Bill Gross's Pimco Exit Relieves the Fed of Its Clothes
As is well known now, Bill Gross resigned from Pimco last week. The market reaction to his departure was swift. Monday's Wall Street Journal reported a $10 billion outflow from Pimco that some estimate could increase to $100 billion. Logic dictates that many of those billions will follow Gross to Janus.
Gross's exit carries with it many implications, but arguably the least spoken of aspect of his departure is what it says about the machinations of the Federal Reserve. That billions will migrate with Gross is a powerful example of the obnoxious, and economy-sapping conceit that drives the Fed. In Gross's case, the billions that will move with him won't have far to go. Apparently his new office will be very near Pimco's Newport Beach headquarters. But if he'd moved to credit-starved Bangladesh, the billions would have still traveled with him. Gross, based on his successful investing track record, is credit personified. Credit is always a very easy "get" for those who are expert at allocating it. That the latter is true speaks to the credit-contracting shame that is government spending, floating money, and the Fed itself.
Government spending is the opposite of "stimulus" simply because politicians, no matter their ideology, can't possibly be as smart as the markets. It's shooting fish in the most crowded of barrels to say that John Boehner and Harry Reid aren't nearly as capable as are Warren Buffett and Peter Thiel when it comes to directing the economy's resources ("credit" just another word for resources) to their highest use.
Leaving Buffett and Thiel out of the equation, markets remain pregnant with information that all-too-human politicians of all stripes lack. Even if the best investors in the world - including Gross - were to retire tomorrow, market forces would still allocate capital much more skillfully than would Mitch McConnell and Nancy Pelosi simply because the broad market (you, me, and the man down the street) operates with much better information.
Given the above tautology, when politicians spend with abandon they are contracting credit simply because their inability to invest with true knowledge means that the economy's limited resources aren't reaching those most capable of multiplying their impact. Politicians destroy capital with investments in housing, railroads and Solyndra, and while private investors similarly make mistakes, that they're constrained by market forces means that their errors are naturally going to be limited in scope. Politicians are never going to find the next Steve Jobs toiling in a garage, but they are going to find politically connected businesses of the Fannie Mae variety. Government spending is anti-credit. End of story.
Considering money, floating money values logically amount to wealth redistribution by politicians and central bankers. If dollar policy favors weakness in the greenback, those long on land, art, rare stamps and gold are going to see an improvement of their wealth positions relative to those who own future dollar income streams in the form of company shares. If policy favors a strong dollar, those who own shares will see their wealth increase relative to those who own hard assets.
Applied to the last 12 years, cheap dollar policies have redirected all manner of investment into hard assets. Oil has been the most notable beneficiary, and the resulting economic weakness that followed the economy's re-orientation into energy easy to understand. Political meddling with the dollar has driven billions into the relatively low profit margins enjoyed in the oil patch; all this at the expense of the higher, credit-boosting margins experienced in the technology sector, among others. Politicians and central bankers are lousy allocators of capital, and their pursuit of a weak dollar since 2001 has quite predictably resulted in relatively limp growth. Policies in support of a weak dollar are anti-credit, yet so are strong dollar policies anti-credit because either way the economy suffers politicization of resource flows. Money's sole purpose is as a measure of value, and if stable, credit is most likely to be properly allocated to a mix of hard and soft assets on the way to the most growth, and by extension, abundant credit creation.
Considering the Fed's wholly naïve imposition of quantitative easing (QE) in modern times to achieve the falsehood that is "easy credit," its actions, exactly like the previous ones, can only make credit less accessible. The story of Bill Gross explains why.
Gross, for being Bill Gross, can access billions to invest precisely because he's seen as expert at profitably allocating resources. Credit is once again "easy" for him. One hundred years ago, Henry Ford transformed limited credit into a global economic behemoth. He understood where economic resources could be best multiplied such that credit was ultimately "easy" for him too. More modernly, Amazon's Jeff Bezos, FedEx's Fred Smith, and Google's Sergey Brin could and can easily access credit to grow because they too are properly viewed as expert at moving limited resources to their highest, credit-multiplying use.
What about the Fed? If we ignore its allocation of trillions borrowed from banks in order to prop up housing and government spending such that economic resources (credit) are being savagely contracted, the Fed, when it attempts to render credit "easy" through artificially low rates, is doing no such thing. The Fed can't create credit any more than politicians can boost demand by virtue of them spending money taxed and borrowed away from others. The Fed can only redirect where some credit flows through interest-rate meddling. More to the point, an information-deficient Fed is usurping the role of an information-pregnant marketplace such that trillions of limited economic resources aren't reaching their highest use, but instead are migrating toward what the Fed laughably presumes is most economically stimulative. It's the equivalent of the Fed choosing housing construction as the proper locale for resource allocation over a skilled investor matching the next Henry Ford with credit. The result isn't Fed "ease," but in fact the exact opposite as those in the real economy are forced to vie for the resources not directed by central bankers and politicians.
Hopefully the departure of Bill Gross to Janus, and the resulting billions that will follow him, serves as a lesson to central bankers and politicians alike. Good stewards of economic resources multiply them, thus expanding the availability of credit for everyone. In short, if we want "easy" credit, politicians and central bankers must cease their meddling so that it can become easy.
