Pimco's Gross: Looking at the New Capitalism

Bill Gross is out with his monthly newsletter and it is a bit of a puzzler. Paul Kedrosky remarked that it had him scratching his head and looking for an embedded code.

I took it as a statement that the rules of the free market game have been changed by the government, that those rules are at this point in time evolving and life under these new rules is likely to be less lucrative for investors. Gross doesn’t bemoan this turn rather he suggests some ways to live with them.

Here is how he describes the shift:

2009 is a similar demarcation point because it represents the beginning of government policy counterpunching, a period when the public with government as its proxy decided that private market, laissez-faire, free market capitalism was history and that a “private/public” partnership yet to gestate and evolve would be the model for years to come. If one had any doubts, a quick, even cursory summary of President Obama’s comments announcing Chrysler’s bankruptcy filing would suffice. “I stand with Chrysler’s employees and their families and communities. I stand with millions of Americans who want to buy Chrysler cars (sic). I do not stand…with a group of investment firms and hedge funds who decided to hold out for the prospect of an unjustified taxpayer-funded bailout.” If the cannons fired at Ft. Sumter marked the beginning of the war against the Union, then clearly these words marked the beginning of a war against publically perceived financial terror.

Gross then meanders around a bit talking about how Pimco is adjusting to these changes and protecting the interests of his clients. He also spends a paragraph or two sort of justifying Obama’s tack, even suggesting that the “rebalancing of wealth” is something he supports and is long overdue. I suppose that if you are a target the size of Pimco it’s not likely that you’re going to be first on the ramparts.

He does eventually get to a conclusion as well as his prescription for surviving and, one would hope, prospering at least a little in the new environment:

This Outlook is not to bemoan this transition, but to recognize it. Slower growth can be a public good if it avoids the cataclysmic effects of double-digit unemployment, escalating foreclosures, and fear of financial insecurity. But the Obama cannon shot will have financial consequences. Do not be deceived by the euphoric sightings of “green shoots” and the claims for new bull markets in a multitude of asset classes. Stable and secure income is still the order of the day. Shaking hands with the new government is still the prescribed strategy, although it should be done at a senior level of the balance sheet. If the government indeed becomes your investment partner, you should keep the big Uncle in clear sight and without back turned. Risk will not likely be rewarded until the global economy stabilizes and the Obama rules of order are more clearly defined.

The ghost of Bernard Baruch still counsels that 2 + 2 = 4, but the repercussions of getting something for nothing should dominate the hopes that mankind will get off the deck and revert to a mean or median standard representative of outdated political and economic philosophies. Mohamed El-Erian’s and PIMCO’s “new normal” should trump green shoot exuberance for years to come.

There seem to me to be several cautions contained in these two paragraphs.

One, asset returns across the spectrum are likely to be less robust under the new regime.

Two, if you are in bed with the government or exposed to finding yourself in bed with them be very sure that you are first in line for repayment and don’t trust what they tell you.

Three, until the rules are defined, risk is not going to be properly rewarded, so don’t take on excessive amounts.

And, four, the old days are gone and they ain’t coming back.

I may not like it, but I think Gross is right. Obama means to and in fact is redefining how capitalism is this country is going to function and that’s going to mean less return to investors.

Comments

[anarchist:]

If Obama indeed does "redefine capitalism" I think it will be more palatable that the "redefinition of capitalism" we suffered under "the decider".

May 05 03:19 PM

[Larry House:]

Love him or hate him, I always find Gross's ideas interesting and thought-provoking. His bottom line is it is too early for equities--stay with senior debt. Only time will show if he is right or wrong. Personally, I wouldn't bet against him.

May 05 03:42 PM

[1 of 4:]

Obama can try all he wants to redefine capitalism. He may even succeed so within the U.S. on an interim basis, but the long term result will be that capital will flee to the areas of highest return. It's like unions can place an artificial restraint on the supply and price of labor, but if they aren't competitive in the long run, those jobs flee the U.S.

May 05 04:06 PM

[Economic Ph...:]

Capitalism can't be "redefined." The only thing that can happen is that we morph into a more "planned" economic system which isn't capitalism.

May 05 05:07 PM

[The Geoffster:]

BHO will soon discover that he cannot control the economy and remake it in his image. The bond markets will show him who's Daddy. If his goal is to spread the misery, he may well succeed. Higher taxes amid sluggish growth will compound the debt. Since we can't pay the debt off anyway, let's eliminate the capital gains tax and reduce the marginal income tax rate to 20%. If you can't make it in the ensuing boom, you don't deserve to.

May 05 06:38 PM

[Luddhunter:]

Ayn Rand has risen from the dead to condemn the O'Mama nationalizations. Here is her rant from today:
youtube.com/watch?v=Pv...

May 05 09:12 PM

[Luddhunter:]

Hmm, link truncated, so just go to youtube and search on TheJoeyPantoShow, and Rand is the latest post. She is VERY cranky about Bam-Bam.

May 05 09:15 PM

[sticktoitiv...:]

Possibly the how-to guide of the future but I hope not.

May 05 09:35 PM

[William Cowie:]

Obama quote: “I do not stand…with a group of investment firms and hedge funds who decided to hold out for the prospect of an unjustified taxpayer-funded bailout.”

So, is Goldman Sachs not an investment firm? The day Obama tells GS to take a hit of only one dime, that's the day he will start regaining credibility. Until then, just another day of empty rhetoric and our dollars lining Wall Street pockets.

May 05 10:13 PM

[Socialism c...:]

It's not about "a war on publically perceived (sic) financial terror," but about a war on capitalism -- of which Obama is no fan. And if Gross admits he's fine with a "rebalancing of wealth," then he's no capitalist and no defender of Liberty. Because property rights are then dead. This country was founded on a set of bedrock principles -- one of which is that YOU get to keep what you work for.

