PIMCO Bill Gross the Ring of Fire

In his new year's investment outlook, the chief of PIMCO talks about public debt, consumer debt deleveraging, and prospects for emerging/advanced economies after financial crisis.

On public debt, he points out that Mckinsey study finds:

1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country’s outstanding debt nearly doubles within three years following the crisis.
   
2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years.
   
3. Once a country’s public debt exceeds 90% of GDP, its economic growth rate slows by 1%.

A different study by Mckinsey also notes that:

1. Typically deleveraging begins two years after the beginning of the crisis (2008 in this case) and lasts for six to seven years.
   
2. In about 50% of the cases the deleveraging results in a prolonged period of belt-tightening exerting a significant drag on GDP growth. In the remainder, deleveraging results in a base case of outright corporate and sovereign defaults or accelerating inflation, all of which are anathema to an investor.
   
3. Initial conditions are important. Currently the gross level of public and private debt is shown in Chart 2.

So with IMF's projection of public debt as shown in Chart 3, his advice to investors:


1, for equities, go where the growth is, where the public debt is low, and where savings and trade surplus will help transform the economy into a consumer-driven economy, namely, China, India, Brazil...
2, hand the safe money to Canada and Germany, definitely avoid UK...

Enjoy reading the full article here:  PIMCO investment outlook