PIMCO's Recession Signal Is "Flashing Orange"

At the forum, PIMCO said it "reckoned it would be difficult to communicate a pause without markets jumping to the conclusion that this is the end of the rate cycle and the next move will be down" and adds that "as Ben Bernanke reminded us, his attempt to signal a pause in the previous rate cycle led to significant volatility. While central banks such as the Bank of England might get away with a pause and continued tightening, this is more difficult for the Fed given its global importance".

Against this backdrop, most of us believed that with the probability of recession likely to rise over time, a resumption of rate hikes after a pause was relatively unlikely.

The forum also discussed the biggest geopolitical quandary du jour, namely the US vs China conflict, asking if a "truce or peace" is possible. Here is the response:

Some participants argued that the worst of the trade conflict was now behind us, as both sides wanted a deal before the negative economic consequences of higher tariffs would be felt.

However, most of us believed the conflict between the U.S. and China is more deep-rooted and about much more than trade alone, and would thus continue to be a source of uncertainty and volatility even if there were a deal on trade. Mike Spence’s description of the conflict as a “clash of systems” resonated with the audience and reminded us of our discussions at the Secular Forum in May about the “Thucydides trap,” which describes the risks of a confrontation between an established and a rising power.

And while we urge readers to skim the full report, here is what PIMCo believes are the key investment implications as we head into another volatile year:

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