Why Bill Gross expects a US recession to begin at the end of the year

Bill Ackman isn’t the only boldface name on Wall Street who thinks the U.S. economy is in worse shape than official numbers suggest.

See: Bill Ackman is making a bet against Treasuries as yields hit a 16-year high

Bill Gross, co-founder of fixed-income investing giant Pacific Investment Management Co., said Monday in a social media post on Platform X that the U.S. economy is likely headed toward a recession by the end of the year.

The regional banking carnage and the recent increase in vehicle crime to long-term historic highs point to a significant slowdown in the U.S. economy. Recession in the fourth quarter, Gross said.

Such a result would represent a remarkable turnaround considering the Atlanta Federal Reserve’s real-time GDP indicator shows the U.S. economy growing at an annual rate of 5.4% in the third quarter. Official GDP data will be released on Thursday, and economists polled by The Wall Street Journal expect average annual growth of 4.5%.

Many Wall Street economists predicted the U.S. would slip into a recession earlier this year. But strength in construction, consumer spending and other areas helped it beat expectations as data shows it instead continued to grow at a solid pace.

Revised data released last month by the Commerce Department showed the U.S. economy grew 2.1% in the second quarter. Typically, investors learn about a recession only in retrospect, after it is officially announced by the National Bureau of Economic Research.

Rising auto loan delinquencies are a troubling sign of economic problems to come, Gross said, citing Fitch Ratings data reported Friday by Bloomberg News that showed the percentage of subprime auto loans delinquent more than 60 days exceeded 6% in September. This is the highest rate ever recorded in the data series dating back to 1994, at 6.1%.

As for investor approaches, Gross said he is seriously considering investing in regional bank stocks that have fallen significantly this year: SPDR S&P Regional Banking ETF KRE,
one of the popular exchange-traded funds, tracking regional players down more than 30% since the beginning of the year. He also touted some merger arbitrage plays, a strategy he endorsed in a recent investment outlook.

He also recommended betting that the Treasury curve will continue to steepen as it looks to break out of negative territory for the first time in over a year. Rising long-term rates have almost caught up with short-term rates, with the 10-year BX:TMUBMUSD10Y yield swinging 30 basis points from the 2-year BX:TMUBMUSD02Y yield on Monday.

According to Dow Jones Market Data, the yield on 10-year bonds was lower than the yield on 2-year bonds for 327 days. This is the longest period since the series of 444 trading days that ended on May 1, 1980.

Gross uses interest rate futures in his growing business. He expects the curve to reenter positive territory before the end of the year as a slowing economy forces investors to adjust their expectations about the timing of Federal Reserve rate cuts.

“Higher for longer” was yesterday’s mantra, Gross said.

After a decades-long career on Wall Street, Gross announced his retirement several years ago after working at the Janus Capital Group. He joined Janus after his controversial departure from Pimco.

Nevertheless, Gross continued to share his views on the markets in posts on X, as well as in letters about investment prospects published on his website and in interviews with the financial press.

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