Pimco’s Joachim Fels said savvy investors would be even wiser to embrace the “very robust, very solid” housing market amid the rising inflation risk and “expensive and volatile” U.S. stocks.
Meanwhile, he told CNBC that the global economy is sailing into calmer waters this year and is “in the midst of a broadening and more synchronized recovery” despite U.S. stocks being too pricey.
“So we think stocks are relatively expensive. And we think that this is a time for investors to maybe take up some cash raise some liquidity in order to deploy the cash and liquidity when we get further bouts of volatility, which we would expect,” said Fels, the global economic adviser for Pacific Investment Management Co. (Pimco) in Newport Beach, California.
“This is also a time where we think that inflation risks, at least medium and long-term, are on the upside. This argues for being overweight inflation bonds, TIPs (Treasury inflation protected securities) particularly in the U.S.,” he said.
“Where are the opportunities? We think the U.S. housing market, for example, is very robust, very solid. We think there are opportunities in non-agency mortgage-backed securities (MBS), for example.”
“The outlook for the global economy is good,” Fels said. “Going into the year, we worried a lot about tail risks coming from China, coming from Europe, coming from Trump's economic policies. These tail risks are still here, but I think what has happened is that they have become a little less (likely)," he said.
"In China, I think the risk of an accident is much reduced. The buzzword in China is stability ahead of the 19th party congress later this year. The risk of a disruption of the Chinese currency is lower. Europe, the risk of a populist victory is lower," he said.
“Here in the U.S., a risk of a trade war sparked by very aggressive trade policy by the Trump administration is also lower now. Trump could have started a trade war. He could have imposed tariffs by executive order from day one, but it hasn't happened, arguing for a more moderate approach. This is why we've scaled back the tail risks. This is why we think the global economy will be doing well this year.
He said the U.S. stock market is fully priced. “The stock market has really focused on the ‘right’ tail risks, the positive aspects of U.S. economic policy in the last few months,”
The U.S. stock market has been on record-setting spree since the election of Trump as president, but the rally has faltered in recent weeks as investors fret over the lack of clarity on his proposals to reform taxes and cut regulation.
Analysts have also said the Trump administration is spending too much of its political capital to pass a Republican-proposed healthcare bill, which may leave it wanting for support when it tries to reform the tax code.
"With tax reform and infrastructure spending getting pushed to the end of this year or even next year, it will eventually weigh on sentiment and business confidence," said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.
"Eventually, the market will lose patience," Frederick told Reuters.
To be sure, one of the most-respected economic minds of our time also has recently warned about soaring inflation.
Former Federal Reserve Chairman Alan Greenspan reportedly warns that Trump's economic policies risk plunging America into a period of 1970s-style stagflation with low growth and "out of control" inflation, the UK Telegraph reported.
Under Trump, Greenspan warns that America could enter a "destabilizing period" where inflation rises sharply as workers begin to demand higher pay.
This could return America to "what happened in the 1970s, when we last experienced stagflation and there were real concerns about inflation spiraling out of control,” he predicted, according to Gold Investor.
(Newsmax wires services contributed to this report).
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