Daniel Ivascyn, chief investment officer at PIMCO, one of the world’s largest bond trading firms with $1.8 trillion in assets under management, told the Financial Times that investors should prepare for a “harder landing” than previously expected, because the world’s central banks are continuing their campaign of raising interest rates.
“The more tightening that people feel motivated to do, the more uncertainty around these lags and the greater risk to more extreme economic outlooks,” Ivascyn stated, adding in fluent bankerese: “We would argue that the market may still be too confident in the quality of central bank decisions and their ability to engineer positive outcomes,” he said. “We think the market is a bit too optimistic about central banks’ ability to cut policy rates as quickly as the yield curves are implying.”
But not to worry – a good speculator can always make a killing in a turbulent market, even if the physical economy is devastated. “A great trade will be to take advantage of the violent repricing of the public markets and then wait for private markets to adjust over the next few years and then rotate into what should be a really attractive opportunity,” he said. “Hold some cash, because we think the next two, three years is going to be quite target-rich for opportunities in the higher yielding space.”
The former CEO of PIMCO, Mohamed El-Erian, who is now president of Queens’ College, Cambridge, and an adviser to Allianz, PIMCO’s parent company, wrote an op ed in the Financial Times which also focused on central bank interest rate policy. “June was an extraordinary month for the central banking world,” he wrote, “one that could potentially be remembered as a defining moment for the credibility of central banking in advanced countries.”
“Rarely do we witness such a combination of events within a few days. The Bank of England, a major central bank, surprised markets by increasing its interest rates for the 13th consecutive time by an unexpectedly large 0.50 percentage points. The European Central Bank raised rates and signaled more to come despite the eurozone economy shrinking and cautionary signals from leading indicators. The central banks of Australia and Canada, both closely monitored for their monetary policy insights, resumed rate increases after a pause in their tightening cycles. Smaller central banks in Norway and Switzerland continued on their path of raising rates.”
Only the Fed chose to pause on the rate increases, but they, too, will resume the upward trajectory, he forecast.
“The theme underlying all these developments is the persistence of inflation. That has led to a consensus among central banks that interest rates must remain elevated for a longer duration.”
And that, in turn, means that turbulence lies ahead. El-Erian concluded: “As noted in the recent annual report of the Bank for International Settlements, countries may already be `testing the boundaries of what might be called the region of stability’.”
