Bill Gross: Does California - and the U.S. - Have the Discipline to Turn Things Around?

In PIMCO Managing Director Bill Gross's monthly market commentary for October 2009, the Bond King focuses on California as a model of an economy poorly positioned to compete in a new type of economy that's turned away from levered risk:

What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike.

What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere.

Now that our financial system has been stabilized, one wonders whether California’s “Governator” and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around. Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell. For now investors should be holding their noses, their risk orientation, as well as their blue bags, until proven otherwise. Specifically that continues to dictate a focus on high quality bonds and steady dividend paying stocks that can survive, if not thrive, in our journey to a “new normal” economy of slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation.

Comments

[Living4Divi...:]

Good article by Bill Gross!

For over a decade, I have watched California circling down the toilet. What are witnessing now is the death spiral of California. It took California decades, but the Golden State is finally self-destructing. The Golden State has nothing but herself to blame. High taxation, lucrative pension payouts, crazy environmental rules and the penultimate welfare state have brought her to her demise.

I am in agreement with Bill Gross when he said:
"Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell."

I hope California will recover. I do not have a crystal ball and cannot predict whether she will or she won't. Until then, I wouldn't dare touch a California Government Bond or IOU.

Sorry, California, I wish you the best of luck.

The silver lining is that California shows us 'a lesson learned'. The other states know they should "Watch out, or they could wind up another failed state like California." Unfortunately, the residents of the state have to suffer the consequences.

Oct 05 11:06 AM

[Leftfield:]

Capital has been shoveled into now overgrown and failing politically favored economic models that have prevailed and are now well past their useful life. Since at least 2001, fiat credit has been pumped into the favored interests like nitrogen into failing oil fields.
This credit and shell games have masked American middle class decline for decades. The bills are coming due and more expensive pump-priming of failures will only help the entrenched elites at our expense.
Failure is evident in countless places of which California is only one notable example. The tooth fairy and political-hack decisionmaking-as-usual won't cut it any more. New (old, actually, from our founders) ideas and leadership is necessary, politically and economically, or we just wither and decline from here.

Oct 05 11:18 AM

[conceptwizard:]

Here is the focus that the Obama Admin has on turning this country around:

1. It is unclear how many additional troops McChrystal may request beyond the 68,000 already slated to be in the country by year's end. Speculation has been that he may request anywhere from 10,000 to 40,000 more troops for the mission in Afghanistan.

The request for additional troops and resources, formally known as a "Request for Forces," is separate from the detailed 66-page security assessment produced by McChrystal that was leaked to the Washington Post on Monday.

2. Health Care Reform at a cost of 1 trillion

3. Americans cannot get any truth out of their government about anything, the economy included. Americans are being driven into the ground economically, with one million school children now homeless.

4. Unemployment is at alltime highs and there is no real focus on permanent job creation.

All you have to do is watch what they do, not what they say. There currently is no leadership in any direction other than the status Quo, of showering money in a hopeless fashion.

Oct 05 12:23 PM

[The Geoffster:]

Every politician knows that reelection depends upon bringing home the bacon. Voters hate Congress but love their Congressman. They know the spending is unsustainable but won't tolerate their bacon being trimmed. Democracy is a systemic risk to the economy. Just wait until moral hazard spreads across all sectors. Strategic default will not be limited to housing. The taxpaying minority will join the fray.

Oct 05 12:39 PM

[Michael Clark:]

The trouble is: Americans are more disciplined, and ready for more discipline, that our leaders in Washington and Wall Street are. If our leaders were speaking honestly to Americans, telling them the truth, leading with discipline, Americans would shoulder responsibility and discipline their own life. (Americans are already responding to the global crisis with more disicpline that their leaders, by saving more money.)

We're getting no leadership out of Washington and New York, where apparently the idea that the party can continue seems to be the guiding light of the resident intelligentsia.

Oct 05 12:40 PM

[bluesky123:]

You want growth? You want innovation? You want more taxes for state and federal government? You want more jobs? You want more US exports? Support US small business which provides most of the nation's jobs. More seed capital (there isn't any). More banks lending to start ups (no bank touches a company without a 3 year profitable history). For the last 10 years there has been no seed capital in America. In addition the best and brightest non-US entrepreneurs have a cumbersome, bureaucratic process to get visas to start companies here which can take years. As Gross says, the best and brightest are leaving. America needs growth to get out of this mess. You create growth by starting thousands of small and innovative companies run by smart people who are properly funded, who go on to create entire new industries like Apple, Google etc. Creating growth for America is not difficult to figure out. It sure beats spending $2.8trillion on housing rebates.

Oct 05 02:04 PM

[realold:]

I have lived in California since 1944, and would have moved decades ago, if it were not for the "kids". This has not been coming for a decade; it has been coming since 1970 or so.

The state is run by ultra liberals (think San Francisco), but don't be too glad they are here. They are also representatives and senators in Congress and are helping to ruin the whole country. The election of Obama is proof that no one in this country is safe. The nation was made vulnerable by Bush and is being finished off as we speak. I hope the rest of you see the light, but based on the California experience, I don't think that you have a chance.

Good luck.


On Oct 05 11:06 AM Living4Dividends wrote:

> Good article by Bill Gross!
>
> For over a decade, I have watched California circling down the toilet.
> What are witnessing now is the death spiral of California. It took
> California decades, but the Golden State is finally self-destructing.
> The Golden State has nothing but herself to blame. High taxation,
> lucrative pension payouts, crazy environmental rules and the penultimate
> welfare state have brought her to her demise.
>
> I am in agreement with Bill Gross when he said:
> "Our future doggie bags can hold steak bones or doo-doo of an increasingly
> familiar smell."
>
> I hope California will recover. I do not have a crystal ball and
> cannot predict whether she will or she won't. Until then, I wouldn't
> dare touch a California Government Bond or IOU.
>
> Sorry, California, I wish you the best of luck.
>
> The silver lining is that California shows us 'a lesson learned'.
> The other states know they should "Watch out, or they could wind
> up another failed state like California." Unfortunately, the residents
> of the state have to suffer the consequences.

Oct 06 11:53 PM

[31October:]

On Oct 05 11:06 AM Living4Dividends wrote:
<SNIP>
......Unfortunately, the residents of the state have to suffer the consequences.

Once D.C. bails out the California legislature, [again under threat of worldwide economic disaster if we don't] we will all be suffering right along with them.
"I cannot ease your pain, but I can feel it with you."

And Micheal Clark is correct that the average American is more disciplined that Congress. But the American balance on credit cards + car loans + other fixed payment debts totaled $16,600 in 2008. The average American has nine credit cards. Nine? 9? Whiskey Tango Foxtrot? Take 535+1 of the most corrupt, pandering people from that average population and give them a printing press. That's our government.

Question:
Does California - and the U.S. - Have the Discipline to Turn Things Around?

Answer:
That was a rhetorical question, right?

Oct 08 10:20 AM