USA in Recession

Well, I could have told you this and have in fact hinted in prior posts that I thought the USA was headed toward financial trouble a number of times. It is nice to see that others concur as indicated by this Financial Times article (http://www.ft.com/cms/s/0/6a7a056a-af37-11dc-880f-0000779fd2ac.html?nclick_check=1). I truly believe that until the housing and mortgage markets revive, there will be a tremendous downward pressure on the economy as a whole. Note how the founder of Pimco, one of the world’s largest fixed-income managers, things very little of what the Chimperator and the Federal reserve have proposed to date. Here are some story highlights:

Bill Gross, founder of Pimco, one of the world’s largest fixed-income managers, has sounded a downbeat note on the US economy by saying it has gone into recession. “If I had to be bold I’d say we began a recession in December,” he said in a Financial Times interview, in which he called on the Federal Reserve to bring interest rates down to 3 per cent. The recession would last “four to five months”, he thought, but he added it would be prolonged if the administration and Congress failed to “take some rather unperceived and unforecasted measures in terms of fiscal stimulation”.

Mr Gross, whose company has $750bn of assets under management, was critical of US attempts to stabilise credit markets, describing the “Super Siv” and plans to freeze mortgage teaser rates as a “temporary fix”. He said: “What needs to be done is something fairly radical compared to Republican orthodoxy, which means spend money and absorb the deficit as opposed to pretending that you’re fiscally conservative.”

He was highly critical of the complicated financial instruments that have exacerbated the credit squeeze, saying the trend of over-leverage was a “dying concept” that will “lead to an implosion at the edges . . . of this new financial marketplace.” He also had stern words for hedge funds, describing them as a “con”.

Mr Gross founded Pimco in Newport Beach in 1971, building it into a powerful bond manager that continues to operate from southern California. With California one of the first places to feel the effects of the subprime crisis, Mr Gross said, the company’s location alerted him early to the danger that has since wreaked havoc in world markets. Pimco switched out of mortgage-backed securities in 2006 and for the first half of 2007 fell behind its competitors. However, in the second half it has outperformed the market as Wall Street has racked up billions of dollars in subprime-related losses.

I also recommend Paul Krugman's column that looks at the failure of regulators who let the motgage disaster ensue: http://www.nytimes.com/2007/12/21/opinion/21krugman.html?_r=1&hp&oref=slogin