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Gross says 2% nominal, 0% real
Old 06-16-2014, 03:07 PM   #1
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Gross says 2% nominal, 0% real

This is for the Federal Funds rate, essentially the 3 month Treasury rate (Tbills). The previous "neutral" rate for Tbills was 4% nominal, 2% real. Now Gross (and others?) are saying maybe we are going to be at 2% nominal, 0% real.

Tough for cash holders if this is the new reality. Bond holders may have to cinch in their belts a bit. Gross doesn't mention how steep he thinks the yield curve will be, i.e. he doesn't discuss what longer dated bonds might go to.

Here is a link to the video: http://finance.yahoo.com/blogs/daily...145520100.html

Of course, this is crystal ball gazing. But most of us have to make a bet. My bet is to hold minimal cash.
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Old 06-16-2014, 03:56 PM   #2
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Makes sense for fixed income. I generally assume between -1.0 and 0% real for fixed low/medium duration and ~4 or so for equity.
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Old 06-16-2014, 04:24 PM   #3
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With the ECB going to negative rate recently, the scenario Gates describes is highly likely.

Outside of I-bonds and stable value funds that I do not want to sell, I still have quite a bit of cash that I need to do something better with. I am thinking about some higher-yielding corporate and sovereign bonds, plus some dividend-paying stocks.
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Old 06-16-2014, 07:21 PM   #4
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Quote:
Originally Posted by Lsbcal View Post
This is for the Federal Funds rate, essentially the 3 month Treasury rate (Tbills). The previous "neutral" rate for Tbills was 4% nominal, 2% real. Now Gross (and others?) are saying maybe we are going to be at 2% nominal, 0% real.....
So if they previously predicted 4% nominal/2% real and IIRC that did not happen, and they are now predicting 2% nominal/0% real, why would we believe it?

IMO Gross has lost his touch and is milking his past record.
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Old 06-16-2014, 08:32 PM   #5
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So if they previously predicted 4% nominal/2% real and IIRC that did not happen, and they are now predicting 2% nominal/0% real, why would we believe it?

IMO Gross has lost his touch and is milking his past record.
The 4% nominal and 2% real is a historical rough mark, not a previous prediction.

We are free to believe anything, of course. Gross's comments are about the short rates going forward over the next 3 to 5 years. I think these estimates are always revisited as time marches on in a similar way as businesses revisit their future assumptions.

I'm generally more interested in the reasoning behind future assumptions before buying into the future assumptions.

For our portfolio, I've been keeping cash at a low level since 2011. FWIW, I keep 1 year's expenses in short term bonds (VFSUX) and the rest of the FI in intermediate bond funds. So Gross's comments will not really affect my portfolio and are in-line with my assumptions. My assumption is that the Fed and government will encourage risk taking. Short term Treasuries are the lowest risk assets.

Maybe I just like the message as it confirms my biases.
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Old 06-16-2014, 08:37 PM   #6
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It is a complete mystery to me why people bother listening to Gross when he talks his book (i.e. says anything in public).
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Old 06-16-2014, 08:44 PM   #7
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It is a complete mystery to me why people bother listening to Gross when he talks his book (i.e. says anything in public).
Since this is a long haul view, it doesn't seem to fall in the short term (talk the book) category. I'd be interested in your long term view as well as Gross's.

Alternate market opinions are interesting to me.
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Old 06-16-2014, 09:04 PM   #8
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I've no idea and I pretty much don't care. Rates will do what they will do.
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Old 06-16-2014, 09:29 PM   #9
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My financial newsletter would not attract any paid customers, nor should it. But with that being said, I have several CDs maturing this month, and I am throwing in the towel. I am just getting 10 year brokerage CDs at 3.35% at being done with it. When they sent me the letter this week saying they will renew for 3 years at 0.80%, I decided I am cashing them out and moving them to my Vanguard account.


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Old 06-16-2014, 09:59 PM   #10
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Originally Posted by brewer12345 View Post
I've no idea and I pretty much don't care. Rates will do what they will do.
When I was just a lad,
I asked my mother,
What will rates be?
Will they be high,
Will they be low,
Here's what she said to me.

Que sera, sera,
Whatever will be, will be,
The future's not ours to see,
Que sera, sera,
What will be, will be.
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Old 06-17-2014, 09:31 AM   #11
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Just saw on the Web this morning:

In the 12 months through May, consumer prices increased 2.1 percent, the biggest rise since October 2012. That came on top of a 2.0 percent rise in April and was above economists' expectations for a year-on-year increase of 2.0 percent.


Perhaps the economy is heating up a lot more in the US than in Europe and elsewhere.

My contractor said that the composite siding that he ordered for my garage may not be in for 4 weeks. He initially thought that it was going to be only 2 weeks, but the factory cannot produce it fast enough.
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Old 06-17-2014, 05:19 PM   #12
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I was poking around at the Pimco site and found this explanation by Paul McCulley for the "neutral rate" mentioned in my original post above:

Quote:
And that assumption became embedded in his ubiquitous Taylor Rule.

