Could Bill Gross Be Wrong in His Apocalyptic View?

Maybe it’s the dog days of August but Bill Gross’s latest missive seems a bit repetitive. Entertaining as always but more of the same talk about the “new normal”

Gross makes the point again that deleveraging, deglobalization and reregulation are the three horsemen of the apocalypse that will lead us to decades of slow growth and shifting centers of economic influence. The American consumer is finished and thus the world cannot grow at previous rates; government’s heavy hand will retard growth; global economic leadership may see the torch passed to the Chinese; and US housing and unemployment will remain as permanent anchors to recovery. All conspire to lead us into a world where in Gross’s words, “…economies grow very slowly instead of growing like weeds…”

All of this naturally leads to his view of an appropriate investment strategy which, of course, is mostly talking his book:

The investment implications of this New Normal evolution cannot easily be modeled econometrically, quantitatively, or statistically. The applicable word in New Normal is, of course, “new.” The successful investor during this transition will be one with common sense and importantly the powers of intuition, observation, and the willingness to accept uncertain outcomes. As of now, PIMCO observes that the highest probabilities favor the following strategic conclusions:

1. Global policy rates will remain low for extended periods of time.
2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilizing leverage and/or guarantees to their benefit.
4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
5. The dollar is vulnerable on a long-term basis.

I’m probably being a bit harsh for I do enjoy his newsletters and I don’t think that he is that far off the mark. Could he be wrong? Of course he could. Economies move in mysterious ways and there is a great deal of momentum that can come from the unlikeliest of places. If the world bounced back stronger than expected over the next several years it shouldn’t be considered that much of a surprise. I don’t expect that it will happen but I won’t be surprised if it does occur.

For that reason, I think it’s wise to heed Gross but not terribly prudent to put all of your eggs in his basket.

Comments

[CautiousInv...:]

He very well could be overestimating our prospects, the Japanese outcome is not off the table.

There is loads of academic debate about the effects of fiscal and monetary stimulus, some suggesting that the policies will not do much of anything until structural imbalances are resolved.

Our stimulus has been of poor quality with a low multiplier and Keynes himself warned of liquidity traps in which once rates reach zero monetary policy is castrated. Of course we can continue to monetize debt but that entails another basket of problems.

Resolving structural imbalances would mean writing down bank losses and developing a replacement model for the consumer driven economy

Sep 03 12:43 PM

[Michael Clark:]

I see it almost exactly the same way Gross sees it. If you look at nature, there is a time for growth, a time for harvesting, a time for rest, a time for planting, a time to nurse the plant up out of the ground with care.

We want there to be one stage, where all we do is collect money out of the economy like the economy was a slot machine, programmed always to spit out money.

The universe seems to have an interesting analogical process: White Holes spit out matter, from which the expanding universe is built into empty objects, or inflated bubbles. Material reality, in fact, in a bubble, empty but seeming to be full. But this bubble has a time structure like everything else in nature. When the alarm clock goes off, the bubble pops.

Black Holes draw in matter, destroying the material world in the process. Black Holes crunch matter back into a point or seed or absolute density (see being the operable word); then Black Holes and contraction reach a critical mass (generating heat from cold compression) and transform themselves in to White Holes. They then, once again, spew out matter, inflating the universe, which is also a bubble. This process may go on for ever.

East Indian philosophy refers to these two processes as the Day of Brahma (expansion of spirit into matter) and the Night of Brahma (as the abstraction of spirit out of matter -- contraction).
"ALL lies concealed its coeternal and coeval emanation or inherent radiation, which, upon becoming periodically Brahma (the male-female Potency) becomes or expands itself into the manifested Universe."

The illusion, shared by many people, clearly by Greenspan/Bernanke, is that the world can expand for ever. The problems we are experiencing now, socially and economically and philosophically/spirit... come from this illusion of Continual Growth. Greed is a form of fear; our fear is that we will shrink, become insignificant, become poor, become failures. That is a huge fear in America. We want to be King of the Hill for ever. We want to be the Hero. No other role will satisfy us as a culture.

