Thursday, June 17, 2004

Pimco Chief Says Global Outlook Unstable

Pimco chief says global outlook unstable
By Deborah Brewster

The outlook for the global economy is the most uncertain for 20 or 30 years, according to Bill Gross, the influential chief investment officer of Pimco, the world's biggest bond fund manager.

"Too much debt, geopolitical risk and several bubbles have created a very unstable environment which can turn any minute.

"More than any point in the past 20 or 30 years, there's potential for a reversal," he warned in an interview with the Financial Times.

"We have become a levered global economy, specifically in Japan and the US.

"With all this consumer debt, business debt, government debt, smaller movements in interest rates have a magnified effect . . . a small movement can tip the boat."

Pimco manages $400bn in bonds, about a third of which is outside the US, and has outperformed the market over the past 30 years. Mr Gross is one of the few bond managers whose views can move the market.

He said there were bubbles in commodities and the UK housing market, as well as the US currency.

"The US dollar is being supported by the kindness of strangers - Japan and China.

"It should be 20 per cent lower than it is. Japan and China will change their stance, we don't know when but we know they will. The dollar isn't overvalued against the euro but it is against Asian currencies."

The threat of economic instability, he said, stemmed in part from "the advent of financial alchemy" - in particular, the growing use of hedge funds.

"Even banks are employing the 'carry' trade - borrowing short and lending long.

"They're doing things they haven't done before. There's lots of risk in the economy now compared with even five years ago."

Mr Gross supported calls for hedge funds to be regulated, describing them as "basically unregulated banks".

"They are amazingly similar in the leverage they use and have the same structure, borrowing at 1 per cent and lending or investing longer, and they take it to an extreme because they go into stocks, commodities, real estate.

"If banks are regulated, hedge funds should be. I think there's a lot of risk there," he said, citing the 1998 collapse of Long Term Capital Management.

Pimco's plan was to "stay ahead of reflation" by keeping money out of the US and in countries such as the UK and Germany that would not be as badly hit by inflation.

The highest level ever of Pimco's money was invested outside the US, in part because of growth in the fund's non-US asset management business.

The proportion would be even higher, he said, except that many US clients, such as pension funds, had a ceiling on how much they could invest abroad.

"If the US is not bond-investor friendly, we take our money and move it somewhere it is," he said. ...Link

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