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Page added on October 13, 2017

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As Good as It Gets

It’s easy to get lulled into complacency by synchronized global growth, easy financial conditions and super-low economic and financial market volatility. Yet, while the current macro environment and outlook appear better than many of the younger market participants can remember, the last time a similar combination prevailed was in 2006 – and that didn’t end well.

Eleven years on, we don’t think another major financial crisis is likely over our cyclical horizon spanning the next six to 12 months. However, then as now, when the macroeconomic environment is as good as it gets and valuations are tight, it is time to emphasize caution, capital preservation and diversified sources of carry away from the crowded trades. Note: you just read our main high-level investment conclusion based on vigorous internal discussions at our September Cyclical Forum. Here’s more on the debate and the analysis underpinning our forecasts and investment conclusions.

Feeding the bull?

Of course, the road to a conclusion that emphasizes caution wasn’t straightforward and was plastered with intense and controversial debates – a hallmark of a nearly four-decade-old forum process that brings together all PIMCO investment professionals every quarter.

Looking on the bright side, our baseline economic forecast is for a continuation of synchronized world real GDP growth at a decent 3% pace in 2018 (the same as this year), low near-term recession risks, a moderate pickup in underlying inflation in the advanced economies, mildly supportive fiscal policies and an only gradual removal of monetary accommodation. Also, political risks emanating from nationalist/populist movements look more contained for now, particularly in Europe, partly as a function of better economic growth. Moreover, as our Asia-Pacific Portfolio Committee colleagues argued at the forum, China may well be successful in continuing to suppress volatility well beyond the 19th National Party Congress in October.

So, if you want to stay or become a bull on risk assets, all of this seems like good macro fodder.

The ABCs of caution

However, once you start to look through the smooth macro surface at the underlying risks and uncertainties, there are a few problems that might pop up even over the short-term cyclical horizon and upset the eerie calm in financial markets. Apart from the obvious geopolitical threat emanating from North Korea, the most important macro uncertainties – “the ABCs of caution” – are the aging U.S. economic expansion, the coming end of central bank balance sheet expansion, and China’s political and economic course following the party congress.

On aging, as the U.S. expansion matures and slack in the labor market keeps eroding, we expect GDP growth to slow to a below-consensus 2% or less and core CPI inflation to pick up to 2% in the course of 2018. Thus, the mix of nominal growth between real growth and inflation will become less favorable as disappearing slack makes it difficult to sustain the current pace of job and output growth. True, an acceleration of productivity growth would help, but does not seem to be in the offing as business investment outside energy remains moderate. A Federal Reserve that is fixated on the Phillips curve will likely raise the policy rate two or three times between now and the end of 2018 – less than the four hikes the Federal Open Market Committee (FOMC) currently foresees but more than the extremely shallow rate hike path that markets price in right now. Thus, the front end of the U.S. yield curve looks vulnerable.

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67 Comments on "As Good as It Gets"

  1. Cloggie on Sun, 15th Oct 2017 7:27 am 

    “Bullshit, compared to which currency? Try again clogged head who cherry picks numbers.”

    Compared to $-2017, Great Thinker.

    Did you invest 2 minutes of your precious goat herd time to actually watch the video of your own MSM CBN? That is the origin of these “cherry picked numbers”.LMAO

  2. Davy on Sun, 15th Oct 2017 7:43 am 

    clog, which currency is the dollar overvalued with and when is the question? Currencies fluctuate constantly and fluctuate in different relationships. I don’t watch your stupid videos. Spell it out in your comment lazy ass otherwise you are talking out your ass and hoping a stupid video baffles with bullshit. When it comes to finance and economics you are all baffle and bullshit.

  3. Cloggie on Sun, 15th Oct 2017 8:03 am 

    “Forget Catalonia, Flanders Is The Real Test Case Of EU Separatism!”

    You want to make a point, Davy?

