Sideways

The monthly DJIA chart shows the current 50% retracement underway (alltime highs vs March 09 lows) with a target of about 10300. These charting basics, which most real traders use as trash, illustrate the trading pattern of the 30 stock index and the somewhat flat net overall performance of the last 10 years. The current rally off the March lows has been powerful despite massive investments in US treasuries by the entire world. Unfortunately for the bulls, money on the sidelines is obviously staying on the sidelines and probably will not find stocks quite as appealing for some time to come. So stock allocations to date and normal front running of the "sidelines" trade have little hope of escaping the continuation of the DJIA's sideways purgatory.

Trading Forcasters

We live in a world where a Supreme Court elects a President, the largest financial institutions have to be saved by tax dollars, and markets increasingly perform in rapid boom/bust fashion putting significant risk upon non professional investors. Now the first condition is the result of one party having been able to stack the highest court with partisans. The second condition is a result of the same party's trashing of regulatory oversight. The third condition is mindless chase for returns, which has up through this decade so far, has resulted in a market unable to retain gains on any significance, except for those transactional profits charged by the same folks that needed all those tax dollars.

It is often said the stock markets look out six months ahead or more and essentially forecast conditions in the future. Now having been in the trading business for nearly thirty years, traders are not that smart. They look at today, then later today, and then the close. But let us look at one of their forecasts. One thousand dollar gold. The reason given, the dollar's future value. Probably not. As the TIPS trade has shown lately by its popularity, professional and herdsman alike believe a stimulus induced tsunami of inflation is inevitable. As in most instances, they are probably wrong, but stocks are in front of the same trade of chasing unreasonable expectations about future performances of companies whose futures have been constructed, not by market share advances, but by cost reductions which ultimately prevent serious expansion.

So is this rally any good? Probably not. But another bus will be by to either run you over or pick you up.

The Dog's New Chain

Battle over projected economic growth between the fixed income folks and stock analysts has resulted in some wide variations. Choices range between the 2% "new normal" with a deflation twist, or the much stronger projections by equities folks and their vision of a new profit cycle. It is hard to fight people such as Bill Gross of Pimco, who coined "new normal", since he has probably been the best trader on the macro side over the last two years. He is buying long term treasuries and believes the economy is just not going to have the ability to muster any sustained push due to the huge inventory of bad debt and increased tendency for public savings. The stock market insiders see great performing companies, cash on the sidelines ready to roll, and M&A activity rebounding.

Now Gross is always talking his position on Bloomberg but his outlook is a bit more realistic than the stock pushers who have had proven quite dramatically their skills rely on a great underlying secular bull, which they had for so long. The buy and hold mentality of a generation will have its moments for shorter periods, but the new dog has a much shorter chain and there is not much slack left. Besides, investing will mean trading more frequently over the coming years and that is not a model used to gain the public's confidence or an eagerness to invest. In and out is hard for 41Ks but easier for the trading industry. So a much more rolling trading affair will wear on the general investing public as their long term investments stay flat as Pimco's prediction of modest growth presents few opportunities for increased employment and overall economic expansion.

Old Is New In Investing

Few new interesting ideas lately on how the post crash market will reconstruct itself. Now everyone knows how various sectors of the economy have suffered, and finding new arguments for investing is tough. The contrarian view or "climbing a wall of worry" has become the primary explanation for the equities rally since March. Investing experts have also reverted to the "lots of cash on the sidelines" reasoning which identifies the astonishing insight managers use every day in plowing under billions of dollars. More clever analysis might find other reasons for the reluctance to invest, but scared shitless does work.

The risk models, which caused so much grief for hedge funds, had a poor understanding of illiquidity in declining markets. But they have no problem with anything in rising markets. Just in case, some have now been replaced by models which employ sophisticated guessing techniques as to which way the markets will turn next. This is done by rapidly analyzing all the potential current information, positive and negative, and then throwing out the negative. So far it is working.

But the most reliable historical reasoning tool for investing in stocks must be the " where else can one go model". This reduces all analytics into a choice as the where best to apply carefully honed skills in betting. Pick a sector of the economy that is working. Of course that would exclude most banking, retail, autos, and construction. Then pick the best performing company stock in that sector and hope all the cash on the sidelines chases your position. This worked for years but can end badly.

Up Good Down Bad

Just about every Bear has brought down their flag and conceded the worst is over, that economic conditions, while still lousy overall, will probably prove the rally in stocks is valid. Repeated surges to new recovery highs has left no other apparent explanation for the weary.

Macro views of market activity are usually traveling at about half the speed of professional trade ideas, but even for larger managers, the turning of big positions, promotes directional plays, as it makes life so much easier. The hedge industry is obviously attached to the bull side because it is easier to invest trade than it is to trade trade. Their recent performance recovery this year is evidence again there are few great thinkers running the biggest of funds. Making money on the up and getting hammered on the down says it all.

The zero rate interest rate policy of the Fed has helped stocks to rally simply as a function of providing one of the few liquid investment opportunities. The lack of sellers after such a large liquidation cycle of 2008 and early 2009, has amplified price moves hinged on investment strategies chasing lower prices. Extrapolating a recovery trend and possibly much more is what the herd will always follow and has historically been the story for stocks. But zero rates may create a dilemma in the way things used to work as current successful Treasury auctions continue to show a world of risk aversion. A policy of simply saving the higher orders of banking/investment firms does not insure economic growth. Injecting cash and cutting overhead does work but with obvious limitations.

This rally is a trade first with the complications associated with rapid deceleration when it ends. The ensuing scramble with banners declaring the second round of the world is ending will be as shallow as the current victory celebrations.

US/China Juiced

US/China trade fight will certainly gain attention especially when there has been a juicing of stocks and commodities by trading operations filing behind huge speculation plays coming out of the China. The double down bets in areas such as technology stocks could become a exceptionally volatile unwinding affair if there is a trade event not foreseen by the information edge boys. This along with China's increasing threat to all financial markets as they increasingly juggle huge stimulus programs, needed to keep their economic positions afloat, next to the need to keep the masses from scaling the walls.

Murky Rally

Stock analysts' projections of the inevitable rise and run of stock prices due to their claim of an undervalued stock market has continually contributed to the rally which has battered the Bears, and a group held in such low regard, I am talking about the analysts now, that have been able to survive on unemployable murky skills, almost as murky and unemployable as economists. But there they are, pumping stocks despite all the leaking waterlines of nearly every sector of the economy. They trot out analogue and historical earnings ratios of now broken industries and place a rally sticker on anything that is below their valuations.

Of course it is crap. But crap is the fantasy which powers the very essence of the Wall Street investment community, make up a story, securitize it, only take what you can steal, and then sell useless insurance against a raid on fantasy values where there is no market, just their mark. Lifting bales of stimulus money has not been easy when also worrying about public image, and a system, now gamed forever by forceful Fed and Treasury policies which have come to prove what everyone has always known, politics and Washington, investments and information, and money, belong to the makers.