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World's Biggest Bond Fund Manager Writes Letter To Obama

Discussion in 'BBS Hangout: Debate & Discussion' started by gifford1967, Jul 1, 2008.

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  1. gifford1967

    gifford1967 Member
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    Looks like Bill Gross lays a large share of the blame for our current economic clusterf_ck, squarely on Bush's shoulders. He also makes some interesting points about raising taxes and the Laffer curve. How did a commie get control of the world's biggest bond fund?



    NEW YORK (Reuters) - The world's biggest bond fund manager anticipates that Barack Obama will be the next U.S. president, and warns that he will face stern economic circumstances.

    Bill Gross, chief investment officer of Pacific Investment Management Co, or PIMCO, manages the $130 billion PIMCO Total Return Fund.
    http://www.reuters.com/article/newsOne/idUSNYG00114420080630

    See letter below-

    Dear President Obama:

    Thought I would jot down this little note to President Obama.
    It’s a little presumptive of course; first that he’ll even be President (he will)
    and second that he’d read it (he won’t). But presumptiveness is an inherent
    requirement of an investment manager and so I shall proceed.


    Dear President Obama:

    You have inherited a mess. Your predecessor, fixated on emulating a former Republican icon from a far different economic era, chose to emphasize tax cuts for the rich and excessive consumption for all Americans. He promoted deregulation and free markets when, in fact, the markets and their institutions needed tough love. Over eight years, he failed to put forth a coherent energy policy. He needlessly invaded Iraq and lowered worldwide esteem for this nation as a symbol of freedom and benevolence.


    But enough about W’s spilt milk. I’ve already ticked off so many readers that they’re questioning my Republican Party voter registration. 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. Although your campaign slogan says “Yes we can,” I have my doubts. Granted, you’re going to raise tax rates on the rich, give a break to the lower/middle class and rebalance the scales of economic justice somewhat. I myself won’t enjoy paying that near 50 percent marginal tax rate after you remove the current cap on the payroll tax, but my wealthy neighbors and I in Newport Beach should just look at it this way: we’ve had an eight-year lease extension on the “high life.” Now it’s time to give something back and I suspect we won’t be working any less hard. That ol’ Laffer Curve has a certain logic to it, but it only makes sense at the upper margin. People did work less at confiscatory tax rates imposed pre-Thatcher/Reagan but once they got down to 50 percent or lower, it was all gravy – promoting conspicuous consumption as opposed to higher productivity and overtime at the office. Gosh, now we don’t even want those oversized trophy houses! The New York Times reports that the high-profile crowd now favors small ecologically certified “LEED” houses – “Leadership in Energy and Environmental Design.” My, what green eyes we have, Grandma!


    Anyway, so you’re gonna do the tax thing, Mr. President, and throw in some form of universal healthcare to boot that your buddy Hillary will help spearhead. You hope you can get a lot of this passed despite a potentially long string of filibusters from a Senate that won’t quite have sixty Democrats. In addition, you’ll need to provide some immediate relief to homeowners in the form of FHA (Federal Housing Administration) subsidies and low mortgage rate loans that somehow have been studied and studied in Congress for the past six months yet still haven’t been passed into law. By January, home prices will be down another 10 percent or so and our Japanese-style property deflation will be in full stride. Congress will have had its summer recess though and spent September and October on the campaign trail. They had to get re-elected you know, so those homeowners just had to wait.


    But you’ll have your tax bill and your healthcare bill and your housing fix, and somehow it’ll all be paid for by wealthy hedge fund managers, oil companies or, pray tell, a robust economy that’s creating good jobs at home instead of exporting them abroad. Uh, I don’t think so, Mr. President. That’s where the “yes we can” morphs into “no we can’t.” Not that you won’t accomplish most of that – the robust economy and the good jobs notwithstanding. It’s just that you won’t be able to pay for it and it’s better to admit it now as opposed to later. No David Stockman confessions in your administration. You’re smarter than Ronald Reagan and too nice of a guy to distort reality like King George. So let’s start out by dropping all of that “budget neutral” rhetoric and admit where we’re headed. Your administration will produce this nation’s first trillion dollar deficit!


