Gross: I think this hope and speculation on a soft landing is just that for several reasons. Greenspan has done an excellent job throughout his tenure, and there's faith in the almighty and in Greenspan himself that he'll be able to do it at least one more time.
But I think one of the problems is that even Greenspan is sailing in uncharted waters here based upon the wealth effect, based upon the question marks that all of us have in terms of productivity growth and the sustainability of productivity. And so even the infallible, I guess, is potentially fallible for several reasons.
We may be approaching a level in terms of short-term rates, where the Fed simply makes a mistake and overreaches their potential targets. At 6.5% or 7% or whatever their eventual resting point is, given the wealth effect and the productivity question, it's hard to know exactly what the right way is in this new age economy. The Fed could overdo it and produce a rather hard landing as opposed to a soft landing.
One of the problems Greenspan has with raising rates is that he can't really lower rates very quickly. That's flexibility that he's had in prior cycles. But this time around if he even hints at lowering interest rates, he starts the stock market on the upward climb all over again.
Financial Advisor: It goes into orbit.
Gross: Exactly, so while he can certainly lower rates in a significant downturn or cataclysmic plunge of the economy or the financial markets, he's going to be very reluctant to do so absent those extremes. So this question of central bank overreach and the inability to lower rates, perhaps over the next six, 12, 18 months, once we get to the sweet spot, wherever that is, is going to be one of the potential problems that weighs against this soft landing. In other words, you have to find the sweet spot almost on the money. You know, if Greenspan were shooting darts at a dartboard, that dart's got to hit dead center. It can't hit six or seven or eight points on the fringe.
Fuss: That used to happen a bit when the Fed really tightened. In old cycles when the Fed really leaned into the market, really took money out of the system, that would happen. The Fed certainly has been raising short-term interest rates, and to a degree, you can say that money is tighter now than it was. But this is not tight, tight, tight money.
Gross: There are other potential problems in the global economy that suggest that perhaps a soft landing may not be, like the question of Japan. They haven't really pulled themselves out of the sinkhole to any significant event and they're still 15% of world GDP. If they reverse course, then that could be a potential problem. There's the overwhelming problem that I've eluded to in terms of an equity bubble and the fact that we're 35% off the top in the Nasdaq and 5% to 10% down in terms of other averages and what that implies for consumer spending. We're in uncharted waters. Perhaps just as significant could be a reversal of the dollar. We haven't seen that yet. It's off about 5% or 6% from the top relative to the Euro.
Financial Advisor: If you would assign probabilities to these three different outcomes, a soft landing, a recession, or a continued rapid expansion, what would you give each?
Fuss: I would bet 60% on the soft landing. I would bet 25% on recession and 15% on rapid expansion. I think the most likely scenario is the soft landing, and the reason I feel that way is that as soon as it becomes apparent that the Fed will not tighten anymore, I expect some pickup in liquidity that's sort of derived from markets. I'd be quite surprised if we go into a real definable recession. But I'd be flabbergasted if the rate of growth picks up from here.
Gross: Well, the stronger bet I would say would be recession. Obviously, if you averaged it out, you'd say soft landing. But I would say 50% recession, 30% soft landing, 20% rapid expansion.