    Davy is hunting the internet for material to make the point that Europe is about to collapse, rather eclipsing the US in the coming decade.

    Does Flemish secessionism exist? It does.

    For what purpose? To join the natural born winners in the

    Geert Wilders for instance…

    (“Do you want more or fewer Africans… em Moroccans in the Netherlands?)

    is supporting Groot-Nederland:

    In 1815 after the victory over Napolean, the Vienna Congress decided to build a buffer state against France. After 15 years some strange revolt the catholic French speaking Walloons and catholic Dutch speaking Flemish decided to secede on religeous grounds. But that was 1830. Now is 2017 and language has become far more important than religion, nobody believes in anymore.

    The comparison with Bosnia is bogus btw because Belgium is ethnically razor sharp separated… except for Brussels, which could indeed become a source of armed conflict. Brussels used to be the capital of the Netherlands before the 80-year war. Now it is 85% French because of all these eurocrats.

    Potential solution: Brussels DC, that is a city state.

    But it is true, Rich Flanders merging with the Netherlands and poorer Wallonia going to France is a distinct possibility in the near future.

    And while we are at it, we would love to get the original Dutch towns of Duinkerken-Dunquerqe, Kales-Calais and Rijssel-Lille back from France back as well, stolen from us by Lou14.

    Just kidding.

    Oh, if Holland and Flanders would reunite, this new state would push Canada out of the G8. You are sure you want

    I myself as a very Dutch secural-protestant do not care too much about this potential reunification.

  4. Davy on Sun, 15th Oct 2017 8:09 am 

    da da dumbass why do you get upset when I do what you do daily, repetitively and obsessively. I guess it is ok for an old white racist to do it for some reason I guess because he is white and right. lol

  5. Cloggie on Sun, 15th Oct 2017 8:10 am 

    “I don’t watch your stupid videos.”

    It is an American video, which makes you an anti-American, which is what you are btw. You hate America which you despise, but love the American empire, although you will not admit it.

    Typically Davy, if presented with a piece of information he doesn’t like, he will put his fingers in his ears saying “I can’t hear you”.

  6. Cloggie on Sun, 15th Oct 2017 8:14 am 

    “da da dumbass why do you get upset”

    Where am I upset? The only one who is fuming for anger about the immanent collapse of the US empire, which you yourself have predicted for years, is you.

    I am merely the good humoured, relaxed uncle from Europe, full of goodwill, explaining the world to his nephew.

  7. Davy on Sun, 15th Oct 2017 8:30 am 

    “It is an American video, which makes you an anti-American”
    I don’t care if it Klingon video. Put down the information in print in your lame comment. You are too intellectually lazy to write it out because you puke your agenda with multiple and repetitive links and references.

  8. Davy on Sun, 15th Oct 2017 8:34 am 

    “I am merely the good humoured, relaxed uncle from Europe, full of goodwill, explaining the world to his nephew.”

    Sure cloggie, tell me all about it. You are like mad kat in so many ways no wonder you two are buddy buddy lately. You can’t stand your imaginary world being disturbed. It is very hard for chauvinistic braggarts that live in binary worlds to maintain their chimera

  9. Cloggie on Sun, 15th Oct 2017 2:54 pm 

    I am a chauvinist all right, but makati?!

    Must advise you to carefully reread “mad kat’s” post to verify he is the anti-chaivinist pur sang.

    You do know what a chauvinist is, I hope?

  10. makati1 on Sun, 15th Oct 2017 5:14 pm 

    chauvinism: excessive or blind patriotism

    There, I saved Davy a few seconds of his precious time. lol

    It sure fits Davy, but not me. I am not a Filipino citizens so I cannot be a Ps chauvinist. I see the plus’ and minus’ of both the Ps and the US and have decided that the Ps is the better of the two places to live. That’s all. Better by far.

    BTW: Davy always wants refs but seldom bothers ot check them out because he knows he will only be proved wrong. There is nothing positive to be said about the US these days. And it is only getting worse.

