Bill Gross: Fed on hold through 2010

| 13 November 2009 15:08

Bill Gross of Pimco spoke on Bloomberg with Tom Keene and Ken Prewitt. He thinks the U.S. is entering a new normal of low nominal GDP growth. However, financial bets have been made on 6-7 percent nominal GDP (think pension liabilities).  Unless we get 5-6% nominal GDP growth debt deflation and deleveraging dynamics (the D-process)will take hold, Gross says.

This is not a bullish scenario for equities as revenue growth is based on nominal GDP, meaning profit growth must come from trimming expenses and a secular increase in already high profit margins. Lower interest rates are the only other way to improve the net present value of future profit streams.

Pimco is dipping a toe into equities, however.  Gross remains cautious on high yield, which he sees as fully priced (buyer beware) a.k.a. overvalued. Mortgage backed securities are also overpriced in his view.  That leaves you emerging markets, corporates, and treasuries in the bond area.

So the Fed will be on hold because they need to see at least 4-5% steady nominal GDP growth, something unlikely to occur before the end of 2010, Gross says.

Video below.

Se also: Bill Gross Says Value Diminishing in Credit Markets – Bloomberg

avatar About Edward Harrison

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.

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