Pimco sees subprime impact on homes, consumers
Founder Gross expects the Fed to cut rates within the next six months
By Leslie Wines, MarketWatch
Last Update: 11:37 AM ET Jun 26, 2007
NEW YORK (MarketWatch) — Pimco Chief Investment Officer and founder Bill Gross Tuesday predicted that the subprime mortgage crisis’s impact will spread beyond the housing sector and prompt the Federal Reserve to cut rates to stir a flagging economy.
Gross, in an outlook for July posted on the Pimco Web site, said the mortgage-sector crisis will impact consumption and new home building over the next year to year and a half.
The crisis “may be just what the Fed has been looking for: easy credit becoming less easy, excessive liquidity returning to more rational levels.”
The bond guru predicted that the Fed will reduce the fed funds rate, which is now at 5.25%, over the next six months.
Gross also declared that the deterioration of two Bear Stearns Cos. hedge funds was reminiscient of the collapse of Long Term Capital Management in the 1990s.
Although some investors believe the Bear Stearns funds problems to be a one-off event, Gross said the implications are more complex.
“The right places to look for contagion are therefore not in the white-washed Bear Stearns hedge funds, but in the subprime resets to come and the ultimate effect they will have on the prices of homes — the collateral that’s so critical in this asset-backed, and therefore interest-sensitive financed-based economy of 2007 and beyond,” he wrote.
“The flaw, dear readers, lies in the homes that were financed with cheap and in some cases gratuitous money in 2004, 2005, and 2006,” he wrote.
“Because while the Bear Stearns hedge funds are now primarily history, those millions and millions of homes are not. They’re not going anywhere…except for their mortgages that is. Mortgage payments are going up, up, and up…and so are delinquencies and defaults.”
Leslie Wines is a reporter for MarketWatch in New York.
The Fed will cut rates, if anything to show that they care. But the rate cut won’t do much for mortgage rates and for housing as a whole.
One the value of Piggington is that we were discussing subprime, liar loans, and other exotics way before for press started reporting on them.
On this board, we are ahead of curve.
The talk of recovery by the financial press is simply trying to talk the market up. Remember when Bush Senior said there was no recession in the 1990s? Well the people knew there was a recession and that’s why they voted for the unknown candidate, Bill Clinton.
I won’t even begin to consider recovery until 2010, after the 2004 5-year notes reset.
The Fed will cut rates, if anything to show that they care. But the rate cut won’t do much for mortgage rates and for housing as a whole.
One the value of Piggington is that we were discussing subprime, liar loans, and other exotics way before for press started reporting on them.
On this board, we are ahead of curve.
The talk of recovery by the financial press is simply trying to talk the market up. Remember when Bush Senior said there was no recession in the 1990s? Well the people knew there was a recession and that’s why they voted for the unknown candidate, Bill Clinton.
I won’t even begin to consider recovery until 2010, after the 2004 5-year notes reset.
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