Bill Gross on Staying Rich as U.S. Fortunes Decline

The latest monthly letter from PIMCO’s Bill Gross, makes for depressing reading, especially for those who make their living off other people’s money.

Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder.

Gross writes that it ” is probable that trillion-dollar deficits are here to stay because any recovery is likely to reflect “new normal” GDP growth rates of 1%-2% not 3%+ as we used to have. Staying rich in this future world will require strategies that reflect this altered vision of global economic growth and delevered financial markets. Bond investors should therefore confine maturities to the front end of yield curves where continuing low yields and downside price protection is more probable. Holders of dollars should diversify their own baskets before central banks and sovereign wealth funds ultimately do the same. ”

All investors should expect considerably lower rates of return than what they grew accustomed to only a few years ago. Staying rich in the “new normal” may not require investors to resemble Balzac as much as Will Rogers, who opined in the early 30s that he wasn’t as much concerned about the return on his money as the return of his money.

Ed Harrison at CreditWritedowns offers a good analysis of Gross’s analysis:

In the end, one can only conclude that the U.S. is indeed likely to deficit spend for a considerable period and that this is going to have negative effects on its credit rating and relative standing in the global economy. A diminished future for America is an inevitability of having lived beyond its means for far too long. Accepting this fact is likely to provide a better outcome than resisting it as the U.K. did when its tenure as king of the hill came to an end.

Comments

[whidbey:]

The Gross message is aimed at Congress! But Congress cares very little. Congress does not plan to grow to the economic capacity available. NO, they hope to rule-out unemployment and raise taxes to cover the gap. It is much worse that Gross leads us to believe, he wants you to believe that the short end of the curve is a good place to invest. He is just talking his book. The Fed can not buy up the short end of the curve without steep inflation.

A triumph of hope over experience.

Jun 03 05:36 PM

[Larry House:]

To even begin to handle the enormous debt the government is piling up, they need 3% growth in 2010 and 4% in 2011. If Gross is right that the "new normal" is growth of 1-2%, we are in a world of hurt. I believe he is more right than government projections.

Jun 03 09:18 PM

[punk_ash:]

The more the taxes go up, the less I will shop. Reduce the government size. Downsize the government. Fire government employees that are discretionary. Tear up the rosy retirement packages. Let the unstable companies fall. Let the risk takers jump in and run the corporate world. Let the speculators speculate, but ensure that they get no help if they get in trouble.

It is called Free markets.

Meanwhile, government should focus heavily on direct help to all the citizens that need help. In fact this is the only place where governments should interfere.

Obama has changed and become just like any other president. Any elected official is good only for the 1st 100 days or so.

Jun 04 12:58 AM

[conceptwizard:]

I agree with those projections as well. Housing won't recover until 2011-2012 by the time the Subprime, Arm's, prime, second lein, HELOCS, commercial Real estate all work their way through. We also have to depend on people spending not saving, and that is going the wrong way as well.

Jun 04 01:01 AM

[Marvin Clark:]

Bill Gross is stating the obvious to thinking people. America threw the greatest party in 2000 years, in the world, in the 20th century. Now, the bill comes due in the 21st century. The real question is, if we can't afford the payment, then what?

Jun 04 02:08 AM

[Phil Trupp:]

The world of the bond trader is a gloomy place. It always has been. It is peopled by bears whose prophecies evoke our worst fears and anxieties. Bonds, after all, soothe those anxieties--that is, until Bill Gross and other bond traders can find something else to drive the VIX sky high. Bond trading is a lot like the "dark science" of economics. As it happens, economics isn't a science; it surfaces only in a big way when when things are indeed dark and getting darker. Notice the smile on Paul Krugman's face whenever he's asked to make one of his own end-of-the-world-as-we... prophecies. Haven't we learned that no one can make fail-safe economic predictions? If we could, we'd all be rich as kings and have little use for bonds or Mr. Gross.

Jun 04 03:14 PM

[Alphameister:]

The superior performance of emerging markets during this rally will become even more pronounced in the years ahead. Those seeking rapid profit growth would be well advised to adjust their investment sights accordingly.

Jun 04 04:34 PM

[TinyTim:]

"A diminished future for America is an inevitability of having lived beyond its means for far too long."

We knew we were doing it while it was happening.
Who was responsible for taking away the puinchbowl?
Thanks Al. Thanks W.

Jun 04 05:02 PM

[adenovir:]

Bill Gross is talking his book again. Is that his high school picture?

Jun 04 10:57 PM