The Federal Reserve's announcemnt on Nov. 3 that it would buy an additional $600 billion in government debt was “a courageous decision,” wrote Paul A. McCulley, a PIMCO managing director in his Wednesday commentary. “Acting irresponsibly relative to conventional wisdom is precisely the right approach for reversing an economy facing, or worst yet, mired in a liquidity trap,” he explained.
It’s the Fed’s job to make policy consistent with its legislative mandate, McCulley says. “Price stability (mandate-consistent inflation) that promotes bubbles in asset prices and debt creation is a prescription for a debt-deflation bust and a subsequent liquidity trap,” he stated in his online viewpoint “A Kind Word for Ben.”
McCulley knows his is not a popular opinion. “It brings me great angst to observe professional critics – many of them acquaintances and friends of mine – rhetorically beating Fed Chairman Ben Bernanke (left) about the head and shoulders for launching QE2,” he wrote.
“To reverse the debt-deflation pathologies of a liquidity trap, when private sector deleveraging renders private sector demand for credit inelastic to lower interest rates, especially when the central bank’s short-term policy rate is pinned against the zero nominal lower bound, the central bank,” McCulley explained, “should openly coordinate itself with the fiscal authority, accommodating increased fiscal expansion, for example printing money to finance an economy-wide tax cut, and openly encourage higher short- to intermediate-term inflation expectations …”
As for the rest of the world, McCulley argues, it should “simply accept this outcome as reality, and adjust – or not adjust.”
Varied QE2 Views
On Tuesday, PIMCO CEO and co-CIO Mohamed El-Erian (left) said the Fed’s move does not go far enough in solving U.S. financial and economic issues. It may reduce the risk of deflation and a double-dip recession but won’t address the “unusual” period of low growth and stubbornly high unemployment.
And PIMCO founder, managing director and co-CIO Bill Gross said in a commentary released in late October that the QE2 is likely to end the 30-year bull market for bonds, since it pushes bonds’ returns to zero. It could also push the dollar’s value down 20% over the next few years.
On Wednesday, PIMCO’s parent company, Allianz SE, shared its third-quarter results and said the fund unit took in more money than any asset-management firm during the third quarter, with more than $56 billion in deposits, according to a Bloomberg report.
Allianz CFO Oliver Baete, however, acknowledged that this pace of inflows may not be sustainable, especially if interest rates rise, Bloomberg reported.
The Financial Research Corp., or FRC, estimated that PIMCO had assets of $409 billion as of Sept. 30, excluding fund of funds and money-market products. This is up 26% year to date and 39% from Sept. 30, 2009.
New ETF Filing
On Tuesday, PIMCO filed a preliminary prospectus with the SEC for an actively-managed ETF called the PIMCO Global Advantage Inflation-Linked Bond Strategy Fund.
PIMCO now has four actively managed bond ETFs with about $500 million in total assets as of October 30. It has also filed to launch two more, the Government Limited Maturity Strategy Fund and the Prime Limited Maturity Strategy Fund.
The latest proposed ETF will focus on the inflation-linked bond market. It will investment in inflation-linked bonds tied to at least three developed and emerging market countries. The value of an inflation-linked bond’s principal or interest is adjusted to track the official inflation figures so that the investor’s income does not lose its value in real terms. The effective duration of the fund will be kept under two years, and it will invest in securities rated Baa or higher.
The ETF’s primary benchmark is the Barclays Capital Universal Government Inflation-linked Bond Index and the portfolio manager of the fund is Mihir Worah, a managing director.
Worah manages the PIMCO Real Return Fund (PRTNX), which has a longer average duration of over four years and consistently has beaten its benchmark – Barclays Capital US TIPS Index – in every time horizon. It has returned 7.40% since inception and returned 12.12% last year.