Right. Once the credit rating drops below BBB, a bond is classified as "non-investment grade" aka "junk." The price loss on that one-step transition can be enormous. That's why it's essential for investors to examine the rating distribution of their "investment grade" bond funds. pic.twitter.com/nvrkvFwv1Z
— John P. Hussman (@hussmanjp) November 27, 2019
The Federal Reserve is in a lose-lose-lose position, says Allianz’s Mohamed El-Erian. That’s good for investors in the short run but it won’t last.
The Federal Reserve is stuck — under increasing pressure from markets (and President Trump) — and is unable to significantly re-inflate growth from here.
“They’re in a lose-lose-lose,” said Mohamed El-Erian, senior economic adviser at Allianz, in an interview with Yahoo Finance’s On the Move. “They can’t stay where they are. They can’t do more. But they can’t do less. And that’s the irony of relying for too long simply on central banks.”
That “lose-lose-lose” situation for the Fed is a win-win for investors — for now.
“Very short term, this is great for investors. How often do we get the trifecta of high returns, not only on your risk assets, but also on your risk mitigation assets, on your bonds?” said El-Erian.
But it won’t last, unless the economy can find “genuine drivers of growth,” he said. “Otherwise, we’re going to find that the gap between asset prices up here and fundamentals down here is too large.”
Three things need to happen for that to occur, said El-Erian. “First, solve the trade tensions. Secondly, Germany implements fiscal stimulus. Thirdly, we get an infrastructure effort both in the U.S. and Europe.”
He thinks the market is way too optimistic about those three events happening.
“The Fed since September, the ECB as well, the BOJ, even the central bank of China is starting to provide some more easing,”…
#recession is closing.
Our current forecast puts its onset to Q2 2020 for the US (postponed from June forecast by one quarter due to aggressive #Fed policy).
But, serious banking problems in Europe, if ignited, may start it already in Q1. t.co/A0cfYdfATP
— Tuomas Malinen (@mtmalinen) November 27, 2019
— Yahoo Finance (@YahooFinance) November 26, 2019