Wednesday, October 11, 2006

PIMCO managers on Bloomberg

I saw Pimco's Bill Gross and Paul McCulley on Bloomberg this morning. They stated that the housing sector is already in a recession and the auto sector is expected to be in one in Q4. Yet amazingly, both insisted that the likelihood of a recession in the overall economy is low.


Click for video from Bloomberg
, found via Calculated Risk

Huh? Has it become "politically incorrect" for high-profile, public figures to issue dour outlooks on the economy? Or is it because they knew better than any the liquidity expansion despite the Fed's 17 consecutive rate hikes? Long time readers of this blog know that I lean towards the former despite the new highs in the Dow. As Jeffrey Saut pointed out in his latest missive, a lot of the recent buying pressure were from money managers with cash sitting on the sidelines that missed the initial rally. I continue to look for a top in the S&P around 1360.

As you can tell, I hold onto my opinions strongly. However, the one thing that can make me change my mind is renewed strength from the consumer quarter, as measured by the YoY rate of change in real PCE (link). Of course, the US consumer may well decide to spend their literal last dime. To me that's akin to committing financial suicide; on the other hand, it has been said that nobody has gone bust betting against the intelligence of US consumers. If that last ditch spending binge were to occur, I would probably remove my hedges and get heavily into cash while become ever more pessimistic of the household balance sheet and future correction. In my mind, a recession that repairs some of the excesses is exact what the doctor orders for this economy.