Fitzgerald now has an office above the TREASURY Starbucks?!?
UPDATE: Guess not. Fitzgerald is still across the street from the Treasury Starbucks.
And Bill Gross is hip. He is a BLOGGER.
He does not confine his blog to the bond market either; his transformation from moderate Republican to Deaniac is sort of interesting. The money (political) quote:
"The war, Katrina, gas prices, and Republicans' continuing focus on tax cuts as the elixir to cure everything are getting ordinary citizens downright depressed."
His bigger point though is that a more leveraged US economy is now more exposed to interest rate rises (seems right to me). The 230 bp rise in the five year Treasury note over the past few years will slow the economy significantly in 2006 (he forecasts 2% growth), leading the Fed to cut rates.
No doubt that implies additional pressure on the dollar – pressure that will test Asian central banks' willingness to step up their reserve purchases (and in China's case step up from already high levels) to keep their currencies from rising against the dollar (see my previous post).
One should assume that Gross, like other portfolio managers, talks his book. Still it is interesting that he is squarely in the low interest rate school of adjustment – which I think means he thinks Asian central banks will step up their intervention should the dollar come under new pressure/ not demand compensation for the risk of further dollar depreciation, allowing US rates to remain low even though the US remains dependent on inflows from abroad. In some sense, that is the core debate. Pretty much everyone thinks the dollar has to fall at some point (when is more of a question), but the implications of a falling dollar for the fixed income market are very much up in the air …
But if Gross is right, and:
"Because the U.S. economy has evolved into a highly levered finance-based economy, it stands to our reason that this modern day version is more sensitive to changes in interest rates than those of years past." (emphasis in original)
We in the US had better hope that our external creditors prove very generous indeed, as any spike in interest rates would prove far more damaging than in the past.