But summer is over. We have harvested our wealth, our plant, our season of growth. Now we go into Darkness, where we will be challenged in another way, in a more spiritual way; and in this darkness we will enter the forge -- an alchemical process -- through which the old tattered and ruined metal of our souls will be heated again and transformed into a new idea, a new form, a new identity, and a new cleaner, more perfect alloy -- a new sword.

Nothing ends. America is not dying yet, except in the metaphoric sense. Nothing to be afraid of. We're giving up an old body that can't really work any longer. We can't go back. We can only go forward.

"Gross makes the point again that deleveraging, deglobalization and reregulation are the three horsemen of the apocalypse that will lead us to decades of slow growth and shifting centers of economic influence. The American consumer is finished and thus the world cannot grow at previous rates; government’s heavy hand will retard growth; global economic leadership may see the torch passed to the Chinese; and US housing and unemployment will remain as permanent anchors to recovery. All conspire to lead us into a world where in Gross’s words, “…economies grow very slowly instead of growing like weeds…”

Sep 03 01:10 PM

[Robert Mart...:]

Bill Gross runs the world's largest bond fund, so it's no surprise that he sees low growth and low rates as far as the eye can see. I believe he is ignoring the inflationary risks that are blindingly obvious to other investors: America's huge trade and budget deficits.

I also submit that his strategy is internally inconsistent regarding quantitative easing. If Bill Gross expects QE to continue and expects "decades of slow growth", that is a recipe for stagflation. Bonds will lose value in dollar terms, and in real terms. Duration risk is huge, and investors should be in cash or in inflation protected ETFs, as I've noted seekingalpha.com/artic...

I must also respectfully disagree with his view about DEglobalization. Corporations have a HUGE vested interest in globalization, since it allows them to invest wherever growth is high, and migrate labor to wherever costs are low. Globalization is leading to a complete disconnect between corporate profits and the American worker. I described this at length last week in "The Deflation of the American Dream" seekingalpha.com/artic...

The idea that multinational corporations will back off of globalization contradicts their vested interests, and those of their shareholders. A reversal of globalization would require a worldwide political revolt and a resurgence of unionization. Does Bill Gross expect a revolution of the working class while the elite do nothing to protect the status quo? Even the idealist in me can't see that.

I do NOT accuse Bill Gross of acting in bad faith by "talking his book." But after spending a career in the bearish world of bonds, I simply think it is easier to see risk than reward, and it is easier to contemplate deflation rather than inflation.

Sep 03 01:23 PM

[DaveW:]

NOBODY knows how this is going to play out. There is potential for world governments (esp. U.S.) to pile enormous amounts of further stimulus into the system creating glimmers of growth and tons of speculation (read: enormous rallys). We may see waves of deflationary/de-levera... forces met with waves of inflationary/re-levera... forces, whipsawing markets viciously in a long-term trading range. Odds of a real recovery, based on real growth with a stable reserve currency are not looking too likely for some time. With so much systemic risk and uncertainty, a very patient and thoughtful trading strategy will be required to preserve and grow portfolios.

Sep 03 01:53 PM

[Michael Clark:]

Corporations DO have a huge vested interest in globalization. But that's where protectionism comes in.

Protectionism doesn't come from the corporations, it comes from angry masses who see Big Business as the cause of all their fears and confusions. And the next president who is elected will be elected by voters demanding restrictions on globalism, restrictions on corporate exporting of jobs to foreign countries, and insisting on diminished powers of corporations generally.

The next president will be elected with orders to PRUNE the giant corporations that have too much influence in our government, and too much power to derail the social structure by misplayed balls in the global tennis court. Remember the anti-trust mandate of Teddy Roosevelt. Remember ITT being shaved and compacted and shipped off into regional units.

The party is over. De-globalization will happen not because it is what corporations want, but because it is what non-corporations want. Those huge bonuses have guaranteed that Chance the Gardener will be given orders to 'get even' with the Titans, with the Masters of the Universe.