  11. Davy on Sun, 15th Oct 2017 5:48 pm 

    Mad kat, I am talking about your own personal chauvinistic world you live in of grandiosity and delusional view of your place in your adopted country that you shove down our throat daily. You want us to think how special mad kat is at his exceptional decision. You want others to feel bad about themselves if they have not done as you have. You think you are exceptional and special but this is only in your mind. It is clear from all your comments you are pressured by personality disorders. Something is wrong inside you mad kat. It is likely beyond medication and points to something that can’t be fixed. It is surprising you made it this far in life with such a poor mental state.

  12. makati1 on Sun, 15th Oct 2017 5:59 pm 

    Delusional? That from the most delusional person on this forum! LMAO

  13. Davy on Sun, 15th Oct 2017 6:15 pm 

    Explain mad kat? You rarely say anything of substance. You generally whine or puke emotions. Explain yourself I am curious.

  14. makati1 on Sun, 15th Oct 2017 6:35 pm 

    I don’t write long bloviating comments saying nothing like you do Davy. They are not necessary. again you use the word chauvinistic incorrectly.

    chau·vin·ism (shō′və-nĭz′əm)
    1. Militant devotion to and glorification of one’s country; fanatical patriotism.
    2. Prejudiced belief in the superiority of one’s own gender, group, or kind:

    Number one does somewhat describe me, but not totally since the Ps is not “my” country. It is where I chose to live. However, #2 describes you perfectly. The US is #1! lol

  15. Davy on Sun, 15th Oct 2017 6:44 pm 

    So you are saying since you can’t write a long comment they are not necessary? Yeap, that sounds like a mad kat dance around the obvious that you are all talk with no substance. A good comment on a difficult topic requires more than a few sentences. That is completely obvious to anyone with a brain here.

    I used the word correctly. You have a prejudiced belief in mad kat’s superiority. You are a special case of foul and despicable and deserve special definitions.

  16. Theedrich on Mon, 16th Oct 2017 3:09 am 

    Cloggie, thanks for the info re: Europe.  I haven’t been that much focussed on Europe in recent times since, given the torrent of fake news here, it is hard to know from this distance what is really happening there.  You’re absolutely on target about der Spiegel as a German organ of György Sörös.  It seems that only Влади́мир Влади́мирович Пу́тин among the world leaders understands who the puppeteers of the Empire are.  Afghanistan is a lost cause draining the American economy and blood, but the elites cannot face the fact of defeat, so will continue to throw lives and money down the drain.  After all, that would mean a serious collapse of the entire NWO.  Meanwhile the corrupt U.S. Congress is slurping up campaign money from narco-outfits legal and illegal, and accelerating the opiatization of America, which appears to be embracing suicide by overdose.  As far as Europe goes, my main wish is for Merkel and Macron to be defenestrated.  Then we could get on with repatriating all of those wonderful believers in the twisted voices in old Mohammed’s head.

  17. Theedrich on Mon, 16th Oct 2017 5:58 pm 

    Boat, I suggest you READ The Internationalists.  It is based on intensive historical research, not the jingoistic drivel that you accept.  Swallowing and regurgitating “official” propaganda does not help in understanding what is going on in Yankee history.  What is important is not HOW the Mexican-American war started, but WHY.  The exculpatory lies justifying entry into that war initiated the endemic American pattern of provoking others into defensive or unseemly actions which are then used as excuses to wage war on them.  The same pattern was followed in starting the war against the INDEPENDENT NATION of the Confederate States of America, falsely called the “Civil War,” as also in the Spanish-American War (1898), in our entry into World Wars One and Two, the Vietnam catastrophe (“Tonkin Gulf incident”), Afghanistan, Iraq, Libya, Syria and, now, North Korea.  Look, idiot:  it is important to understand the real reasons, not the agitprop pretexts, for megalomaniac American aggression against the world.

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