    While the Republicans will blame you for years and label you “Trillion Dollar Obama” in future campaigns, there is in fact not much that you or any other President can do. You’ve inherited an asset-based economy whose well has been pumped nearly dry with lower and lower interest rates and lender of last resort liquidity provisions that have managed to support Ponzi-style prosperity in recent years. Foreign lenders have cooperated by purchasing Treasuries at yields which when combined with dollar depreciation have resulted in negative returns on their money. Even if these charades continue (and they may not), their stimulative effects – their magical powers to transform a 110-pound weakling into a Charles Atlas/Arnold Schwarzenegger mensch of an economy – are gone. What you need now is fiscal spending and lots of it. No ordinary Starbucks will do, Mr. President, you need to step up for a six-pack of Red Bull.


    Now I know, Mr. President, that you’re already addicted to those nicotine smokes and I’m not trying to promote a caffeine habit here, but this economy will need an additional jolt of $500 billion or so of government spending real quick. It must replace both reduced residential investment and consumption whose decline has placed the U.S. economy near, if not in a recession. Some quick math for you Sir: gross private domestic investment (machines, houses, inventories) has declined by $200 billion since its peak in late 2006. Due to higher unemployment and energy costs, domestic consumption will soon be $300 billion less than it should be if we are to return to historical economic growth rates. According to that old C + I + G formula (scratch the trade deficit for now) when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The G, Sir, is you – the government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so. It takes time to spend those types of bucks.


    It took the Japanese a lot of time too, Sir. Take a look at the chart below which graphically displays Japan’s increasing deficits as a percentage of GDP following their property bubble of the late 1980s. Over a seven-year span, expansionary fiscal spending widened from a relatively benign 2 percent deficit to a level that exceeded 10 percent at its peak in 1998. Our one trillion dollar level in 2011 would equate to something like six percent of GDP, a mere pittance by Japanese standards.


    And what will this mean for investors? Well it’s not totally clear. That same Japanese example was accompanied by declining inflation and near zero percent interest rates in Japan by the time it was all over. They experienced a liquidity trap that stifled investment and failed to revive their economy for nearly a decade. Some fear the same thing here in the U.S. PIMCO has for many years now debated the tightrope walking of the U.S. economy on the knife’s edge between reflation and deflation. A serious case can be argued for either side. Still, as our recent Secular Forum concluded, strong global growth spearheaded by developing countries and accompanied by significant commodity inflation should provide a firm background for stimulative U.S. monetary and fiscal policies during your first administration. Importantly as well, current negative real interest rates along with the innovative liquidity provisions by Bernanke’s Fed should promote “re” as opposed to “de“-flation. A trillion dollars of government deficit spending is potent medicine. Its potency regarding inflation will not be felt fully during the peak deficit period. Rather, inflation will accelerate during the subsequent recovery as the government bonds acquired during the recession are transformed once again into risk bearing assets and high levels of investment. That suggests that intermediate and long-term yields on government bonds have already bottomed and will gradually rise throughout your first, and perhaps second Administration. Your term will not go down in history as investor friendly.



    In the final analysis I wonder why you or anyone else would want to be President in 2009. But there’s the ego thing and a hope for a better tomorrow and all that. Come to think of it, “President Obama” does have a certain ring to it. When I listen to your speeches, you even have me half convinced!



    All the best, and a fist bump to ya!

    William H. Gross

    Ordinary Citizen

    http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+July+2008.htm
     
    #1 gifford1967, Jul 1, 2008
  2. weslinder

    weslinder Member

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    I couldn't have written advice more dangerous to the long-term survival of the country if I had tried. Trillion-dollar deficits? Gross needs to put away the Keynes and read some economics with better science behind it.

    My response:

    Mr. Obama,

    Please do not listen to Mr. Gross. In fact, be wary that any bond fund manager advocating more borrowing is doing so for his own benefit, at the expense of the country as a whole.

