His victory could bring great disruption to the debt

His victory could bring great disruption to the debt
His victory could bring great disruption to the debt

Bill Gross, the legendary Wall Street fixed income guru, has issued a warning heading into November: the arrival of Donald Trump with a second term could generate a major disruption in bonds. The reason given by the co-founder of Pacific Investment Management (PIMCO) is clear: aggressive tax cuts like those proposed by the Republican could generate a deficit that would drag down the entire market.

Speaking to the Financial Times, Gross commented that “Trump is the most bearish of the candidates because his program advocates continuous tax cuts and will generate greater inflation.” In that sense, he pointed out that, due to the enormous deficit that this drift could lead to, “his choice would be the most disturbing.”

In any case, the former director has not hesitated to clarify that Biden does not represent the opposite extreme either, claiming that “he has also been responsible for trillions of dollars in deficit spending“. This problem was precisely one of the elements that brought Gross to fame, with a strategy in the market to confront it. However, this problem has been increasing very profoundly in recent years, in fact the negative balance of The US reached 8.8% in 2023 compared to 4.1% in 2022.

According to the Independent Congressional Office, CBO, the deficit regardless of what future governments do will be trapped in an upward spiral due to demographics (higher spending on social security) while increasingly being paid plus interest for the new debt it is acquiring (the US is already leaving 1 trillion dollars on this item, more than on defense). They expect about 1.6 billion by 2024 and 1.8 billion by 2025. From there they see “a constant increase until reaching the ceiling of 2.6 billion in 2034″.

A victory for Donald Trump would have to be added to this situation. The New York tycoon has promised to make permanent the tax cuts he announced in 2017, during his first term. If this decision is made, CBO experts believe that the White House would assume a hit next decade of about 4 billion extra. This hole would come, according to the group, from lower revenue due to the reduction in taxes by the Republican. In this way, the structural problems with the deficit would find a new burden.

The explanation is clear, a state spending much more than it earns is a decisive factor. “An annual increase of 2 billion of dollars in the offer… it is something that is clear that is going to put pressure on the market, Gross stated. Because of this, the ‘king of bonds’ recognizes that he is protecting himself in private credit and preferred securities.

In any case, the expert explains that he also sees problems in equities. The reason is different and is mainly fatigue after the aggressive increases that have been seen throughout Wall Street. “It is necessary that investors temper their expectations“rather than expecting a repeat of what happened last year in the S&P 500, Gross explained. “Over time the markets should reverse, or at least greatly limit their advances, so if people expect 10% or 15% % re profitability, they should expect lower profits.




 
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