Pimco Bill Gross
Pimco founder and co-chief investment officer Bill Gross who runs the world’s
largest bond fund, Pimco Total Return Fund reported the fund took in $1.3
billion in new cash during August, bumping total inflows for the year to $9.3
billion. Gross said Tuesday in his separate monthly investment outlook that only
gold and real assets would thrive in a “ring of fire” of U.S. fiscal problems.
Gold GG elicits black and white responses, the Pimco analysts said. Some
investors “have a deep, almost religious conviction that gold is a useless,
barbaric relic with no yield,” while others “love it” and see it as “the only
asset that can offer protection from the coming financial catastrophe” always
just around the corner, they said.“Our views are more nuanced. Our bottom line
per Gross: given current valuations and central bank policies, we see gold as a
compelling inflation hedge and store of value that is potentially superior to
fiat currencies. We believe investors should consider allocating gold and other
precious metals to a diversified investment portfolio.” Other investments, such
as Treasury Inflation-Protected Securities, offer an inflation hedge. TIPS are
also less volatile than gold. History shows gold’s high correlation to inflation
and gold’s unique supply-and-demand characteristics may lead to attractive
valuations Gross said. Gross warned that the U.S. would no longer be “the first
destination of global capital” seeking safe returns if it doesn’t address its
fiscal gap. The U.S. “will begin to resemble Greece before the turn of the next
decade” if it continues to close its eyes to deficits, Gross said. “Unless we
begin to close this gap, then the inevitable result will be that our debt/GDP
ratio will continue to rise, the Fed would print money to pay for the
deficiency, inflation would follow and the dollar would inevitably decline.
Bonds would be burned to a crisp and stocks would certainly be singed; only gold
and real assets would thrive within the ‘ring of fire,’” Gross said. A financial
Armageddon is not around the corner, Gross said. “I don’t believe in the
imminent demise of the U.S. economy and its financial markets. But I’m afraid
for them,” he said.
Following up on recent technological snafus that have hurt investor confidence,
a panel of experts at the Securities and Exchange Commission Tuesday backed the
creation of computerized “kill switches,” along with other limits to problems
stemming from computerized trading. “We believe that a kill switch-like solution
is may be the most widely agreed-upon solution that may be implemented in a
reasonably short time frame,” said Lou Pastina, executive vice president at the
New York Stock Exchange (NYX). SEC chief Mary Schapiro told panelists that the
agency is not concerned about whether a single firm may fail, but whether it
causes collateral damage to investors and their “confidence” in the markets.
“The inherent speed of trading, which itself is partly a result of the
competitive nature of our markets, means that even small, short-lived
infrastructure issues can cause drastic harm,” she said. Panelists agreed that
while all software contains errors, some of the problems that have occurred
recently are not solely attributed to technology. The group also supported
setting up software “kill switches” at exchanges to shut down trading when an
error occurs. What’s more, they debated whether it was important to develop
better technology for the SEC to monitor fast trading. The panelists backed the
idea of a so-called "kill switch" that could be administered by exchanges to
provide a “systematic” shut-off if a firm exceeded a prescribed trading limit.
The idea would be for an exchange to turn off trading for a member of the
exchange if they pass a threshold for trading. Some panelists said that it may
be difficult for an automated algorithm "kill switch" to differentiate between
trading that needs to be terminated versus that which is intended. Panelists
discussed how high-speed traders can do a better job of testing their algorithms
before employing them in the markets and agreed that smaller firms may do a
poorer job taking the time to test appropriately.
With talk of a deal to help the U.S. economy avoid falling off a so-called
'fiscal cliff', there were reports out from Washington on Tuesday there are a
group of senators working on several proposals to prevent deep spending cuts and
sharp tax hikes from taking effect January 1 as scheduled. Business leaders warn
that the standoff in Washington is already harming the economy. The bipartisan
group of senators is not close to a deal yet, and it is unclear if the House
would go along with whatever plan is concocted. Senators are discussing ways to
help the economy while at the same time, boost federal revenue by revamping the
tax code and eliminating deductions. More controversially, changes could be made
to Social Security and Medicare to constrain the growth in entitlement programs.
Any plan would have a large deficit-reduction effect, though most of the savings
would likely take place in the future. Of course, the outcome of the 2012
elections could play a big role in the final outcome. Senators are looking to
strike a deal shortly after the November 6 vote before 2013 starts to prevent a
potential crisis from landing on Washington’s doorstep when the new year begins.
Late Monday, New York Attorney General Eric Schneiderman filed a lawsuit against
J.P. Morgan Chase & Co. (JPM) in civil court, alleging widespread fraud in the
sale of mortgage-backed securities. The suit relates to mortgage-backed
securities issued by Bear Stearns & Co., which was acquired by J.P. Morgan in
2008 when the firm collapsed amidst the financial crisis. The complaint argues
that Bear Stearns defrauded “thousands of investors.” The charges, which came
partly as a result of a federal mortgage task force formed in January by the
Justice Department, assert that the misconduct was in connection with J.P.
Morgan's “due diligence and quality control processes” that “constituted a
systemic fraud on thousands of investors.” The complaint alleges that Bear
Stearns and its mortgage unit “committed multiple fraudulent and deceptive acts”
in promoting and selling residential mortgage-backed securities. It alleges that
the bank “systematically failed to fully evaluate the loans” while leading
investors to believe that the securities have been “carefully evaluated.”
CoreLogic on Tuesday reported a 0.3% gain in U.S. home prices in August, to take
the year-on-year jump to 4.6% for the biggest year on year increase in six
years. The move is additional evidence that the housing market recovery has
gained traction. With all but six states experiencing gains, CoreLogic has
reported six straight monthly gains. Excluding distressed sales such as
foreclosures and short sales, home prices were up 4.9% year-on-year during
August and 1% on the month. CoreLogic’s pending home price index expects home
price gains to stretch to 5% on a year-on-year basis but fall 0.3% monthly as
the summer buying season ends. CoreLogic said that the five highest states with
the biggest home price appreciation were Arizona, Idaho, Nevada, Utah and
Hawaii, with Arizona seeing a surge of 18.2%. Nevada has seen the biggest drop
from the peak of 54.7% and Arizona has seen a 42% drop from its peak.
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