    All the best, and another fist bump!

    weslinder

    Ordinary citizen young enough to have an interest in the country lasting more than 50 more years.
     
    #2 weslinder, Jul 1, 2008
  3. robbie380

    robbie380 ლ(▀̿Ĺ̯▀̿ ̿ლ)
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    i like bill gross but i just can't agree with him on this. this would be horrible. someone explain to me how more debt helps us because mr. gross didn't or maybe i just missed it.
     
    #3 robbie380, Jul 1, 2008
  4. pippendagimp

    pippendagimp Member

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    it's absolutely necessary in order to avoid deflationary spiral......bill gross is no fool.
     
    #4 pippendagimp, Jul 1, 2008
  5. Air Langhi

    Air Langhi Contributing Member

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    Maye we need some deflation.
     
    #5 Air Langhi, Jul 1, 2008
  6. pippendagimp

    pippendagimp Member

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    deflation in the US in its current state of indebtedness = death of a nation
     
    #6 pippendagimp, Jul 1, 2008
  7. Bandwagoner

    Bandwagoner Member

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    But if the dollar devalues then won't the debt be less significant?

    I never took a macro class but unless we have some type of inflation indexing in our debt (which i know for most of it we don't) I don't see how inflation hurts us from that aspect.
     
    #7 Bandwagoner, Jul 1, 2008
  8. Dubious

    Dubious Member

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    It's the trickle up theory.

    You stabilize the middle class's death spiral of debt. Once you level off at a lower altitude you try responsible management to slowly regain solvency.

    I'll guarantee you bond managers are smarter than equity managers and understand more about the state of the economy. Their funds dwarf equities and they take a long term view instead of just the next quarter.
     
    #8 Dubious, Jul 1, 2008
  9. Air Langhi

    Air Langhi Contributing Member

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    Its already pretty much there. Lets just take our medicine and move on.
     
    #9 Air Langhi, Jul 1, 2008
  10. pippendagimp

    pippendagimp Member

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    yes, exactly. the fed will/must adopt a weak dollar policy (as they have for the past 7 years) in order to avoid having our mountains of debt cave in and avalanche all over us. bernanke will destroy the dollar if he has to - as long as the deflationary spiral is avoided. if this means congress and the white house have to start spending trillions on roads or wars or solar panels or tax rebates then so be it. as long as the $$$ gets into circulation. the cannot allow deflation to get a grip on the economy or it is The End. helicopter ben knows this very well - he's an expert on jap deflation and our own '30s depression. he will just monetize all our debt before he lets us get to a point where we won't be able to service it.
     
    #10 pippendagimp, Jul 1, 2008
  11. pippendagimp

    pippendagimp Member

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    it's there in terms of housing prices and stock values, yes...

    but not so much so otherwise......

    and with our levels of debt, "taking our medicine" would simply be disaster beyond any idea you and i can fathom at this point....i really don't think there would be any option of "moving on"....were deflation to truly get a hold on the US, our entire economy would collapse with tangential consequences for every aspect of american life.....deflation is the end-all virus that would wipe us out and that's why the fed and whoever the next POTUS is will do anything and everything to avoid it.
     
    #11 pippendagimp, Jul 1, 2008
  12. robbie380

    robbie380 ლ(▀̿Ĺ̯▀̿ ̿ლ)
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    I hate doing this but...fixed it for you. :p

    Anyhow I understand more what Gross is saying now. I had to re-read it a couple of times because I was thinking from a different perspective. I need some more time to think about this but things just don't add up. It's seems like he is advocating the same old deficit spending that is quickly leading this country to an economic catastrophe. To me it sounds like a last ditch effort to save the economy from Obama's spending plans that he feels Obama has not calculated correctly.