Simply translated, his Rule espoused that if inflation was at the Fed’s (then presumed, not explicit) 2% target, and if the economy was at its full employment potential (that is, the unemployment rate was at NAIRU, or the non-accelerating inflation rate of unemployment), then the “right” level for the Fed’s policy rate would be 4% – at-target 2% inflation plus his assumed 2% real rate “constant.”

Yes, that’s the origin of the 4% number that, to this day, the FOMC prints as its “longer-term blue dot” for where the fed funds rate “should be” (if the Fed were, theoretically, pegging the meter on both of its mandates).
link: PIMCO | - Just Give Me a Framework
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Old 06-17-2014, 06:11 PM   #13
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Originally Posted by Lsbcal View Post
This is for the Federal Funds rate, essentially the 3 month Treasury rate (Tbills). The previous "neutral" rate for Tbills was 4% nominal, 2% real. Now Gross (and others?) are saying maybe we are going to be at 2% nominal, 0% real.
I didn't watch the video, but is it even that much? My understanding is the starting estimate for a bond's return is its yield, and tbills are in the 0.30-0.35% range at the moment, or thereabouts. For real, you take that rate and subtract estimated inflation rate, and that'll put you at approximately -1.8%.

So sounds to me like Mr. Gross is being optimistic here (or is predicting rates to fall)?
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Old 06-17-2014, 06:16 PM   #14
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You are right about the current situation. See my post just above about neutral rate analysis for past economies. Also one could look up the Taylor rule.


Gross is talking about the neutral rate going forward. We are not yet at the neutral times. still coming out of the nasty recession.
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Old 06-17-2014, 06:31 PM   #15
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It is a complete mystery to me why people bother listening to Gross when he talks his book (i.e. says anything in public).
Yeah. "The New Neutral" seems like a PIMCO branding effort. It's very difficult to project economic trends beyond a year in developed countries, almost impossible in the higher growth economies.
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Old 06-17-2014, 06:57 PM   #16
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What Gross said or implied was that inflation rate would run 2% in the next few years, and at first I agreed with him, seeing that the ECB was doing some unprecedented stimulus, and perhaps that meant the world-wide economy was not doing so great.

But then, as I reported in a subsequent post, there are recent signs that the US economy is picking up, and also the accompanying inflation. Today, I talked to my contractor again regarding the delay in getting material for my home repair project. He mentioned that building activity has been picking up in this neck of the wood (literally as we are surrounded by a national forest). A home was just finished down the road from me. And the more expensive homes here are 2nd homes purchased by "weekenders", not by the locals who have more limited income. So, people are spending money again.

Just some anecdotes...

PS. We went checking out a wedding venue (down in the metro area, not this boonies place) with my daughter and her fiance last week. Most places were booked out for this year, and even next spring!
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Old 06-17-2014, 07:16 PM   #17
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Our area seems to be percolating a bit too NW-Bound. There was a report today that homes are up nicely in price, business is doing much better. County and state budgets are getting flusher. Of course, the market knows this as it happens well ahead of newspaper articles.

I think the Fed will let animal spirits emerge (if they are capable of emerging) and tighten only later if really necessary.
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Old 06-17-2014, 07:29 PM   #18
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Here's another anecdote. My contractor has been waiting for a concrete slab to be poured to start a new home, and he said he did not anticipate that wait. He added that his subs were busy, but have not been hiring because they were afraid that all this activity might be just a blip.

Local businesses were hurt bad in 2009, being reliant on "weekenders" to spend money. Now, driving on the nearby highway, I saw that cafes and restaurants were having their parking lot full again.
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Old 06-17-2014, 08:06 PM   #19
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Here's another anecdote. My contractor has been waiting for a concrete slab to be poured to start a new home, and he said he did not anticipate that wait. He added that his subs were busy, but have not been hiring because they were afraid that all this activity might be just a blip.

Local businesses were hurt bad in 2009, being reliant on "weekenders" to spend money. Now, driving on the nearby highway, I saw that cafes and restaurants were having their parking lot full again.
In my plebian, middle class corner of suburbia, I have seen a Maserati both today and yesterday (not the same tinypenismobile). Things must be looking up for at least a slice of the population.

I am pretty happy to have an overweight in sectors that do well when things start to heat up.
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Old 06-17-2014, 10:47 PM   #20
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In my plebian, middle class corner of suburbia, I have seen a Maserati both today and yesterday (not the same tinypenismobile). Things must be looking up for at least a slice of the population.

I am pretty happy to have an overweight in sectors that do well when things start to heat up.

Nothing that a good dose of this If Iraqi oil goes off line, $200 oil is next - Outside the Box - MarketWatch couldn't cure.
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