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Monthly Investment Outlook from Bill Gross DOWNLOAD OUTLOOK SHARE
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January10,2017
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BillGross
WithappreciationforIsakDinesen
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ItraveledoncetoAfrica,asyoumighthaveguessedbynow,andit'sbeenapartofmeeversince. SubscribetoBillGross'Investment
Beingperhapsthecradleofcivilization,ifnotlifeitself,Africacastsaneerieglowovertheentire OutlookPodcast
historyand,indeed,meaningofexistence.There'sastrangebeautytoitthiseatandbeeaten
landbrutal,yetfairandlovingunderneathitsviolentsurface.Ithinkit'showIviewmyownlife.I
sawmyselfinAfricaand,ofcourse,throughmyowneyesIsawyouthere,too.Thequestion
however,thatendseverystanzaofmypoemiswhetherAfricasawandwillrememberme.Arewe
justpassingthroughwithoutatracefollowingourdustydeaths?Willanyone,oranything,atthe
endofthelinebethebetterforourtimeonearth?I,myself,knownothingofagrandschemeof
existence,butIwishtheretobeoneifonlytogivemeaningtoourpreciousmomentsof
happinessandfrequenthoursofdespair.
HappinesshasdominatedriskmarketssinceearlyNovemberanddespairhascharacterizedglobal
bondmarkets.HopeforstrongergrowthviaRepublicanfiscalprogress/reducedregulation/andtax
reformhaveencouragedrisk.ThepotentialforhigherinflationandamorehawkishFederal
Reserveliebehindthe100basispointmoveinthe10yearTreasuryfrom1.40%to2.40%overthe
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sametimeperiod.AreriskmarketsoverpricedandTreasuriesoveryielded?Thatisacritical
questionfor2017.
I,forone,amskepticalofthe3andmoreconfidentofthe2.Thelongertermnegativesofmy"New
Normal"andLarrySummer's"SecularStagnation"mayhavedisappearedfromthebusinessfront
pagesoftheFTandtheNYT,buttheyhaveneverreallygoneawayTrumpornoTrump.
Demographicnegativesassociatedwithanagingpopulation,highdebt/GDPnowmoreatriskdue
torisinginterestrates,technologydisplacementofhumanlabor,andfinallythedeceleration/retreat
ofglobalizationposenegativeongoingthreatstoproductivityandthereforeGDPgrowth.Trump's
policiesmaygrantatemporaryaccelerationoverthenextfewyears,buta2%longerterm
standardislikelyinplacethatwillstuntcorporateprofitgrowthandslowdownriskasset
appreciation.
Thecriticalquestionofinterestratesandthefuturelevelofthe10yearTreasuryisequally
challenging.WhiletheFedhasbeguntotightenpolicyafterabandoningQuantitativeEasing
severalyearsago,othermajorcentralbankscontinuetostokethefirewithasmuchas$150billion
ofmonthlybuybacks.WiththepinningofJapaneseJGB10yearyieldsatnear0%andtheongoing
dovishnessofDraghi'sECB,globalarbitrageeffectivelycapsthe10yearat2.4%to2.6%levels.
Currencyadjustedyieldpickupsof70basispointsbyselling10yearJGB'sorGermanBundsand
buyingU.S.Treasuries,outlinetheartificialpricingofour10year,evenasinflationmoveshigher
andshorttermyieldsareraisedbytheFedonce,twice,orthreetimesinthenext12months.
Source:Bloomberg.
Now,howeverthissuperstrong,frequentlytesteddownwardtrendlineisatriskofbeingbroken.
2.55%to2.60%isthecurrent"top"ofthistrendline,andoverthepastfewweeksithasheldand
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reversedlowerby15basispointsorso.BUT.Andthisismyonlyforecastforthe10year
in2017.If2.60%isbrokenontheupsideifyieldsmovehigherthan2.60%asecularbearbond
markethasbegun.Watchthe2.6%level.MuchmoreimportantthanDow20,000.Muchmore
importantthan$60abarreloil.MuchmoreimportantthattheDollar/Europarityat1.00.Itisthe
keytointerestratelevelsandperhapsstockpricelevelsin2017.
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Investinginvolvesrisk,includingthepossiblelossofprincipalandfluctuationofvalue.
Returnsquotedarepastperformanceanddonotguaranteefutureresultscurrentperformancemaybelowerorhigher.
Theviewsexpressedarethoseoftheauthor,BillGross,anddonotnecessarilyreflecttheviewsofJanus.Theyaresubjecttochange,andnoforecastscanbeguaranteed.The
commentsmaynotberelieduponasrecommendations,investmentadviceoranindicationoftradingintent.
Thereisnoassurancethattheinvestmentprocesswillconsistentlyleadtosuccessfulinvesting.
Inpreparingthisdocument,Janushasrelieduponandassumed,withoutindependentverification,theaccuracyandcompletenessofallinformationavailablefrompublic
sources.
Fixedincomesecuritiesaresubjecttointerestrate,inflation,creditanddefaultrisk.Thebondmarketisvolatile.Asinterestratesrise,bondpricesusuallyfall,andviceversa.The
returnofprincipalisnotguaranteed,andpricesmaydeclineifanissuerfailstomaketimelypaymentsoritscreditstrengthweakens.
Investinginderivativesentailsspecificrisksrelatingtoliquidity,leverageandcreditandmayreducereturnsand/orincreasevolatility.
Statementsinthispiecethatreflectprojectionsorexpectationsoffuturefinancialoreconomicperformanceofthemarketsingeneralareforwardlookingstatements.Actual
resultsoreventsmaydiffermateriallyfromthoseprojected,estimated,assumedoranticipatedinanysuchforwardlookingstatements.Importantfactorsthatcouldresultinsuch
differences,inadditiontotheotherfactorsnotedwithsuchforwardlookingstatements,includegeneraleconomicconditionssuchasinflation,recessionandinterestrates.
Janusmakesnorepresentationastowhetheranyillustration/examplementionedinthisdocumentisnoworwaseverheldinanyJanusportfolio.Illustrationsareonlyforthe
limitedpurposeofanalyzinggeneralmarketoreconomicconditionsanddemonstratingtheJanusresearchprocess.Referencestospecificsecuritiesshouldnotbeconstruedas
recommendationstobuyorsellasecurity,orasanindicationofholdings.
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