    Obviously, you can tell that I am not an economics major, but to me it sounds like Gross is an advocate of a weaker dollar and govt spending in order to avoid deflation and pump up the economy. This is the goal because deflation would clearly destroy Americans given the present debt levels, but this plan does not even address the addiction to credit and lack of savings Americans have. It would seem that this point would need to be addressed as well. (Am I thinking about the wrong kind of debt? personal debt v national debt?) If you are inflating your way out of their current debt problem wouldn't you have to change their future habits with debt or you will still have the same problem after the inflationary tactics.

    Granted, you have to keep the patient alive before you can think about rehab. But if you pump up inflation and fail to encourage healthy savings among Americans and the end of deficit spending in Washington then you would hasten the coming economic catastrophe of entitlements and completely inadequate preparation for that bill we will have to pay.

    This seems like a necessary last ditch effort but it doesn't address all the issues. Let's continue to discuss this because I truly feel like a random idiot when it comes to economics and all the theory around it.
     
    #12 robbie380, Jul 1, 2008
    Last edited: Jul 1, 2008
  13. Rule0001

    Rule0001 Contributing Member

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    I disagree. Bond guys sat at the loser's table at lunch anyways.
     
    #13 Rule0001, Jul 1, 2008
  14. Sweet Lou 4 2

    Sweet Lou 4 2 Member

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    the time to run a deficit is during weak economic times, that's why running a deficit during good times is so stupid.

    We have to do this in order to get the economy back on track. two years of high gov't spend until growth returns and then balance the budget.
     
    #14 Sweet Lou 4 2, Jul 2, 2008
  15. Baqui99

    Baqui99 Member

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    Not sure how I feel about this piece. The Fed has already pumped a ***** ton of liquidity into the commercial banking system. It's expanded its powers well beyond what it's ever done before. Still, we are dangerously heading towards stagflation -> high unemployment and high inflation. These are monetary issues, so there's not much that Bush, McCain, or Obama can do anything about.

    Anyway, as far as FISCAL policy, Obama would be well advised to tread carefully here to avoid further inflation. That means it might be time to either roll back some of the Bush tax cuts, or start cutting spending on stuff like Iraq, bridges to nowhere, pork bills, etc.

    As an aside, the one thing that can absolutely plummet our economy is if China and other emerging markets start selling off their U.S. assets such as treasuries, equities, and other fixed income. If they start selling off assets en masse, our markets will nosedive. Hell, the whole reason the housing bubble started is because of the massive capital inflow from China during 2004 - 2007. That money was parked in the U.S., and our banks were eager to lend...
     
    #15 Baqui99, Jul 2, 2008
  16. bigtexxx

    bigtexxx Member

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    1) please post data that shows we're nearing stagflation
    2) please tell me what interest china would have in selling their US treasury investments, and how that would impact china
    3) worst thing that could happen would be to increase taxes when the economy is experiencing slow growth, or negative growth

    KTHXBYE
     
    #16 bigtexxx, Jul 2, 2008
  17. Air Langhi

    Air Langhi Contributing Member

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    I think it would not be good for china to dump use treasury. It will collapse the dollar, and since we buy so much crap from china it would tank their economy as well. Their competitive advantage is the lower value of their currency. If their currency goes up they lose some of that. Also if they tried to dump us treasury their invest will tank further hurting them.
     
    #17 Air Langhi, Jul 2, 2008
  18. rhester

    rhester Member

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    The laws of economics will always correct

    I don't care what anyone says you cannot keep borrowing your way out of debt and into prosperity

    President Obama (McCain would do the same) is going to increase the debt and the pressure on the dollar is going to increase

    only the fed can create inflation

    speculations on commodities oil in particular also adjusts

    tightening credit markets (higher rates) will force the issue; many more obvious bankruptcies.

    keeping rates low may not stall the Big Bang much longer

    more debt makes matters worse, so spending money makes matters worse.

    increasing taxes without stopping spending only decreases the rate of increasing the debt.

    basically we are a house of cards with a big bad army

    one day something bad is going to happen either to the bankers or the US economy

    I vote for the bankers going broke
     
    #18 rhester, Jul 2, 2008
  19. Baqui99

    Baqui99 Member

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    Buffett Says He's Concerned About U.S. `Stagflation' (Update4)

    http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=amCCz4wNzVCE

    June 25 (Bloomberg) -- Billionaire investor Warren Buffett says he's concerned about ``stagflation,'' or slowing in the U.S. economy while inflation accelerates.

