Bill Gross, Managing Director at Pacific Investment Management Company LLC, known as PIMCO, has some interesting comments on the credit markets, housing prices, the economy, and how the Federal Reserve should respond. In his October 2007 Investment Outlook newsletter, he offers several cogent observations:

  • "The modern financial complex has morphed into something unrecognizable to many astute market veterans and academics."
  • National housing prices are expected to decline 10% to 15% over the next several years.
  • Home prices have a more significant impact on consumer spending habits and confidence than do stock prices.
  • Fed policy should move rates up like an escalator (25 basis point increases) but down like an elevator (50 basis point cuts).
  • "A U.S. Fed easing cycle historically has required a destination of 1% real short rates or lower. Under a conservative assumption of 2½% inflation, that implies Fed Funds at 3¾% or so over the next 6-12 months."
  • Rate cuts "will likely be interrupted by false hopes of a housing bottom, fears of a dollar crisis, or misinterpreted one month’s signs of employment gains and faux economic strength."
  • "The downward path of home prices, however, will dominate Fed policy over the next several years as will the lingering unwind of related financial structures and derivatives that have yet to be discovered by the public, and marked to market by their conduit holders."

Those tracking how the direction of the economy may impact the level of future Chapter 11 bankruptcy filings will find the entire Investment Outlook well worth reading.