According to PIMCO CEO Emmanuel Roman, the U.S. economy is set for a slow start to 2020.
“We see the U.S. economy slowing down,” Roman said this morning at a CNBC-hosted conference.
“We are slightly above 1% [GDP growth] for the first half of 2020 and, obviously the big elephant in the room is the trade war with China and how it will resolve itself.”
And while blaming the trade war for stifled growth is nothing new, Roman’s 1% prediction certainly raised some eyebrows. After all, he’s the CEO of PIMCO, one of the world’s largest investment management firms. Years back, they were famous for offering the highest yielding fixed income solutions (bonds) to investors.
But these days, Roman & Co. are better known for their economic commentary – at least to non-fixed income seekers.
In addition to the trade war, Roman sees other international crises – like Brexit and Saudi Arabia – as potential hazards. Especially since, in his view, central banks may be unable to stop the bleeding.
“There’s only so much monetary policy can do to reignite growth.”
However, Roman also thinks that it’s not all bad news for 2020.
Thanks mostly to the legions of spend-happy American shoppers – a group that has kept the economy afloat.
“The consumer is the bright spot of the U.S. economy, but CAPEX and the manufacturing sector are already in recession,” he said.
“It’s difficult. You’ll see a slow first half in 2020, but things will pick up in the second half.”
And though Roman’s commentary grabbed headlines across financial media outlets this morning, what he said shouldn’t be news to anyone.
At least, not to anyone paying attention.
He simply reiterated what all ear-to-the-street investors already know – the economy (particularly business investment) might be slowing due to the trade war, but consumers are spending while unemployment stays low.
What I did find interesting though was a statement made by Mary Callahan Erdoes, CEO of J.P. Morgan Asset & Wealth Management. Erdoes shared the stage with Roman at CNBC’s Delivering Alpha conference alongside other investment firm CEOs.
“We live in interesting times,” she said.
“So much money is going into bonds.”
If you’ve read my past commentary on the bond markets, particularly European corporate bonds, you’d know that I’ve voiced my concern over the rise of negative-yielding bonds in the past.
It’s something that Ron Paul spoke about just a few days ago, but before that, it was a topic only discussed by niche economists and analysts.
For the most part, negative-yielding corporate debt was flying under the radar.
But Erdoes’ short quip about “so much money going into bonds” marks the first time that I’ve heard the leader of an investment firm comment on it. Now, she didn’t say anything about negative yields, nor the danger they pose in the event of a European economic recovery.
However, she said something about the exodus to bonds – something that’s a bigger deal than the trade war, Brexit, or even the Saudi oil attacks.
Because for investors weighing their options, bonds still appear extremely attractive relative to stocks. They’ve done nothing but go up while volatility has rocked equities and the central banks continue to drop rates, either through direct rate reductions or quantitative easing (QE).
The latter of which being precisely what the European Central Bank hopes will save Europe. Which, ironically, could scorch negative-yielding bondholders.
And so, I’m glad that at least someone high-up in the money management game recognizes this phenomenon publicly. The more we talk about bonds, the better.
Because if a bubble truly is forming, we at the very least need to recognize when it’s coming and the potential hazards associated with it.
Odds are, though, that investors will continue to ignore the warning signs. And in the end, they could end up paying dearly for it.
