[정품]금융전문가 1.5

Korea

Maeil Business Newspaper

Interview with PIMCO Founder and co-CIO, Bill Gross

Circulation is 1.3 million.

Question

U.S. is a major allied nation and biggest export market of Korea. When do you expect U.S. and the World economy to escape from the economic crisis completely? What`s ahead, what have we learned and what we should do next? What would you suggest as to ways to restore trust and confidence?

Response

The world is going through a desynchronized global recovery. Entering the crisis in 2007, the emerging market countries were generally underleveraged with room for significant fiscal stimulus and private sector leveraging (borrowing, spending and drawing down private savings) while the developed countries had highly leveraged private and public balance sheets which led to property and credit bubbles. For the first time since World War II, a global recession was centered in the United States, the leader of the global economic system. Due to higher fiscal deficits, higher savings rates, lower levels of private sector leverage and permanently higher levels of unemployment, developed market growth will lag developing market growth going forward. This will lead to a shift of growth leadership towards the emerging market countries going forward. However, this transition will not be smooth. It will be influenced by the policy responses of various countries towards their currency levels, trade flows, fiscal deficits and deleveraging processes. Forecasting in such an environment is challenging given the multiple potential paths global economic growth can take depending on the policy reaction functions of the developed and developing countries.

In the United States, households must increase their savings given that the vehicle they levered to finance consumption, their home, has lost significant value. While the unemployment rate will come down from its current highs, it will not return to the low levels of 2005/2006 as there have been permanent jobs lost in the financial, auto and housing industries, to name a few. The banking system is shackled with underperforming assets and loans as well as being forced by regulators to delever which will reduce credit availability to households.

We expect the US economy to grow at a more modest, “new normal” pace going forward of 1%-2% real growth given the structural changes that have occurred in the economy.

Question

What are the steps toward the resetting of the global economy? What will be some of the established principles and concepts that are required to be adjusted to achieve this fundamental reset of the economy?

Response

A healthy restructuring of the global economy is required where the developed world runs less levered balance sheets and more prudent levels of consumption and the developing world relies less on export-led growth and looks towards domestic demand to drive their economies. Accompanying this would be a realignment of currencies where the developing market currencies appreciate versus the developed market currencies.

Question

As the global Chairman for PIMCO, what are the main challenges for you now, amid the current economic crisis? How has the economic crisis affected PIMCO?

Response

Our challenge is to prudently seek investment opportunities for our clients in a market environment of unbalanced global economic growth and a fundamental shift in growth leadership towards the emerging economies. As I said before, this transition will not be smooth and there are a broad range of potential economic outcomes in this environment. We must evaluate the full dimension of possible outcomes and keep our investment strategies nimble until there is more clarity in economic direction. PIMCO’s macroeconomic forecasting capabilities have proven very prescient over the past 39 years and will serve our clients well in the coming periods.

In early 2006, PIMCO recognized that abnormally low Fed Funds rates following the equity market correction in 2002, created a US economy flush with liquidity and appreciating asset prices. Risk premiums in all asset classes decreased as investors reached for yield, confident in benign inflation with the Fed at the helm. The stock markets recovered quite dramatically from their post bubble-bursting lows. Commodity prices rose from decades of low and dormant levels. Innovative mortgage financing, driven by non-bank and less-regulated mortgage lenders, allowed US homeowners to extract rising equity in their home for increased consumption, to move up into larger homes, to buy multiple homes as investments, and enabled individuals who never maintained appropriate credit standards, to receive loans to become first-time home buyers.

PIMCO recognized that in a finance-based economy, flat yield curves could not be maintained. In an economy where home ownership reached close to 70% and savings levels fell into negative territory, housing price declines would be highly detrimental to economic growth.

Therefore, going into 2007, our clients’ portfolios were positioned for slowing US growth and Fed easing. With risk premia on most assets low, we reduced spread risks in our portfolios as we didn’t think our clients were being fairly compensated for the risk taken. Our clients’ assets were well protected when the financial crisis hit. We then took advantage of historically wide risk premia in the second half of 2008 to position our clients’ portfolios for the recovery we have witnessed in 2009 and their investments with PIMCO have performed very well.

Question

Amid the current economic crisis, do you see what kind of opportunities are you looking for in your business areas?

Response

The crisis has significantly altered return opportunities in the financial markets and our clients’ investment objectives and risk tolerances.

We have structured a number of specialized funds focused on investing in distressed assets in the MBS, ABS, and corporate sectors to benefit from the asset price normalization resulting from the extraordinary policy responses we have seen around the world.

We have developed a multi-asset allocation product which allocates across numerous asset classes based on forward looking expectations of returns on risk factors rather than anticipated returns on asset classes and an assumption of return mean-reversion. We have integrated into this product tail risk hedging to protect an investor’s downside to systemic event risk.

With developed market growth to be slow given reduced leverage, a more regulated financial system, and increased savings, we have developed a number of products to invest in various areas of the emerging markets which will offer more attractive investment potential. These products include investing in emerging market currencies, local currency bonds, and investments to benefit from infrastructure spending.

