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If Bill Gross gets paid by the word, then no wonder heâ??s a bajillionaire.
Mr. Gross has released his latest epic Investment Outlook piece, clocking in at a cool 2200 words and approximately 900 metaphors (just kidding, we didnâ??t count).
In it, he puts aside the â??New Normalâ? economic concept he helped coin in favor of the â??Paranormal:â?
The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It's as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012.
Seriously, nobody writes an investment letter like Bill Gross.?Moons like cancerous tumors! Iâ??m stealing that for the title of the fourth book in my sci-fi/fantasy heptalogy.
Anyway, this paranormal state is a result, Gross says, of the fact that the world has not been de-leveraging as predicted, but rather levering up, borrowing money hand over fist, to help delay the economic pain that de-leveraging brings. That raises the risk that things could get even crazier:
Perhaps the first observation to be made is that most developed economies have not, in fact, delevered since 2008. Certain portions of them â?? yes: U.S. and Euroland households; southern peripheral Euroland countries. But credit as a whole remains resilient or at least static because of a multitude of quantitative easings (QEs) in the U.S., U.K., and Japan. Now it seems a gigantic tidal wave of QE is being generated in Euroland, thinly disguised as an LTRO (three-year long term refinancing operation) which in effect can and will be used by banks to support sovereign bond issuance. Amazingly, Italian banks are now issuing state guaranteed paper to obtain funds from the European Central Bank (ECB) and then reinvesting the proceeds into Italian bonds, which is QE by any definition and near Ponzi by another.
Weâ??ll stop here and say we have to disagree with Gross about his assessment of the LTRO. Thereâ??s no evidence yet that it has, or ever will, help support sovereign-debt issuance in the euro-zone. It seems more likely to simply help banks roll over their existing debt than anything else.
But itâ??s true that this nonetheless does have the effect of helping the euro zone avoid the pain of de-leveraging. And, yeah, the business of the ECB borrowing from sovereigns to lend back to sovereigns is just kind of nuts.
And Gross says this raises the risk of not only the old bogeyman of the monetarists, runaway hyperinflation â?? which is nowhere in sight â?? but the other fat-tail risk of a deflationary collapse:
Zero-bound money â?? credit quality aside â?? creates no incentive to expand it. Will Rogers once fondly said in the Depression that he was more concerned about the return of his money than the return on his money. But from a system-wide perspective, when the return on money becomes close to zero in nominal terms and substantially negative in real terms, then normal functionality may breakdown. We all start to resemble Will Rogers.
Gross is certainly playing it a little safer this year, hedging his bets by saying things could either blow up into inflation, or do the opposite of that. But thatâ??s not an unreasonable position to take.
In order to arm yourself for this spooky spirit world, Gross, who last year clung to a staunch anti-Treasury stance that hurt his fund performance, recommends holding 5-9-year Treasurys, particularly TIPS, along with high-quality, senior corporate debt and municipal bonds.
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Gross is absolutely right that the only thing that has happened in the last 4 years is that household debt has gotten shifted to govt debt. What he missed last year, and seems to understand better now, is the result is that govts are now in control of the debt markets â?? therefore, the normal rules of supply and demand donâ??t apply. Govt, through QE and similar mechanisms, can create artificial demand; which they have done and appear ready to do more of. The result is negative real yields, and they appear to be here to stay.
The questions in my mind for the next 12-24 months are 1) whether govt support for the debt markets and the economy can keep high-yield bonds strong, and 2) whether the declining $ and Euro will continue to make emerging market bonds a strong play.
Gross is right about the return on money. As long as interest rates are such that money earns essentilly zero and, is in fact, being devalued by the supposed deleveraging of debt bloated economies this recession will continue. Too bad Gross is not the next Fed Chairman.
Here is an article that shows how much corporate, government and household debt has grown over the past 30 years:
http://viableopposition.blogspot.com/2011/12/debt-break-over-point-when-is-too-much.html
Economists point out that eventually debt levels reach the point where additional debt accrual by governments actually slows GDP growth.
Gross is right that deleveraging will come and it will be painfull. We have done nothing to address the problem and hence, its only getting worse. I fear we are living in a dream land that is about to end as we wake up to reality in the next few years.
budgeter, Like â??Wâ?? He was a businessman.
Anyway, the article is not about Obama. The only mention of the U.S. government is in reference to QE which was run by Bernake, a Republican nominated by â??Wâ?.
Finally, itâ??s my understanding that the U.S. has delt with the bankster recession better than Euroland and probably better than China.
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