1/28/2017 BillGrossInvestmentOutlookJanuary2017

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INVESTMENT OUTLOOK ARCHIVES

Echoes from Africa
RedistheNewGreen
December2016
IfIsangasongaboutAfrica
Ofthespottedgiraffe,thehyena'slaugh
PopulismTakesaWrongTurn
Ofthefierysunrisingtomeettheday
November2016
Withastillnessbelyingthelion'seveningmeal
WouldAfricasingasongaboutme?
DoublingDown
IfIrememberedatimeonceinAfrica, October2016
Brideatmyshoulder,chasingaleopard'sshadow
WithhumaneyesandNikonshutterswideapart
VIEW ALL
Invadingthesolitudeofblackenedancestors
WouldAfricarememberatimeoncewithme?
IfIknewastoryofAfrica FEATURED BILL GROSS MATERIAL
Capturingadisappearingcontinentforamomentintime
WatchBillGrossReacttothe
Fleetingfarbrieferthantheearth'sreign
LatestEmploymentReporton
Atleastuntilitsdustydeath, BloombergSurveillance
WouldAfricaknowastoryofme? WATCH NOW

BillGross
WithappreciationforIsakDinesen
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ItraveledoncetoAfrica,asyoumighthaveguessedbynow,andit'sbeenapartofmeeversince. SubscribetoBillGross'Investment
Beingperhapsthecradleofcivilization,ifnotlifeitself,Africacastsaneerieglowovertheentire OutlookPodcast
historyand,indeed,meaningofexistence.There'sastrangebeautytoitthiseatandbeeaten
landbrutal,yetfairandlovingunderneathitsviolentsurface.Ithinkit'showIviewmyownlife.I
sawmyselfinAfricaand,ofcourse,throughmyowneyesIsawyouthere,too.Thequestion
however,thatendseverystanzaofmypoemiswhetherAfricasawandwillrememberme.Arewe
justpassingthroughwithoutatracefollowingourdustydeaths?Willanyone,oranything,atthe
endofthelinebethebetterforourtimeonearth?I,myself,knownothingofagrandschemeof
existence,butIwishtheretobeoneifonlytogivemeaningtoourpreciousmomentsof
happinessandfrequenthoursofdespair.

HappinesshasdominatedriskmarketssinceearlyNovemberanddespairhascharacterizedglobal
bondmarkets.HopeforstrongergrowthviaRepublicanfiscalprogress/reducedregulation/andtax
reformhaveencouragedrisk.ThepotentialforhigherinflationandamorehawkishFederal
Reserveliebehindthe100basispointmoveinthe10yearTreasuryfrom1.40%to2.40%overthe

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1/28/2017 BillGrossInvestmentOutlookJanuary2017
sametimeperiod.AreriskmarketsoverpricedandTreasuriesoveryielded?Thatisacritical
questionfor2017.

Hope for stronger growth via Republican scal

progress/reduced regulation/and tax reform have
encouraged risk.
Theassessmentoffuturegrowthandassociatedriskspreadsisstilluncertainofcourse.
PresidentelectTrumptweetsandmarketslistenfornow,butultimatelytheirvalueisdependenton
ajumpstepmovefromthe2%realGDPgrowthrateofthepast10yearstoa3%plusannual
advance.3%growthrateshistoricallyhavepropelledcorporateprofitstoasomewhathigherclip
becauseoffinancialandoperatingleveragedependentonhighergrowth.2%orlesstypicallyhas
smotheredcorporateprofits.The1%differencebetween2and3isthereforecritical.Weshallsee
whetherRepublican/Trumpianorthodoxycanstimulateaneconomythatinsomewaysisatfull
capacityalready.Todosowouldrequireasignificantadvanceininvestmentspendingwhichup
untilnowhastakenabackseattocorporatestockbuybacksandmerger/acquisitionrelatedusesof
cashflow.

I,forone,amskepticalofthe3andmoreconfidentofthe2.Thelongertermnegativesofmy"New
Normal"andLarrySummer's"SecularStagnation"mayhavedisappearedfromthebusinessfront
pagesoftheFTandtheNYT,buttheyhaveneverreallygoneawayTrumpornoTrump.
Demographicnegativesassociatedwithanagingpopulation,highdebt/GDPnowmoreatriskdue
torisinginterestrates,technologydisplacementofhumanlabor,andfinallythedeceleration/retreat
ofglobalizationposenegativeongoingthreatstoproductivityandthereforeGDPgrowth.Trump's
policiesmaygrantatemporaryaccelerationoverthenextfewyears,buta2%longerterm
standardislikelyinplacethatwillstuntcorporateprofitgrowthandslowdownriskasset
appreciation.

Thecriticalquestionofinterestratesandthefuturelevelofthe10yearTreasuryisequally
challenging.WhiletheFedhasbeguntotightenpolicyafterabandoningQuantitativeEasing
severalyearsago,othermajorcentralbankscontinuetostokethefirewithasmuchas$150billion
ofmonthlybuybacks.WiththepinningofJapaneseJGB10yearyieldsatnear0%andtheongoing
dovishnessofDraghi'sECB,globalarbitrageeffectivelycapsthe10yearat2.4%to2.6%levels.
Currencyadjustedyieldpickupsof70basispointsbyselling10yearJGB'sorGermanBundsand
buyingU.S.Treasuries,outlinetheartificialpricingofour10year,evenasinflationmoveshigher
andshorttermyieldsareraisedbytheFedonce,twice,orthreetimesinthenext12months.

When the fundamentals are confusing, however,

technical indicators may come to the rescue and it's
there where a super three decade downward sloping
trend line for 10-year yields could be critical.
Sofor10yearTreasuries,amultipleofinfluencesobscurearationalconclusionthatyieldsmust
inevitablymovehigherduringTrump'sfirstyearinoffice.Whenthefundamentalsareconfusing,
however,technicalindicatorsmaycometotherescueandit'stherewhereasuperthreedecade
downwardslopingtrendlinefor10yearyieldscouldbecritical.Showninthechartbelow,it's
obvioustomostobserversthat10yearyieldshavebeenmovingdownwardsincetheirsecular
peakintheearly1980s,andataratherlinearrate.30basispointdeclinesonaverageforthepast
30yearshaveloweredthe10yearfrom10%in1987tothecurrent2.40%.

Source:Bloomberg.

Now,howeverthissuperstrong,frequentlytesteddownwardtrendlineisatriskofbeingbroken.
2.55%to2.60%isthecurrent"top"ofthistrendline,andoverthepastfewweeksithasheldand

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1/28/2017 BillGrossInvestmentOutlookJanuary2017
reversedlowerby15basispointsorso.BUT.Andthisismyonlyforecastforthe10year
in2017.If2.60%isbrokenontheupsideifyieldsmovehigherthan2.60%asecularbearbond
markethasbegun.Watchthe2.6%level.MuchmoreimportantthanDow20,000.Muchmore
importantthan$60abarreloil.MuchmoreimportantthattheDollar/Europarityat1.00.Itisthe
keytointerestratelevelsandperhapsstockpricelevelsin2017.

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Investinginderivativesentailsspecificrisksrelatingtoliquidity,leverageandcreditandmayreducereturnsand/orincreasevolatility.
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resultsoreventsmaydiffermateriallyfromthoseprojected,estimated,assumedoranticipatedinanysuchforwardlookingstatements.Importantfactorsthatcouldresultinsuch
differences,inadditiontotheotherfactorsnotedwithsuchforwardlookingstatements,includegeneraleconomicconditionssuchasinflation,recessionandinterestrates.
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