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Tags: Pimco | Fels | Bubble | Crisis

Pimco: 'Brace Yourself for the Next Bubble and Crisis'

Pimco: 'Brace Yourself for the Next Bubble and Crisis'

By    |   Monday, 14 December 2015 06:04 AM EST

Pimco warns that excessive savings and declining interest rates are caught in a vicious circle, creating more severe asset bubbles that may spark the next financial crisis.

"Excess savings not only pushed down [natural real interest rates] and actual interest rates but also drove up asset prices and caused serial asset bubbles in equities, emerging markets,  housing, credit, eurozone peripheral bonds and commodities," Pimco managing director and global economic adviser Joachim Fels told Vanessa Desloires of the Australian Financial Review.

The lower rates in a bid to boost spending makes it more difficult for financial crises to be overcome with conventional policy tools, many already exhausted, including quantitative easing, the efficacy of which is now being questioned in the eurozone and Japan, AFR.com reported.

"There is a significant risk that central banks may not be able to deal effectively with the next crisis," said Fels, the former chief economist at Morgan Stanley.

The global bond manager's managing director Joachim Fels said the natural real rate of interest, the equilibrium rate at which GDP is growing at its trend rate and inflation was stable, was sitting near zero, AFR reported.

"If my basic thesis that both the decline in [real interest rates] and the serial asset bubbles and financial crises can be attributable in large part to the global savings glut is right, the implications could be quite dire," Fels said.

"Despite attempts to make the financial system safer and more crisis proof, avoiding bubbles and crises will be very difficult as long as desired savings significantly exceeds desired investment."

"So, in short and thinking long-term, get used to the savings-glut-fueled 'New Neutral' and brace yourself for the next bubble and crisis," he said.

To be sure, Pimco isn't the only respected financial voice to predict some gloom.

Citi has warned that the outlook for the global economy next year is darkening, with a U.S. recession and China becoming the first major emerging market to slash interest rates to zero both potential scenarios.

As the U.S. economy enters its seventh year of expansion following the 2008-09 crisis, the probability of recession will reach 65 percent, Citi's rates strategists wrote in their 2016 outlook.

And the general direction of growth projections among analysts surveyed by Bloomberg has been clear. The consensus forecast for U.S. GDP growth in 2016 has slipped to 2.5 percent from 2.8 percent in August.

To be sure, some still hold out hope that all won't be as bad as envisioned by the doom and gloomers.

"One reason we should be more upbeat for next year is that everyone is slicing and dicing their estimates heading into 2016," Neil Dutta, head U.S. economist at Renaissance Macro, told Bloomberg. "So the bar for an upside surprise to GDP ain't that high."

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StreetTalk
Pimco warns that excessive savings and declining interest rates are caught in a vicious circle, creating more severe asset bubbles that may spark the next financial crisis.
Pimco, Fels, Bubble, Crisis
462
2015-04-14
Monday, 14 December 2015 06:04 AM
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