On Sep 03 01:23 PM Robert Martorana wrote:

>
> Bill Gross runs the world's largest bond fund, so it's no surprise
> that he sees low growth and low rates as far as the eye can see.
> I believe he is ignoring the inflationary risks that are blindingly
> obvious to other investors: America's huge trade and budget deficits.
>
>
> I also submit that his strategy is internally inconsistent regarding
> quantitative easing. If Bill Gross expects QE to continue and expects
> "decades of slow growth", that is a recipe for stagflation. Bonds
> will lose value in dollar terms, and in real terms. Duration risk
> is huge, and investors should be in cash or in inflation protected
> ETFs, as I've noted seekingalpha.com/artic...
>
>
> I must also respectfully disagree with his view about DEglobalization.
> Corporations have a HUGE vested interest in globalization, since
> it allows them to invest wherever growth is high, and migrate labor
> to wherever costs are low. Globalization is leading to a complete
> disconnect between corporate profits and the American worker. I described
> this at length last week in "The Deflation of the American Dream"
> seekingalpha.com/artic...
>
>
> The idea that multinational corporations will back off of globalization
> contradicts their vested interests, and those of their shareholders.
> A reversal of globalization would require a worldwide political revolt
> and a resurgence of unionization. Does Bill Gross expect a revolution
> of the working class while the elite do nothing to protect the status
> quo? Even the idealist in me can't see that.
>
> I do NOT accuse Bill Gross of acting in bad faith by "talking his
> book." But after spending a career in the bearish world of bonds,
> I simply think it is easier to see risk than reward, and it is easier
> to contemplate deflation rather than inflation.

Sep 03 02:57 PM

[sstumpff:]

In your "Deflation of the American Dream," you talk about "oil demand increasing." In fact, you suggest that if the U.S. never grew again, it wouldn't have much effect on oil demand growth and by-proxy oil price. I agree.

I guess my question to you is, "What exactly do you think we use to transport all that crap from China to the United States?"

I'll give you a hint . . It is not low priced labor. When the oil transport "tarriff" starts to erode profits on chinese crap, the game is up. The american worker whose nieghbor actually buys the crap will look pretty good to "shareholders." Globalism will become a failed experiment.


On Sep 03 01:23 PM Robert Martorana wrote:

>
> Bill Gross runs the world's largest bond fund, so it's no surprise
> that he sees low growth and low rates as far as the eye can see.
> I believe he is ignoring the inflationary risks that are blindingly
> obvious to other investors: America's huge trade and budget deficits.
>
>
> I also submit that his strategy is internally inconsistent regarding
> quantitative easing. If Bill Gross expects QE to continue and expects
> "decades of slow growth", that is a recipe for stagflation. Bonds
> will lose value in dollar terms, and in real terms. Duration risk
> is huge, and investors should be in cash or in inflation protected
> ETFs, as I've noted seekingalpha.com/artic...
>
>
> I must also respectfully disagree with his view about DEglobalization.
> Corporations have a HUGE vested interest in globalization, since
> it allows them to invest wherever growth is high, and migrate labor
> to wherever costs are low. Globalization is leading to a complete
> disconnect between corporate profits and the American worker. I described
> this at length last week in "The Deflation of the American Dream"
> seekingalpha.com/artic...
>
>
> The idea that multinational corporations will back off of globalization
> contradicts their vested interests, and those of their shareholders.
> A reversal of globalization would require a worldwide political revolt
> and a resurgence of unionization. Does Bill Gross expect a revolution
> of the working class while the elite do nothing to protect the status
> quo? Even the idealist in me can't see that.
>
> I do NOT accuse Bill Gross of acting in bad faith by "talking his
> book." But after spending a career in the bearish world of bonds,
> I simply think it is easier to see risk than reward, and it is easier
> to contemplate deflation rather than inflation.

Sep 03 03:50 PM

[nobby73:]

A few things - firstly, fuel is a tiny part of the cost of finished goods shipped around the world, so a doubling or tripling of oil will only add a few percent onto prices; secondly, China is coming to understand its economy will never reach a stable state if it is overly reliant on selling stuff to people who can only pay for it if they lend them the money and finally, American consumers are beginning to realize there is more to life than buying stuff they don't need with money they don't have.


