WILLIAM H. GROSS
Chief investment officer
Pacific Investment Management Co.
Newport Beach, Calif.
Assets under management: $245 billion
Hot sectors: Emerging markets and corporates
Bad bet: Lower-quality junk bonds
With the recent rate cut, Bill Gross believes things are falling into place for the much-anticipated turnaround.
"From this point forward, the Fed will only lower rates to the point that the economy shows some signs of relief and upward progress," Mr. Gross said. "And that should be relatively soon, so we may have just seen the last rate cut."
The stock market has started to improve, the wealth effect has been jump-started and now it's time for the economy to do its part and start improving, Mr. Gross said.
"But don't count on a V-shaped recovery with growth rates of 4%, 5% and 6%," Mr. Gross warned. "It will be a long, slow, gradual recovery with 2% growth. The recovery will then be enough to stop the Fed's cutting, and I believe this will take place in the first or second quarter of 2002."
However, Mr. Gross does not think we will see any interest rate increase for the next 12 to 15 months.
"You see, historically, the Fed has waited an average of 12 months after a recession ends before they raise interest rates," he explained. "Also, and almost to the month, the Fed rarely raises rates until manufacturing operating capacity moves up to 82% of capacity. Right now we're at 75%."
If the economy moves to growth as fast as it moved down, it would take 16 months before manufacturing operating capacity gets to the 82% level, Mr. Gross said. Given these two factors, Mr. Gross foresees at least 12 months of "all-clear from the Fed."
"Bottom line, I foresee no tightening in 2002."
These low, flat rates will have a significant impact for many spread investment vehicles and for many areas of the bond market.
"I'm not suggesting that we're entering a bear bond market, but rather a 12-month period where yield, or spread, will be making the difference," Mr. Gross said. "In this context, sectors such as emerging markets and corporates begin to look good but I believe lower-quality junk will continue to have its problems in 2002."