Markets

(Washington)

The Fed finally paused. Investors were worried about it, but it happened as many expected. The Fed decided to lower rates another 25 bp yesterday, but said that for the time being, it would stop worrying about the possible trade war. Analysts interpret Powell’s statements as indicating that the Fed wants to wait to see weakness in the US consumer before undertaking any more rate cuts.


FINSUM: Some are perplexed by this pause because none of the three main things the Fed is worried about have actually improved.

(Los Angeles)

For many years Pimco was the undisputed leader in bonds. While that reputation may now be arguable given Bill Gross’ departure, Pimco is still undoubtedly highly respected. Therefore, their warning this week is worrying. The firm says it is shunning corporate bonds because of the big risk of a quick fall in prices. The firm’s CIO, Dan Ivascyn, says “The credit sector has been well behaved but if people begin to really fear recession, we can see underperformance quickly … this is the sector most prone to overshooting on the downside”. Pimco is also worried about Treasuries as they see no further room for a rally and instead are favoring agency MBS.


FINSUM: Total debt has grown hugely and a lot of it is of borderline credit quality, so a real downturn in economic expectations could lead to a lot of selling and downgrades. We tend to agree with Pimco here.

(New York)

Probably the world’s most famous hedge fund manager, Ray Dalio, who runs the largest hedge fund in the world, has just made an interesting comment about equities. Dalio, who runs Bridgewater, says that he does not see a big bust coming in equities, just a “great sag”. Speaking about corporate debt levels and the risk of a blow up in fixed income, Dalio says “Those extremities we are reaching are not such that it is likely to have a debt crisis. But you have reached the limits of that so it creates a big sag versus a big bust”.


FINSUM: We think this is a pretty nuanced view. A big meltdown similar to 2008 does not seem likely, but a long-term growth overhang from too much debt does seem a distinct possibility.

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