The credit crunch is far from over, a Pensions & Investments round table of investment experts predicted a month ago. To date, their warnings largely are coming true.
A mostly gloomy panel warned there will be further carnage in both fixed-income and equity markets, and that pension fund executives expecting average annual returns of 8% for the foreseeable future are likely to be disappointed.
“The credit crisis isn't over,” said Jeffrey Gundlach, chief investment officer of TCW Group Inc., Los Angeles. Aside from mortgage-backed securities, “I would say in some sectors the credit crisis is nearer the beginning than the end,” Mr. Gundlach added.
Jeremy Grantham, chairman of GMO LLC, Boston, said paying investors negative real returns on Treasury notes won't resolve the problem. Such a solution “brings to mind the hair of the dog that bit you. The guy is a drunk and you're offering him a kind of early morning pickup. It may get him to the office feeling reasonably good but it doesn't do much for his cirrhosis of the liver.”
Real estate markets and the subprime mortgage sector remain a thorn in the side of the U.S. markets, panelists agreed.
“We would say that there's a long way to go,” said Joseph Nankof, partner at Norwalk, Conn.-based Rocaton Investment Advisors LLC. “A lot of attention has been focused on the subprime sector of the market and less so on ... prime and home equity loans ... Those shoes have yet to drop.”
The round table, dubbed “Post-Traumatic Credit Disorder,” was held June 9 in New York — before the latest round of problems hit financial markets. The other two panelists were Martin Leibowitz, managing director at Morgan Stanley, New York, and William Goetzmann, Edwin J. Beinecke Professor of Finance and Management Studies and director, International Center for Finance, Yale School of Management, New Haven, Conn. Joel Chernoff, executive editor of P&I, moderated the discussion.
Further complicating matters has been the public and government outcry to name a scapegoat, namely the entire financial sector, Mr. Goetzmann said. The quest for information and congressional hearings would only lengthen the crisis, further weakening the U.S. financial system and stymieing innovative ways to restructure debts and restore investor confidence, he said.
Focusing on how cost-push inflation has gripped the U.S. markets, Mr. Leibowitz recounted a recent client conference where a “surprising majority” of audience members expected headline inflation to be more than 5% by the end of this year.
Not only was the consensus “amazing,” but also the high inflation expectation augurs badly for long-term interest rates. “The issue of inflation is very much on the central bankers' minds throughout the world,” he said.
What's more, Mr. Grantham blasted the Fed for its role in JPMorgan Chase & Co.'s acquisition of Bear Stearns Cos. in mid-March.
“We've learned that there aren't too many adults around. There's nothing but easy solutions and easy answers. I think we've learned that the Fed is intellectually nearly bankrupt, that it stretched the law in bailing out investment banks and, in the process, compromised, as (Mr.) Volcker said, some long-established principles, which he obviously valued,” he said.