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Multi-billion bond fund manager Bill Gross warns US economy not strong enough for government to “gracefully exit” stimulus spending programs
By Michael Hennigan, Founder and Editor of Finfacts
Jan 8, 2010 - 6:25:26 AM
PIMCO (Pacific Investment Management Company) was founded in Newport Beach, California, in 1971 by Bill Gross with $12 million in assets under management and had $940.4 billion in assets under management as of September 30, 2009. It has more than 1,200 employees in offices in Newport Beach, New York, Amsterdam, Singapore, Tokyo, London, Sydney, Munich, Toronto and Hong Kong and was acquired by the German financial group Allianz, in 2000.
Bill Gross, the founder of multi-billion bond fund manager PIMCO, which is one of the world's biggest investors in sovereign debt, says it's unlikely that the US economy is strong enough for the government to “gracefully exit” stimulus spending programs or that private investors would be capable of absorbing the balance in deficit funding.
Six months ago, he began his June 2009 investment outlook with the famous quote from the French writer Honoré de Balzac: "“Behind every great fortune lies a great crime.” He ended with a quote from the American Depression-era comedian Will Rogers, at whose shrine I once paid homage, on Cheyenne Mountain, Colorado Springs. In between, Gross said it was probable that US trillion-dollar deficits are here to stay because any recovery is likely to reflect “new normal” GDP growth rates of 1%-2% not 3%+ as America used to have. Staying rich in this future world would require strategies that reflect this altered vision of global economic growth and delevered financial markets.
Gross said Will Rogers had opined in the early 30s that he wasn’t as much concerned about the return on his money as the return of his money.
He writes:"Quixotic journeys often make for great literature, but by definition are rarely productive. I am, after all, referring to windmills here - - not their 21st century creation, but their 17th century chasing. Futility, not productivity, was the ultimate fate of Cervantes’ man from La Mancha. So it is with hesitation, although quixotic obsession, that I plunge headlong into a discussion of American politics, healthcare legislation, resultant budget deficits and - - finally - - their potential effect on financial markets."
Bill Gross says what amazes him most of all is that politicians can be bought so cheaply - - he should study Irish politics! Public records show that combined labour, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return. The fact is that American citizens have never been as divorced from their representatives - - and if that description fits the Democratic Congress now in control - - then it applies to Republicans as well - - past and present.
He says the current state of global fiscal affairs is often confusing - - it’s much like Robert Palmer’s 1980s classic song where he laments that “She’s so fine, there’s no telling where the money went!”
Gross says that over the past two years the sovereign debt of G7 advanced countries, has climbed by roughly 20% of respective GDPs, yet that is not the full story. Some of governments’ mystery money showed up in sovereign budgets funded by debt sold to investors, but more of it showed up on central bank balance sheets as a result of check writing that required no money at all. The latter was 2009’s global innovation known as “quantitative easing,” where central banks and fiscal agents bought Treasuries, Gilts, and Euroland corporate “covered” bonds approaching two trillion dollars.
"Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total - - perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought - - you guessed it - - Treasuries with the proceeds," Bill Gross writes.
The bond fund manager warns that while "we may not have much of a vote between political parties, in the investment world we do have a choice of airlines and some of those national planes may have elevated their bond and other asset markets on the wings of central bank check writing over the past 12 months. Downdrafts and discipline lie ahead for governments and investor portfolios alike. While my own Pollyannish advocacy of 'check-free' elections may be quixotic, the shifting of private investment dollars to more fiscally responsible government bond markets may make for a very real outcome in 2010 and beyond."
He says that if exit strategies proceed as planned, all US and U.K. asset markets may suffer from the absence of the near $2 trillion of government checks written in 2009.
"It seems no coincidence that stocks, high yield bonds, and other risk assets have thrived since early March, just as this 'juice' was being squeezed into financial markets," he concluded.
Bill Gross discusses the US economic outlook on CNBC, on Dec 08, 2009:
