Founded in 1971 by Bill Gross, with $12 million in assets under management, PIMCO - - Pacific Investment Management Company - - today with over $800 billion (as of March 31, 2008) in assets and more than 1,000 employees in offices all over the world, is one of the largest specialty fixed income managers in the world, and is owned by German insurer, Allianz .
``You have inherited a mess,'' Gross, co-Chief Investment Officer of PIMCO, said in an open letter to Obama, published on the Newport Beach, California-based company's web site last July. ``What do I think you should do as the new president to rectify this mess? All I know is that any solution will come with a high price tag.''
Gross says in his February Investment Outlook, that: "Animal spirits, once dampened, are hard to reignite; 'fear of fear itself' dominates greed. Under such circumstances, the benevolent hand of government is required and Keynes is reincarnated in an attempt to plug the dike via fiscal spending and imaginative monetary policies that support asset prices."
Gross says PIMCO is helping the government in several of those efforts -- including those related to commercial paper and agency-backed mortgage loans.
"These two programs, in our opinion, have been the major policy successes to date -- not because of our involvement -- but because they have supported and increased asset prices whose decline has been the major deflationary thrust behind the real economy,"he said."Stop asset prices from going down and with a 12-month lag, unemployment will stop going up, and President Obama's targeted 3 million new jobs will have a fighting chance of being achieved."
Gross slams the "numerous, seemingly uncoordinated ways" efforts have been made to stop the drop in asset prices. One big factor in the fall is what Gross terms the "shadow banking" system, which includes hedge funds, investment banks and structured financial conduits which have had to delever in the current climate.
"An economic recovery is dependent upon commercial real estate prices stabilizing and most retail stores staying open for business in the months and years ahead,"he says. To help that, yields on commercial real-estate-backed securities need to fall, which Gross said may happen as part of several ideas being debated in Washington.
Falling yields is also necessary for municipal bonds, said Gross, "to enable states and cities to return to normal functioning."
Bill Gross says PIMCO’s advice to policymakers is as follows:"you can’t bail out everyone, yet economic recovery is not possible unless certain critical asset sectors are not only reliquefied, but rejuvenated in price. The prior Administration’s focus on the banks has been critical but unidimensional. The shadow banking system with its leverage and financial innovation, powered a near 25-year global economic expansion, but it is the delevering of those hidden quasi-banks that is now threatening its petrification. Policymakers should not focus entirely on one-off bailouts of large real estate developers, municipalities, or even credit card issuers like they have with Citi, BofA, and AIG. Rather, they should recognize that supporting critical asset prices such as municipal bonds, CMBS (Commercial mortgage-backed securities), and even investment grade corporate bonds is a necessary step towards eventual economic revival. Capitalism at its philosophical and practical center depends on credit, and while new loans can be and are being advanced via the banking system, it’s a much more difficult task to force shadow banks to lend. That lending depends on securitization which in turn depends on stable and eventually higher asset prices than currently exist. The original focus of the TARP (the $700 billion Troubled Assets Recovery Program) was on asset prices, but the prior Administration quickly lost its way or perhaps its nerve. Like his Road Runner nemesis, Wile E. Coyote must now extend some infrequently used figurative wings to avoid the deflationary precipice below. Support asset prices."
