Bond legend Bill Gross shared his latest outlook with CNN Money – and I was glad to see him weigh in on deflation in particular:
What about the possibility of deflation occurring?
We’re in a struggle between inflation and deflation right now. We may never get to a negative consumer price index, but the danger is a drop in asset prices and the destruction of credit. It means corporate bonds defaulting because companies aren’t getting enough business and they can’t pay off their debts. It means foreign governments defaulting. It’s individuals with mortgages who can’t get out from under their 16 tons of debt. The economy can’t recover, and unemployment stays high. Stocks would be in trouble because some companies would be going bankrupt while others couldn’t get the credit they need to grow.
So which is the bigger risk now — inflation or deflation?
Our investment committee has sketched out four possible scenarios. Scenario A is that the global economy rebounds back to past levels of high growth. B is just a decent rebound. C is that new normal — half-sized growth. And D is deflation, debt, destruction. I’d say we’re at a C — right now. We believe in the new normal, but what we’re seeing in Europe puts the minus on that C grade.
Scenario D that Gross mentions – where credit is destroyed faster than the Fed can create it – is the ugly deflation scenario Robert Prechter believes is unfolding. And also the scenario I am partial too.
I concur with Gross in that we’ve seen the rosier scenarios (A & B) come and go – you can probably rule them out now (if you hadn’t from Day 1). Now, we’ll see whether or not the global economy can skate through the “New Normal” without falling off a cliff.
More Bill Gross: His take on Portugal and Europe’s Sovereign Debt Mess
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