The crisis has reinforced the importance of strong risk management capabilities and a sound investment process. Investors will seek those managers who have a proven ability in these two areas and look to invest with those managers across all asset classes. PIMCO has expanded our product offerings into equities. We will apply our proven and tested risk management and investment processes to the equity markets.

Question

Do you have any suggestions for Korean companies to prepare for post economic crisis?

Response

Korean companies should prepare for permanently reduced demand for their products from the developed world and rather look more domestically or look to sell their products into faster growing emerging markets.

Question

Major central banks continue to maintain neutral stances while weighing the timing of rate hikes. When do you think the FRB will raise FED fund rate?

Response

We expect US real GDP growth over the coming 6-9 months to range between 1.5% and 2.5%. Given a high and persistent unemployment rate, home prices that have stabilized but at significantly lower levels than several years ago, a deleveraging of the public balance sheet, and a consumer that continues to delever his balance sheet, we would expect the US Fed to keep rates stable throughout 2010.

Question

International ratings agencies Moody`s and S&P recently downgraded the sovereign credit ratings of Greece and Spain-countries with high level of public debt-and warned the US and the UK of similar action. Do you think how much the probability of US AAA rate`s downgrading?

Response

The US’ annual deficit of $1.5 trillion represents 10% of GDP, a number never approached since the 1930s depression. While policymakers assure voters and the financial markets that such a large deficit is unsustainable and that a return to fiscal conservatism will remerge once the US economy recovers, it is difficult to see how this can be achieved. Private sector deleveraging, reregulation and reduced consumption all argue for real growth rates in the US that require continued government stimulus for years to come just to keep growth above the rate necessary to keep employment stable. Five more years of 10% of GDP deficits and America’s debt to GDP ratio will rise over the 100% level, a level that the rating agencies and the markets recognize as not consistent with a AAA rating. Studies show that Federal spending for social security, Medicare and Medicaid will collectively increase by 6% of GDP over the next 20 years leading to even larger deficits unless taxes are increased proportionately. Collectively, these 3 programs represent an approximate $40 trillion liability that will have to be paid. Added to the current deficit and the US reaches a 300% debt to GDP ratio.

So, there is a strong possibility that the AAA-rating of the US is threatened at some point in 3 to 5 years unless the US moves quickly towards a more balanced budget once a sustained recovery is assured and growing future social safety net costs are addressed. However, the US will be challenged as it is probable that trillion-dollar deficits are here to stay because any economic recovery will reflect the “new normal” GDP growth rates of 1%-2% and not the 3%+ that we had in our previously levered economy.

Question

What do you think the Fed will want to see as a signal to stable growth or threat to inflation before being comfortable to raise interest rates?

Response

The Fed will look for a sustained fall in unemployment and the output gap to narrow before concerns of inflation force the Fed to hike interest rates.

Question

There are critiques about how a large part of China’s growth is relying on government spending only to build mounting number of empty houses to reach their government’s growth target. How do you assess the chance of a burst in such bubble-like situation in China?

Response

China responded aggressively to the global recession with a massive fiscal stimulus program relative to its GDP. Along with its aggressive fiscal spending, bank lending was ramped up leading to rapid credit creation. This, along with rising commodity prices and China`s pegged exchange rate which gives China a more accommodative monetary policy than perhaps is appropriate, may lead to goods and/or asset inflationary pressures. China has already begun to fine tune its policy with a series of administrative measures in the real estate sector as well as raising the yield it pays on its weekly bills sales. China has multiple policy levers (interest rates, reserve requirements, level of exchange rate, and sector- and region-specific policy actions) at its disposal to implement in 2010 if inflationary pressures continue to build.

Question

Emerging market including Korea has shown faster recovery this year so that resulted in higher yield than US. Do you think which is the most recommendable among investment in US Treasury, emerging market bonds and US corporate bonds?

Response

Given the extraordinary stimulus programs in the US to counteract the financial crisis and resulting recession, one should expect a massive supply of US government debt over the coming years. Corporate spreads have tightened considerably in 2009 but corporate bonds should outperform Treasuries and US mortgages in 2010 due to improving credit fundamentals and supportive credit market technicals in which demand exceeds supply. Within the credit market, select banking and financial sector bonds appear attractive. Banks are delevering their balance sheets, raising more equity capital and facing increasing regulatory oversight. Increased regulation will ensure banks maintain adequate levels of loss-absorbing equity capital which is a positive for bonds as they are higher up in the capital structure. We expect relatively better economic growth and financial market returns in the emerging markets versus the developed markets over the cyclical and secular horizon. An exposure to a diversified basket of EM currencies versus developed market currencies and holding select emerging market bonds from countries with sound fiscal balance sheets and a high level of foreign reserves should perform well.

Question

Do you think the emerging Asian countries including Korea should follow the path of Australia in raising interest rates to prevent future inflation or leave it at the current low levels? What effect will such move have on the US and the global economy?

Response

Those countries which entered the crisis with more sound public and private balance sheets should begin to look to normalize their policy rates as we have passed the crisis point in the financial crisis. We are no longer in a world of synchronized economic contraction but rather one of desynchronized economic growth. Many countries do not need to run policies to protect their countries against financial crisis contagion.

Thank you.