Managed Money Cautious, Capital Preservation Key
$DIA, $SPY, $QQQ, $VXX
The “new normal” led to the “new neutral” led to ‘insecure stability”.
The world has entering a phase of rising risks as the effect of central-bank stimulus policies diminishes.
“You can think of it as insecure stability,” Richard Clarida, Pimco’s global strategic adviser, said in an interview Wednesday. “We believe there are diminishing returns to monetary-policy activism. They may still be positive, but they’re diminishing.”
Pimco’s outlook comes as the Organization for Economic Cooperation and Development (OECD) warned that the global economy is slipping into a self-fulfilling “low-growth trap” where ultra-loose monetary policy risks doing more harm than good.
While global growth is just fast enough to keep economies from stalling, there are no evident sources of productivity increases or organic demand to support a more robust expansion, Pimco said in its published forecast Wednesday.
Pimco’s outlook is based on discussions and presentations at its annual secular forum in May in Newport Beach, California.
The firm popularized the term “new normal” after a forum following the Y 2008 financial crisis to describe a protracted period of below-average economic growth, heightened government intervention and increasing strength of emerging-market economies.
Then in Y 2014, it refined that outlook by arguing that central banks’ “neutral” policy rate had moved lower than it was before the financial crisis.
Financial markets have already priced in the “new neutral” view, reflected in rising asset prices amid a search for yield, according to the report Mr. Clarida co-wrote with Pimco’s Andrew Balls and Daniel Ivascyn.
The forum featured input from the firm’s global advisory board, which includes former US Fed Chairman Ben Bernanke, ex-UK Prime Minister Gordon Brown and former European Central Bank (ECB) President Jean-Claude Trichet.
With central banks in Europe and Japan pursuing negative-interest-rate policies and piling up debt with stimulative asset purchases, the impact of further monetary moves is limited, the authors wrote.
“There is the distinct possibility,” they said, “that monetary policy exhaustion and an overhang of debt in some major economies pose material threats to the sustainability of the global recovery and financial stability.”
The Paris-based OECD, which advises its 34 member countries, said that too much of the burden of lifting growth has been left to central banks. After pushing interest rates below Zero and pumping money into their economies through asset purchases, they are starting to see diminishing returns and their actions could even generate financial-market volatility.
Pimco, which oversees $1.5-T, plans to “have more cautious positioning in our portfolios, and to make capital preservation the #1 priority,” according to the report.
Pimco sees US GDP expanding at or slightly above an annual rate of 1.5 to 2%, compared with growth of 1 to 1.5% in the Euroarea and 5 to 6% in China.
“The game is only going on because of massive QE programs, negative Zero interest rates and emerging economies,” Mr. Clarida said Wednesday during a TV interview. “So our view is that investors cannot get a false sense of security by extrapolating past trends. So you see a world that now appears to be stable, but is not very secure.” Meaning, “insecure stability”
While most of the outlook warns of the risks of deflation and slowing economies, the firm recommends buying inflation-protected securities, especially in the US, because they offer good value and valuable protection.
Other investing implications include seeking seniority in debt purchases, guarding against negative interest rates in Japan and Europe, and using active management to select securities that provide higher returns than an index.
“The broad theme is that we think there will be a reward for active money management,” Mr. Clarida said in the interview. “This is not an environment where investors want to turn passive with their money.”
Thursday, US major stock market indexes finished at: DJIA +48.89 at 17838.56, NAS Comp +19.11 at 4971.36, S&P 500 +5.93 at 2105.26
Volume: Trade was a bit above average with about 952-M/shares exchanged on the NYSE
- S&P 500 +3.0% YTD
- Russell 2000 +3.0% YTD
- DJIA +2.4% YTD
- NAS Comp -0.7% YTD
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