PIMCO's Bill Gross
This month's Investment Outlook from PIMCO's managing director and co-CIO includes a sobering view of the prospects for America's banking industry in the years ahead:
"When yields are too low, and acceptable risk spreads so narrow that top line interest revenue is increasingly marginalized, then lending is at risk. Excessive historical overhead represented by rents, salaries, pension and health benefits, to name just a few, force financial and lending institutions to do one of two things: They lever up to cover those costs or they slow or shut lending down to preserve equity and the ultimate franchise...
"Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it. When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over."
And a final caveat for pension-fund managers (including those at MainePERS):
"The age of credit expansion which led to double-digit portfolio returns is over."
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