Bill Gross: U.S. Government Must Ride To The Rescue
Bill Gross, the founder and managing director of PIMCO, just released his latest “Investment Outlook” for September 2008. This month, Gross talked about the need for the U.S. government to start using more of its money to support markets in order to prevent an asset and debt liquidation of near historic proportions. He brought up a phrase that is repeated often by CNBC’s Jim Cramer on his “Mad Money” show, which is, “Remember, there’s always a bull market somewhere!” Gross addressed this by saying:
So the lesson must be to go forth and find the bull market, wherever it is. Almost always – but not now because in a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand. For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:
What Happens During Delevering
1. Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
2. Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
3. The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.
The legendary bond investor talked about where the United States is at in the delivering process. Gross wrote:
This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.
As a result, Gross prescribed the following:
Common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.
The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something… knows something,” it is time for the Treasury to do likewise.
Source:
“There’s A Bull Market Somewhere?”
Bill Gross
PIMCO, September 2008
