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Merrill Lynch, PIMCO: No Avoiding Recession

President Bush said today at a White House news conference that the nation’s economic “fundamentals are strong,” and that his administration will “consider all options” to prevent a recession from happening in the United States. The White House may be late to the party, according to two articles I came across today.

The Toronto-based Globe and Mail said that a Merrill Lynch recession probability indicator is pointing to a “painful and pronounced downturn next year” for the U.S. economy. According to the Globe, Merrill Lynch uses the U.S. National Bureau of Economic Research’s definition of recession, which is a significant decline in economic activity lasting more than a few months and evident across economic measures including GDP, employment, and retail sales. Their recession probability indicator looks at a combination of the yield curve and corporate spreads, and is now signaling that there is a 100% probability that a U.S. recession will take place within the next 12 months. David Rosenberg, Merrill’s North American economist, warns, “Clients should be taking recession risks very seriously.” The odds have grown since October, when the indicator was at 75%. Only this past summer did the tool show no threat of recession.

While Merrill Lynch’s recession probability indicator may warn of an inevitable recession on the horizon, Bill Gross of Pacific Investment Management Company, LLC (PIMCO), one of the world’s largest fixed-income managers, says the U.S. economy has already gone into recession, according to the Financial Times (UK). In an interview with the Times, Gross said, “If I had to be bold I’d say we began a recession in December.” The U.S. recession would last “four to five months,” he thought, but warned it could be prolonged if the White House and Congress neglected to “take some rather unperceived and unforecasted measures in terms of fiscal stimulation.” Gross explained:

What needs to be done is something fairly radical compared to Republican orthodoxy, which means spend money and absorb the deficit as opposed to pretending that you’re fiscally conservative.

According to the Times:

He said: He was highly critical of the complicated financial instruments that have exacerbated the credit squeeze, saying the trend of over-leverage was a “dying concept” that will “lead to an implosion at the edges . . . of this new financial marketplace.” He also had stern words for hedge funds, describing them as a “con”. A hedge fund, he said, was “an unregulated bank. A bank isn’t a con but a bank is a regulated entity. A hedge fund is not . . . it’s been a con on the government in terms of their unwillingness to regulate the industry.”

Say fella, what hedge fund do you work for?

Gross called for the Federal Reserve to bring interest rates down to 3%, and was critical of U.S. attempts to stabilize credit markets, describing the “Super SIV” and plans to freeze mortgage teaser rates as a “temporary fix.”

It’s interesting to note that PIMCO switched out of mortgage-backed securities last year, and for the first half of 2007 fell behind its competitors. Since that time it has outperformed the market as subprime-related losses mount.