PIMCO's Gross Echos Harvard Professor, Saying US Economy Is at 'Tipping Point'

(August 4, 2011) — Bill Gross of the Pacific Investment Management Co. (PIMCO) says the US economy is at the ‘tipping point’ of a recession.

In an interview with Bloomberg Television, he asserted: “We are at what we call a stall speed, in which corporate profits don’t grow, jobs aren’t created and therefore the economy sinks.” Additionally, Gross said that the debt-ceiling deal is a “Republican Tea Party victory,” following PIMCO co-CEO Mohamed El-Erian’s comments that a debt deal will only bring temporary relief.

“The key issue…is that we simply cannot generate enough growth to get us over all these issues,” El-Erian, PIMCO’s co-CEO, said in an interview with CNBC. “Therefore, we have these structural headwinds that continue to slow us down. Until we see structural solutions we’re going to be stuck on the bumpy road to a new normal.”

El-Erian asserted that in the near-term, the deal could avert a debt downgrade threatened by ratings agencies, such as Moody’s and Standard & Poor’s. Earlier this month, Moody’s cautioned that it would slash the US’ AAA credit rating if the government misses debt payments. It noted that because lawmakers have acted to increase the debt ceiling, it had not previously considered the situation high-risk.

Earlier this week, Harvard University professor Martin Feldstein told Bloomberg that there is a 50% chance of a new recession. “This economy is really balanced on the edge,” he said.

In May, Gross asserted that in the face of rising inflation, investors should embrace local-currency emerging market debt. Expressing PIMCO’s belief in the strength of developing and emerging markets, Gross wrote, in his usual colorful language: “Bond – and stock – investors have been sailing on the ‘Good Ship Lollipop’ for over 30 years following the Volcker Revolution and the return of high real interest rates to investment markets. Now, however, with governments attempting to impose financial repression, bond investors should revolt.”