On Sep 03 03:50 PM sstumpff wrote:

> In your "Deflation of the American Dream," you talk about "oil demand
> increasing." In fact, you suggest that if the U.S. never grew again,
> it wouldn't have much effect on oil demand growth and by-proxy oil
> price. I agree.
>
> I guess my question to you is, "What exactly do you think we use
> to transport all that crap from China to the United States?"
>
> I'll give you a hint . . It is not low priced labor. When the oil
> transport "tarriff" starts to erode profits on chinese crap, the
> game is up. The american worker whose nieghbor actually buys the
> crap will look pretty good to "shareholders." Globalism will become
> a failed experiment.

Sep 03 05:01 PM

[whidbey:]

Pimco is describing deflation, but not saying so. Holding short term debt might be appropriate.

The conditions for new normal are also conditions for period of deflationary depression that is in train now, and probably unavoidable. The policy options open have run out of time.

The necessary result is not recovery but eventually a grind down where consumers become less than 60% of the GDP. That leads to deflation.

Sep 05 04:54 PM

[Robert Mart...:]

Michael Clark:

You make a sound argument that America is at a tipping point. People are so fed up with globalization that perhaps the pendulum will now swing from globalization to protectionism. The stimulus bill had "Buy American" requirements, so that is clearly where the political winds are blowing.

Nevertheless, protectionism won't affect all industries equally. The oil industry is VERY globalized, especially exploration and production, refining, and petrochemicals. (Marketing activities are local, and so is natural gas.) So, like it or not, we are stuck with a global oil industry. It just makes economic sense. (The cost of wars in the Mid-East is beyond the scope of this discussion.)

The energy industry is one example where voters cannot "unring the bell" of globalization. The industry is too intertwined, and it would serve no one to shift towards protectionism. (Maybe Brazil could do it, but I can't think of any other country off the top of my head.)

Manufactured goods, on the other hand, lend themselves VERY readily to protectionism. This is where we may be headed, so thanks for pointing to pending tide of protectionism.
Rob
______________________...

sstumpff and nobby73:

Energy costs are a small percentage of global shipping costs for MOST goods. Bulk commodities, however, are expensive to ship overseas. (Think cement, agricultural products, etc.) Global trade WILL suffer from higher fuel costs, and commodities will suffer the most.

By the way, land-locked Switzerland learned about this a long time ago. That's why Swiss watches are such a success as an export: Small, and easy to ship.

Thanks,
Rob

Sep 06 08:30 PM

[Robert Mart...:]

Michael Clark:

I would like to respond to your first comment. You describe the "Greenspan/Bernanke illusion that growth can go on forever." Our philosophical beliefs certainly affect our view of capitalism.

You present a description of the natural order as an endless cycle of of birth, growth, death, and rebirth. This has philosophical roots in Hinduism, which explains the cycle spiritual cycle in terms of the transmigration of the soul (reincarnation). Likewise, some astronomers and physicists believe our universe follows a cycle of death and rebirth, as black holes sprout new universes through a budding process. These baby universes are all part of a cosmic "multiverse".

I hope this accurately summarizes the views you presented.

I see a fundamental problem with this cosmological view: Other universes are impossible to observe EVEN IN PRINCIPLE, so belief in their existence depends not on physics but on faith. It sounds like religion to me.

Personally, I find that Christian cosmology to be much more satisfying: The universe has a defined beginning and a defined end. The beginning is consistent with a the Big Bang, and the end with a yet-unknown cosmic event.

As for cyclical analysis, I have found it to be very effective for economic cycles and for industries such as energy and semiconductors. Cycles also have the power to explain many historical events and trends.

But it is dangerous to assume that cycles explain the future of countries, of capitalism, and of the cosmological order. It is just too easy to say that "America is like the Roman empire, and must inevitably decline." I think it is more probable that America will cede global dominance, but remain highly prosperous and influential for the forseeable future.

Thanks for sharing your thoughts,
Rob

Sep 07 09:29 AM