Pimco Germany Boss: Trump Will Not Boost Productivity

  • Why it matters

    Why it matters

    A leading fund manager says Donald Trump’s pro-cyclical interventions may extend the current boom, but cannot counteract fundamentals such as low productivity growth.

  • Facts


    • Since taking office, Donald Trump has cancelled the TPP Pacific trade agreement, and has made aggressive statements on trade with China, Mexico, and Germany.
    • Mr. Trump plans to radically simplify the U.S. tax system, cutting corporate and individual taxes, and allowing U.S. firms to repatriate cash held overseas.
    • This week, the U.S. Federal Reserve raised interest rates a quarter-point, with strong indications of further rate rises later in 2017.
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Pacific Investment Management Co. LLC Managing Director Andrew Bosomworth Interview
Pimco's Andrew Bosomworth thinks Donald Trump's words will speak louder than his actions. Source: Bloomberg

Andrew Bosomworth, head of portfolio management at Pimco Germany, has told Handelsblatt that he does not foresee increases in U.S. interest rates beyond 2018. In a wide-ranging interview, he said he was skeptical about Donald Trump’s capacity to bring large-scale growth to the U.S. economy. It was possible that the current boom could be prolonged by a year or two, he said, but genuine increases in productivity seemed less likely.

Mr. Bosomworth, a native of New Zealand, joined the investment management firm Pimco in 2001. Pimco, headquartered in California, has around $1.5 trillion in assets under its management around the world, and is regarded as particularly strong on economic analysis. Mr. Bosomworth and his team in Germany manage around €280 billion, or $300 billion worth of assets.

Commenting on the Federal Reserve’s decision to increase base rates by one-quarter of a percentage point, Mr. Bosomworth said he did not foresee a prolonged upswing in rates. “We figure there’ll be a total of three quarter-point increases in 2017, but not much going beyond 2018.” Although some observers foresaw a continuing economic boom, Mr. Bosomworth pointed out that we were already experiencing the third-longest expansion in the post-war era. Any falling-off in growth would limit the Fed’s capacity to push up rates.

“Unemployment might fall a bit. Whether jobs will move back to the United States remains to be seen.”

Andrew Bosomworth, head of portfolio management, Pimco Germany

Speaking more generally about Mr. Trump’s promises to “make America great,” Mr. Bosomworth said actions speak louder than words: he was skeptical, he said, if “an artificially-induced investment boom can actually increase productivity in the long term.”

However, in the shorter term, pro-cyclical expansion could certainly boost growth, particularly when tax write-offs kicked in around the third quarter of this year. Overall, he said, U.S. growth could reach 2–2.5 percent this year. Mr. Trump could extend the current economic cycle by a year or two, he added.

Beyond that, he was more pessimistic. “The last recession ended in summer 2009. So things are getting tighter. Historically, every time Republicans get into power, there is a recession.” The economic cycle would eventually reassert itself, said Mr. Bosomworth, especially since protectionist measures would act as a brake on longer-term productivity increases. Productivity growth was essential for sustained economic growth, he added.

In terms of impacts on capital markets, the Pimco executive said that he expected U.S. three-year Treasury bonds to approach 3 percent this year, but not much further, and only then if growth continued.

Mr. Bosomworth acknowledged that there were considerable differences of opinion within Pimco on Mr. Trump’s impact on capital markets. In particular, it was unclear how the new American administration would impact what has become known as the “new normal” – a world with low long-term growth, high levels of debt, and low interest rates.

He said Pimco’s diagnosis of a “new normality,” originally coined in 2009, was based on four underlying trends – an aging population in the West, high public indebtedness, low productivity growth, and a widening gap between rich and poor. On all of those factors, Mr. Trump’s policies would leave them unchanged or worse, he said.

Productivity was key, he said. “Unemployment might fall a bit. But an American worker costs more than a Chinese one. Whether jobs will move back to the United States remains to be seen – it all depends on productivity.”

This laid the basis for future trends on the bond market, said Mr. Bosomworth. “There might be a short-term growth boost. I don’t think it is sustainable. There could well be a short-term flash-in-the-pan, with bond rates rising, but only briefly,” he said. However, the Pimco boss said others in his company were more optimistic, and thought Mr. Trump’s policy could represent a genuine structural change in the United States economy.

“It might look like a trade war now. But Trump is unlikely to put massive tariffs on imports. The U.S. economy would collapse.”

Andrew Bosomworth, head of portfolio management, Pimco Germany

Within Pimco, he said, differences of opinion was always worked on, until a consensus emerged. In the current context, this meant that the company was “cautiously optimistic” on future growth prospects, so they were looking at securitized bonds, high-yield bonds, and short-term emerging market bonds.

Overall, he said, he did not expect Mr. Trump’s administration to have a strong negative impact on world trade. Studying Mr. Trump’s book, The Art of the Deal, said Mr. Bosomworth, it was noticeable that Mr. Trump saw vigorous action as a kind of negotiating tactic: he would take an extreme position and shock people, but only in order to end up somewhere in the middle.

In the current situation, this meant that Mr. Trump had cancelled the Trans-Pacific Partnership, the trade deal often known as TPP, and had been aggressive on trade with China, Mexico, and Germany. “It might look like a trade war now. But Trump is unlikely to put massive tariffs on imports. The U.S. economy would collapse. The United States is the world’s biggest economy, but it is not an island,” he added.

Tariffs would also push up the dollar, which America could not afford, he said. In other words, there were economic limits to Mr. Trump’s protectionism. However, more generally, Mr. Trump was a significant change: he represented a reaction against globalization, as it had shaped Western politics and economics for decades.

On Pimco’s current positions, Mr. Bosomworth acknowledged that the company was holding more liquidity that usual. “We’re keeping our powder dry,” he said: “If there is turbulence on the market, we want to be in a position to buy.”


Anke Rezmer covers the investment fund industry for Handelsblatt out of Franfurt. To contact the author:

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