These Amerikan Neo-Marxists are very good at their spin and at selling the Amerikan publik on what they are doing. If anything, *too much* government is what *caused* this recession and the near collapse of the financial industry. It was easy money and a housing bubble -- brought to us by manipulation of monetary value by the Federal Reserve, and government manipulaton of the housing/mortgage markets via HUD, Fannie, Freddie, and the Community Reinvestment Act -- that caused this. This was not a failure of capitalism, because we DID NOT HAVE capitalism in the housing & mortgage industries!! The solution for failed socialism is not all-out Marxism!!!

Wake up people...or you'll be in for a doozy of a ride -- Soviet style. Do you not see the way the Big O is oozing charisma during times of duress, just like one Adolph in Germany? Is that just rhetoric? Then why the report from DHS & Janet Napolitano...labeling those who are anti-tax, anti-big government, pro-life, anti-gay marriage, pro-gun or are returning vets...as "right-wing extremists" and to be watched as "potential domestic terrorists"??? Oh, also making the list -- those sporting Ron Paul bumper stickers. Sounds like the old Gestapo intimidation routine -- RIGHT HERE in America? Only a few months into this administration, and I ALREADY DON'T RECOGNIZE MY COUNTRY!!!

Please -- don't fall for this notion that more control of the financial system by government is needed!! Don't take MY word for this -- do your own reading. And consider all that is going on politically -- the above are just a few notes on it! This admin MUST be resisted...by liberals and conservatives alike. I would hope that even liberals see that neo-Marxism is not good for liberals, as it entails loss of freedom by ALL.

May 06 10:51 AM

[Al-USA:]

With all due respect to Mr. Socialism Can't Compete assertions of corrupt government, which is mostly true I admit, you have to look at who is doing the corrupting: the 17,000+ capitalist lobbyists not socialist lobbyists.

And educate yourself about the REAL Marxists at www.marxist.com/
where they rail against President Obama as a pawn of the financial American Oligarchy.

The people you mention are no doubt liberals, maybe rabid liberals, but are no where near Marxists, neo or otherwise.

May 09 02:16 PM

[Jose D Roncal:]

The current financial crisis has changed our perceptions of the term capitalism and everything we have always assumed it stood for. The deeper the recession gets, the longer it drags on, the more anger will get directed towards Wall Street.

The intellectual impact of the economic meltdown has been so enormous the financial systems will be changed beyond recognition. The investment banks, those that were formerly the foundation of Wall Street, have already either folded or merged into the ranks of retail banks. For the middle-income families who face losing their homes and their jobs, and for the Wall Street firms that have been falling like dominoes, the economic crisis has been disastrous. Even high-profile investors like Warren Buffett describe it as having “fallen off a cliff”.

Until the dust settles, no one can guesstimate what the total fiscal cost will be. For a major portion of the financial system, it's now governments that have been thrust into the role of the primary borrowers, lenders, investors and insurers of last resort. The future landscape of the entire financial system will depend on how quickly and smoothly the government can dislodge itself from the deep hole of commitments they've dug for themselves. And the magnitude of the crisis will be measured by how well they manage it.

It's not as if we haven't been down this road before. Our economic system today is the result of the successful efforts to fix the mess of the 1930s. It's also the results of the failures. While our current situation is still not as harsh as the Great Depression, it's bound to leave a deep scars for years to come.

Over the past decade or more many government agencies have gotten sloppy or simply looked the other way as savvy, disreputable profit-seekers—the banks, hedge funds, insurance companies, and the Madoffs of the world—were allowed to take too many liberties while running roughshod through Wall Street. We are referring to the new complex investment structures, the toxic assets and tainted schemes, the so-called "wealth-creation investments" that got rammed past the gates and into the system.

These deals had so much leverage and so few underlying resources backing them up, you have to wonder how anybody managed to pull them off in the first place. The fact is that, with exception to a relatively small group of math wizards who were hired to run the numbers and structure the deals, nobody completely understood what was going on—not the buyers and not the sellers—which made it easy to keep pumping more deals into the pipeline. We now know that the government employees who get paid to understand such things, and who are charged with the responsibility to stand guard and protect the public from high level fraud, these are the guys that were asleep at the wheel.

But Wall Street and the banking industry was operating under the umbrella of capitalism, which meant that if so much money was being made, and if these deal were driving the market, then everything was fair game. It turned out to be a game alright, but not a fair game.

Now that the house of cards and the umbrella has collapsed, what is the future of capitalism? Will our current, broken system be replaced with a totally egalitarian, socialist society? That's not likely. Instead, we predict something that Adam Smith might deem suitable.

With all the financial bailouts over the past few months, as well as those still on the table, we're already witnessing a certain degree of government interference in “the market,” maybe a little more than we'd prefer, but we are taking a wait and see attitude considering the extreme situation we're in. We expect to see a gradual increase in taxes as well as an increase in public scrutiny and a demand for higher accountability on the part of those who are still taking large profits—the "capitalists!"

But capitalism, albeit in a more muted version in the short term, will survive. Yes, capitalism has it flaws, but then so does democracy or any form of government. There may be moves toward the exits as citizens explore other modes of financial systems, but when none are discovered, the masses will once again hunker around the warm glow of capitalism.

If you found this helpful, visit financialspeculation.com to claim your own copy of Jose Roncal's popular FREE REPORT, "12 Keys to Smart Speculating in Tough Times." It's chock full of valuable insight on how to rebuild your nest egg. While you are there, check out "The Big Gamble: Are You Investing or Speculating?" See for yourself why Donald Trump has called it "a great read!"

Aug 25 05:28 PM

[lemuria:]

。。。。。。。。

Oct 09 11:16 PM