This is interesting. His investment outlook for August makes a similar argument. (As an aside, McCulley similarly talks about the menace of asset price deflation in an environment he calls the ‘paradox of deleveraging’.)
Last month’s Bill Gross missive talked about an inflationary uptrend. Here’s what he wrote:
A trillion dollars of government deficit spending is potent medicine. Its potency regarding inflation will not be felt fully during the peak deficit period. Rather, inflation will accelerate during the subsequent recovery as the government bonds acquired during the recession are transformed once again into risk bearing assets and high levels of investment.
I covered this and commented on El-Erian’s latest book in an earlier post. I had concluded with these lines:
My 2 cents is that yields would probably come down in the next year in a deflation scare, before treasuries enter a decade long bear market. Even Hussman extended bond duration a few weeks back. PIMCO’s investment thesis, while right in the long run, could underperform this year.
Note that my conclusion was derived in part from reading Gary Shilling’s opinion, the GaveKal piece on monetary velocity posted by John Mauldin, and the simple fact that commodities peak late in a slowdown. Talking of commodity price driven inflation in a credit crunch with rising unemployment is problematic, global growth and a trillion dollar fiscal deficit notwithstanding.
Guess what? Maybe it’s due to crude cracking up, or some other data point, but Gross seems to have changed his view point. The 'deflationary threat' seems to be the new mantra.
“Inflation is high. headline inflation at 5% is much higher than it should be. To suggest that the Fed or a central bank should raise interest rates in the face of a significant asset deflation, is certainly a wrong approach, to put it mildly. With housing prices going down, unemployment going perhaps as high as 7% 12 months down the road will be tantamount to raising interest rates in the mid 1930s which was a classical mistake the Fed reserve made at that time”
His investment outlook for August makes a similar argument. (As an aside, McCulley similarly talks about the menace of asset price deflation in an environment he calls the ‘paradox of deleveraging’.)