Recent signs of economic strength – employment and retail sales data, for example – have convinced many experts that we’ll avoid a recession.
The bond king Bill Gross, who made his name at the helm of Pimco Total Return fund, isn’t one of them.
Related: Billionaire investor makes a move on bonds, has a dire warning about the global economy
“Regional bank carnage and the recent rise in auto [loan] delinquencies to long-term historical highs indicate the U.S. economy slowing significantly,” he wrote on X (formerly known as Twitter).
Several regional banks, most notably Silicon Valley Bank, have bitten the dust this year, caught unprepared for higher interest rates. The KBW Nasdaq Regional Banking Index has slumped 28% year to date, compared to an 11% gain for the S&P 500.
Maybe next week. Will tweet.
— Bill Gross (@real_bill_gross) October 23, 2023
On bonds. Invest in the curve. Various combinations 2/10, 2/5. Should go positive before year end. I’m buying SFR h5 (SOFR futures). “Higher for longer” is yesterday’s mantra. 2/2
The percentage of auto borrowers who were at least 60 days late on their loan payments rose to 6.11%, in September, according to Fitch Ratings. That's the highest rate in almost 30 years.
So what’s the prognosis for the economy from here? “Recession in the fourth quarter,” Gross says.
GDP growth registered an annualized 2.1% for the second quarter.
'Best investments'
The “best investments” are equity arbitrage plays, he says. (See below for Gross' latest picks.)
Equity arbitrage plays are companies that have agreed to be taken over by others. That includes Capri Holdings (CPRI) -), which owns Michael Kors and has agreed to be bought by Tapestry (TPR) -).
It also includes Seagen (SGEN) -), a biotechnology company that has agreed to be acquired by Pfizer (PFE) -). Gross also cites VMware (VMW) -), an information technology infrastructure company that has agreed to be purchased by semiconductor titan Broadcom (AVGO) -). But Gross calls the VMware deal a “long shot.”
He said he’s also “seriously considering regional banks again, maybe next week.” Gross said he will tweet if he does so.
If interest rates stop rising, presumably the banks’ performance will rebound. For some time the phrase “higher for longer” has been used to describe the Federal Reserve’s rates policy. But with the economy weakening, that’s “yesterday’s mantra,” Gross said.
He said the yield curve should go positive by year-end, meaning both the five- and 10-year Treasury yields will surpass the two-year yield. On Tuesday, Oct. 24 the two-year Treasury yielded 5.09%, the five-year 4.81% and the 10-year 4.84%.
