‘Bond King’ forecasts US recession by end of 2023.
The U.S. economy is heading towards a recession in the fourth quarter, fueled by troubles in the banking industry, according to billionaire investor Bill Gross.
Gross, also known as the “Bond King” and co-founder of Pacific Investment Management Co. (PIMCO), made this prediction on Oct. 23, stating that the recent rise in auto delinquencies and regional bank failures indicate a significant slowdown in the U.S. economy.
The banking system in the U.S. has been facing a crisis since the failure of Silicon Valley Bank (SVB) in March. While the overall liquidity of the banking system has increased, there are more banks with smaller liquidity buffers, putting them at a higher risk of failure.
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Furthermore, car loan defaults in the United States have reached a record high, with subprime auto borrowers being 60 days past due at a rate unseen in Fitch Rating’s history.
PIMCO had previously predicted a recession for the U.S. economy back in February, and other investment firms share similar views.
Charles Schwab, an investment firm, stated that while the current economic slowdown may be a result of post-pandemic adjustments, the risks of a recession are still present. Factors such as the increase in the value of the U.S. dollar, oil prices, and Treasury bond yields have put downward pressure on the economy and market.
Mr. Gross believes that the best investments at the moment are in equity arbitrages, specifically mentioning Capri Holdings, Seagen Inc., and possibly VMware. He also suggests investing in the curve for bonds.
Mr. Gross is currently buying secured overnight financing rate (SOFR) futures, which are used to hedge interest rate risk in the short term.
Recession Indications
The Federal Reserve has been raising rates since March last year to control inflation. Some officials at the central bank are now signaling a potential economic slowdown.
Fed Governor Christopher Waller expressed concerns about the current economic conditions, stating that growth may moderate or undermine progress towards inflation objectives.
According to a Bankrate survey, top economists rate the odds of a recession between now and September 2024 at 46 percent, the lowest since the first quarter of 2022.
While some economists believe in a soft landing for the economy, others, like Mark Hamrick from Bankrate, see a stronger chance of a recession hitting the United States.
Last week, the U.S. 10-year Treasury note briefly breached the 5 percent rate, raising concerns about a recession. The Conference Board Leading Economic Index (LEI) for the United States has also been declining for a year and a half, indicating potential economic weakness ahead.
The Conference Board forecasts a shallow recession in the first half of 2024.
What are the primary catalysts for the impending downturn in the U.S. economy, as predicted by billionaire investor Bill Gross?
Ession in the U.S. economy earlier this year, based on concerns over the escalating trade war between the U.S. and China. Now, Gross believes that the troubles in the banking industry will be the primary catalyst for this impending downturn.
Since the failure of SVB, the banking system in the U.S. has been facing increased challenges. While the overall liquidity of the banking system has improved, there are more banks with smaller liquidity buffers, making them more susceptible to failure. This has raised concerns about the stability of the banking industry and its ability to weather potential economic shocks.
In addition to the banking industry, the surge in auto delinquencies is also a significant cause for concern. The number of car loan defaults in the U.S. has reached a record high, especially among subprime auto borrowers. Fitch Ratings has reported that 60-day delinquencies among this group are at a level unprecedented in their history. This indicates that many consumers are struggling to repay their loans, which could have broader implications for the overall economy.
Gross’s prediction aligns with recent events in the U.S. economy. The recent failures of regional banks have demonstrated vulnerabilities in the banking system, while the rise in auto delinquencies points to a potential slowdown in consumer spending. These factors, combined with the ongoing trade war and other global uncertainties, create a recipe for a recession.
It is important to note that predictions about the economy are inherently uncertain. Many factors can influence economic trends, and unforeseen events can significantly impact the course of the economy. However, the concerns raised by Gross and others should not be dismissed. It is crucial for policymakers and financial institutions to closely monitor the banking industry, address vulnerabilities, and implement measures to mitigate the potential risks.
In conclusion, billionaire investor Bill Gross predicts that the U.S. economy is heading towards a recession in the fourth quarter. Troubles in the banking industry, including the failure of SVB and the increased vulnerabilities of smaller banks, along with the rising number of auto delinquencies, point to a significant slowdown in the economy. While predictions about the economy are uncertain, these concerns should be taken seriously and appropriate measures should be taken to minimize the potential risks.
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