Thursday, June 28th, 2007
Bond Guru Calls For Interest Rate Cuts, But is it Déjà vu All Over Again?”
Bond guru William H. Gross believes the fallout from the subprime mortgage crisis will spread beyond the housing sector, inducing the Fed to cut interest rates sometime in the next six months to keep the problem from spreading.
Gross, the founder and chief investment officer for Pimco, one of the world’s largest specialists in fixed-income investing, posted his comments in his July outlook column on the company Website. He believes the mortgage-sector crisis will crimp the construction of new homes as well as consumer spending. And that, in turn, will induce the central bank to reduce the benchmark Federal Funds rate from its current level of 5.25%.
That reduction will take place within the next six months, Gross stated.
While “there is no hint yet of a true ‘crisis’ - these developments may be just what the Fed has been looking for: Easy credit becoming less easy; excessive liquidity returning to more rational levels,” Gross wrote. “Still, Pimco looks for the Fed to issue an insurance policy in the form of lower Fed Funds at some point over the next six months.”
Gross says he still believes we’ll see strong global growth, but says the U.S. housing downturn will affect both growth and short-term interest rates for another year or more. He also cautioned that the subprime-credit-related problems in several Bear Stearns hedge funds reminded him of the problems at the vaunted Long-Term Capital Management Hedge Fund a decade ago.
“Derivatives are a two-edged sword,” Gross said. “Yes, they diversify risk and direct it away from the banking system into the eventual hands of unknown buyers, but they [also] multiply leverage like the Andromeda strain. When interest rates go up, the Petri dish turns from a benign experiment in financial engineering to a destructive virus because the cost of that leverage ultimately reduces the price of assets;.
Added Gross: “Houses, anyone?”
Ironically, it was the Fed’s decision to cut interest rates after the collapse of LTCM that most experts now say created the artificially low interest rates that fueled the disastrous Internet bubble - and in an oddly decoupled and delayed manner - the housing boom that followed and that’s the cause of the current credit problems.
The Fed’s policymaking Federal Open Market Committee concludes its two-day June meeting today, but is expected to leave interest rates unchanged.
Jim Rogers: China’s Expansion Depends on Water
Oil isn’t China’s most precious resource. China must spend $162 billion in the next five years to clean up its polluted rivers-as nearly 40% of them are undrinkable. "China has a huge water problem," Legendary investor Jim Rogers says. "…If they don’t solve it, or if they don’t solve it in time, then China has failed." Find out which six global water treatment powerhouses are set to make “liquid profits.”
