Economist Online

Bill Gross is buying long-term government treasuries and he expects slower growth and low interest rate in coming years (source: Bloomberg).

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he’s been buying longer maturity Treasuries in recent weeks as protection against deflation.

“There has been significant flattening on the long end of the curve,” Gross said in an interview from Newport Beach, California, with Bloomberg Radio. “This reflects the re- emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth.”

Gross had said during the midst of the credit crunch that Treasuries offered little value as investors seeking a refuge from turmoil in global financial markets drove yields to record lows in December. He boosted the $177.5 billion Total Return Fund’s investment in government-related bonds to 44 percent of assets, the most since August 2004, from 25 percent in July, according data released earlier this month on Pimco’s Web site. The fund cut mortgage debt to 38 percent from 47 percent.

“We’ve exchanged our mortgages for the government’s check” as the Federal Reserve winds down purchases of agency debt, Gross said today. “Mortgages are expensive compared to Treasuries and other vehicles.”

Fed policy makers last week committed to complete their $1.45 trillion in purchases of mortgage securities and extended the end of the program to March from December.

Policy Reversal

Pimco’s Total Return Fund handed investors a 17.85 percent gain in the past year, beating 94 percent of its peers, according to data compiled by Bloomberg. The one-month return is 1.94 percent, outpacing 57 percent of its competitors. Pimco is a unit of Munich-based insurer Allianz SE.

Pimco in July reversed a policy to steer clear of U.S. debt when it said it would buy five- to 10-year Treasury securities.

“With Treasury yields near the top of our expected range, Pimco plans to overweight duration and take exposure to the five- to 10-year portion of the yield curve,” the firm said July 20 in a report on its Web site.

On that day, the yield on the 10-year note touched an intra-day high of 3.72 percent and a low of 3.57 percent. The note yielded 3.29 percent at 10:36 a.m. today in New York.

Gross said intermediate- to long-term bonds will perform well as long as policy rates and inflation remain low, after minutes of the Federal Open Market Committee’s Aug. 11-12 meeting was released on Sept. 2.

‘New Normal’

Officials at Pimco have forecast a “new normal” in the global economy that will include heightened government regulation, lower consumption and slower growth. The economy will likely expand at a 2 percent to 3 percent rate going forward, Gross said.

The world’s largest economy shrank at a 1.2 percent annual rate from April to June, more than the originally reported 1 percent contraction, according to a Bloomberg News survey before the Commerce Department’s Sept. 30 report. The jobless rate climbed to 9.8 percent this month, from 9.7 percent in August, according to a separate Bloomberg survey before the Labor Department reports figures on Oct. 2.

Michael Mussa is a no-nonsense economist. It’s always good to hear him.

Mussa offers some insights of why he thinks US economy will have a rapid recovery. He expects annual growth rate to be 4.5% and accumulative growth rate from now to the end of 2010 to be 6.8%, both substantially higher than the blue-chip forecast.

Mussa’s forecast largely based on the observation that the sharper the economy falls, the steeper the economy will come back. This statistical behavior of business cycle is shown in the following graph and also documented in my previous post.

Mussa’s forecast still left many questions unanswered: Should we simply rely on a historical statistical pattern to make our economic forecast? We know every recession is different; What if this Great Recession is so different that it will break this historical pattern.

Now I give you Michael Mussa (Source: PIIE, about 30 mins)

Following my last post that looks at the current market rally in historical perspective, here is another update from FT.

Just admit it: most institutional managers simply missed the rally since March. Now in order to keep their jobs or get higher compensation, they have every incentive to get into the market even when the market is already overpriced.

This is one of the main reasons why we had bubbles in the first place: investment managers compete for portfolio performance with their peers — as long as the party is on, they will have to keep dancing.

I am afraid we are likely to head into another asset bubble.

(click to watch; source: FT)

Nicholas Lardy and Morris Goldstein, of Peterson Institute of International Economics, talk about the evolution of China’s exchange rate policy and the future.

Starts to watch from 3’30″.

Source: WSJ

While gold is grabbing the headlines, its sister precious metals are actually reaping the most gains. For the year to date, platinum and palladium, two lesser-known metals, have surged 38% and 56%, respectively, far eclipsing gold's 12% gain. Silver is up 42% over the same period.

With their dual roles as precious and industrial metals, platinum and palladium are managing to profit from both sides of the debate over whether an economic recovery is on the horizon.

Platinum and palladium have a multitude of uses, with the auto industry taking about 60% of each metal's annual production for catalysts to reduce tailpipe emissions. Some bulls view the metals as a bet on economic recovery, and on the struggling automobile sector in particular.

Meanwhile, for those concerned about the fragility of economic conditions and the Federal Reserve's printing of money, some see the metals as a store of value like gold.

However, despite "cash for clunkers" programs around the world boosting vehicle sales, analysts still think auto makers' demand for both metals will decrease this year. Even with output likely to decline because vital South African mines are plagued with power shortages and labor disputes, both the platinum and palladium markets still confront the threat of a surplus.

 

One factor supporting prices is the growing appetite from exchange-traded funds that are backed by platinum and palladium. As investors speculate on commodities, the total amount of the metals held by six such funds — traded in the U.K., Switzerland and Australia — hit records last week, with about $1 billion in assets, according to Barclays Capital.

Of late, China may also have helped prop up the metals, with imports of platinum and palladium up 92% and 63%, respectively, in August from a year earlier, fueled by stronger demand from jewelers and auto makers.

Last year, Chinese jewelers and auto makers accounted for 16% of platinum's global consumption, according to metal refiner Johnson Matthey. China's jewelry demand for platinum is this year projected to exceed peak purchases seen in 2002, meaning a jump of 43% from last year, according to John Reade, a UBS metals strategist. However, real demand growth isn't strong enough to support such explosive imports, suggesting stockpiling.

With car makers in Detroit and elsewhere still facing weak sales, the rally in platinum and palladium seems to have gotten ahead of itself. Without the support of a sustainable rebound in industrial demand, prices could wane once stockpiling slows down. Any loss of faith in the strength of the expected global recovery would likely hurt the two metals a lot more than gold.