    ``We're right in the middle of it right now,'' said Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., in an interview on Bloomberg Television today. ``I think the `flation' part will heat up and I think the `stag' part will get worse.''

    Buffett, the world's richest person, runs a company with a $72 billion stock portfolio and businesses ranging from candy to corporate jet leasing and insurance. He's said the U.S. housing slump has been a drag on Berkshire's earnings, adding today he's unsure when the economy will recover.

    ``It's not going to be tomorrow, it's not going to be next month, and may not even be next year,'' said Buffett, 77.

    The U.S. economy will expand 1.4 percent in 2008, the weakest performance since 2001, according to a survey by Bloomberg. The Federal Reserve today left its benchmark interest rate at 2 percent, saying ``uncertainty about the inflation outlook remains high.'' Consumer prices rose 4.2 percent in the 12 months ended in May, the fastest pace since January.

    Buffett, whose Berkshire is the second-largest shareholder of Anheuser-Busch Cos., declined to comment on InBev NV's $46.3 billion bid for the St. Louis-based brewer. He disavowed comments in the media attributed to him about whether he favors the offer.

    Mistaken Identity

    ``I've been reported to be in St. Louis, I've been reported to be at dinner with August Busch IV,'' Buffett said referring to the chief executive officer of the brewer. ``There must be some guy in St. Louis that looks a lot like me, because I have not been in St. Louis since this started.''

    Federal regulators may not need to step in to help Lehman Brothers Holdings Inc., the securities firm that lost about 62 percent of its market value this year, Buffett said.

    ``The fact that they intervened on Bear Stearns prevents them from needing to intervene on other large investment banks,'' Buffett said. ``The very act of the fire engine showing up when there was a fire means that other fires won't break out in this particular case.''

    The second-largest underwriter of mortgage debt last year, Bear Stearns Cos. sold itself after an exodus of clients and lenders threatened to plunge the company into bankruptcy. New York-based JPMorgan Chase & Co. agreed in March to buy Bear Stearns with backing from the Fed.

    Buffett also praised Barack Obama, the Democratic senator from Illinois running for president against Republican John McCain, an Arizona senator.

    Charity Lunch

    ``He will have more concern for the people who don't get the lucky breaks in life like I've gotten,'' said Buffett, ranked the richest man by Forbes magazine.


    As far as China goes, they're earning almost ZERO real income off their U.S. treasuries right now with inflation around 4%. They've already started investing in other areas such as in the U.K. and other EU nations where they can get better yields.
     
    #19 Baqui99, Jul 2, 2008
  20. Dubious

    Dubious Member

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    Frankly I'm just glad someone is proposing a plan, any plan.

    The old real estate developers saying I always like to trot out is " owe the bank a million dollars and they own you, owe the bank 100 million dollars and you own the bank". The US is never broke as long as they own the printing press, there is not much difference between owing 500 billion or a trillion. China and the other developing nations would have no choice but to keep buying US indebtedness because if our economy shuts down so does theirs...for now.
    I'm not too worried about inflation in the US because any excess money consumers have is going to be spent on energy and food and balanced somewhat by the deflation in the housing market, not a bubble that is coming back any time soon.

    I don't think a President Obama will see himself as a sacrificial one termer and actually run up a trillion dollar deficit. And I don't think a President McCain would see himself as a sacrificial one termer and begin the process of cutting entitlement programs and telling American's they need to quit expecting anything but a safety net and start saving and investing for themselves if they don't want to retire to the State Home.

    Besides nothing gets done without a vote of Congress anyway and you know they want to keep their jobs.
     
    #20 Dubious, Jul 2, 2008
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