Wikinvest Wire

Bill Gross wants a return to "normalcy"

Friday, July 25, 2008

Six months ago, when former Countrywide CEO Angelo Mozilo participated in a panel to talk about the future of the nation's troubled housing market, he was labeled a "moron" when he noted that falling home prices are the cause of the current mortgage mess.

Oh, here it is ... number one ...
Now it looks like "The Bond King" Bill Gross at Pimco is desirous of joining that club if his latest Investment Outlook is any indication:

Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again.
When he writes "barns", he really means "single family homes" - part of a rather disastrous barnyard metaphor. The above was even written in bold type, as if to make an even stronger case for the Mozilo comparison.

Of course you don't have to look too hard elsewhere in this piece to get a better sense of where this logic originates. Early on you get a good idea that, like many others, history starts in the mid-1980s for the Bond King.
Aside from cyclical contractions and a brief bout of deflationary monetary policy in the Volkerian 80s, credit has always been available and at a relatively cheap price. Credit and debt finance is, in fact, the mother’s milk of capitalism: without it, entrepreneurs may transact, but economic progress would be most difficult with seashells or gold bars for mediums of exchange.
While it is true that credit is a key ingredient for a robust capitalist economy, excessive credit is the key ingredient for a "bubble economy", a distinction that should not be lost on Mr. Gross, but apparently is.

It is as if the last twenty years were the "normal" years, nothing before that time is relevant, and the last 11 months are just an aberration. This view is expressed elsewhere in another passage (once again in bold for emphasis) where the housing bill is lauded for all the good it will do.
But absent that (blowing up houses to reduce inventory and push prices back up), lowering the cost of mortgage credit via the omnibus housing/GSE bill now placed before the Congress and the President is the best way to begin the long journey back to normalcy.
Apparently, "normalcy" is an infinite stream of easy money and a perpetual "bubble economy" is a good economy.

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Nick said...

What Gross fails to point out in his editorial is that the only way to get prices back to the inflated values they were at before, and keep them going up sustainably, is to devalue the currency appropriately until those goals are achieved. He seems to be hinting at that, and Pimco funds are certainly positioned to return good returns when the government does this (while making Pimco healthy returns by charging people a lot for the privilege of retaining more of their value). Fortunately for the government, devaluing the crap out of the dollar coincides nicely with their "spend without limit" tradition; unfortunately, the socialist policies will ensure an uneven and fundamentally unfair distribution of the additional dollars we'll mass-create.

It's a dangerous game, walking the line creating enough inflation to fuel the enormous out-of-control spending by taking it from savers through phantom taxation, while trying to preserve global faith in a stable dollar which prevents a collapse into hyperinflation and national insolvency, while preventing anyone with wealth from fleeing the country until the government can suck them dry. It's only going to get harder as Obama and the Congressional Idiots (maybe they can form a band) try to deficit spend their way out of a deficit spending created recession while simultaneously deficit spending the country into a new socialist "utopia" regime. Interesting times ahead.

Anonymous said...

Not everyone is a gold freak.
Debt is very necessary, and no we arn't ever going onto a gold standard, sea shells, using sextants or believing the earth is flat again.
It's just been allowed to run rampant. Primary culperate is the idiot congress, elected by the i...

Leverage is not difficult to understand nor is sound policy toward fiat money.
Maybe people just don't want to understand? So they'll learn the hard way, again.

Anonymous said...

I'm of the opinion that we are going to return to gold...after all no paper money has ever made it.

When this will be is anyone's guess.

History shows us that if you give anyone the ability to print an infinite amount of money...that's exactly what they're going to do.

Making transactions with gold will not be as complex as opponents would like you to believe.

You won't have to walk around with sacks of heavy bars or coins. Transactions will happen digitally just like today.

The only difference will be that neither the banks nor the government will be able to inflate the supply of gold to pay for all of their projects, and foreign adventures.

RN said...

Tim Iacono said: "Apparently, "normalcy" is an infinite stream of easy money and a perpetual "bubble economy" is a good economy."

Oh, for the love of God, get a clue, would you?

Gross has been talking about the over finance-driven and unrealistically low interest rate environment for YEARS.

Geez. Wake up.

Tim said...

You must be new around here.
I've liked most of what the Billionaire Bond King has had to say in recent years, but he occasionally goes off the deep end with the apparent aim of becoming a multi-billionaire.

RN said...

tim -

Fair enough - his rhetoric has flourishes, to be sure.

But you've read his point all wrong. When he argues for "normalcy", he means functioning credit markets, not a return to bubble credit levels. Nowhere has he ever said the bubble credit was "normal", nor has he said he wants a return to that.

And I believe you're decidedly wrong on your below-the-belt personal attack on him being some kind Millken type who just wants to use his ability to access a public audience to get megaricher at the expense of everyone else. Gross does not fit that profile, and never has.

Further your analysis reveals the shallowness of your financial thought. Guys as smart and connected and with the ability to move first and move markets do much better when things are far from normal and blood is in the streets, as it were. He'll do far less well if credit markets return to normalcy because there won't be such imbalances to take advantage of.

Don't get me wrong, Gross is motivated by profit as we all are. But your reasoning and personal assaults are unwarranted, and frankly reek of someone who's afraid he's going to lose money in gold and wishes all hell would break loose. This I suspect is the true reason for the nature of your post.

stocksystm said...

I don't know how anyone can defend Gross after the statement he made last summer about cutting everyone a check who took out a risky mortgage. Maybe he was being facetious, but it didn't sound like it. Putting a guy like him in any position of power would be truly scary.

Anonymous said...

Lest we not forget that after a sub-par year in 2006 and early 2007 when Pimco bets were skewed toward lower interest with none forthcoming from the Fed, they were one of the biggest proponents of lower interest rates and this paid off for them handsomely over the last year.

rn - "functioning credit markets" are, by definition today, "bubble credit markets". I think that's Tim's whole point.

NC Jim said...

Credit was not always so easy. I recall way back in the 1950's my Father saying that the only way a poor man could get a loan was to prove he didn't need one.

That sounded quaint in a period of NINJA and liar loans.


Bud said...

It's been a downward spiral for Gross since he shaved his moustache, hired Alan Greenspan, and dove into distressed muni-bonds earlier this year.

Tim said...

RN - please stop with the psychoanalysis. You obviously haven't been around here long enough to understand a few simple points:

1) Aside from hiring Alan Greenspan, this is about the only time I've written anything negative about Gross and generally regard him quite highly.
2) Pinning my motives on hopes for financial armageddon and the resulting higher price for gold is way off base - you must have me confused with a "real" gold bug.

You seem to have become way too emotionally involved with this post for reasons that you should probably explain, or at least give some thought to before hurling more vitriol my way.

Anonymous said...

I find Bill Gross to be a consummate pragmatist. He knows the game is rigged and chooses to play along. He made the right call on GSE paper years ago. Another guru frequently in the news, Jim Rogers, knows similarly knowledgeable but is more purist, imo, and just takes his play offshore.

BTW, gold bugs have no interest in Armageddon. They just know what always happens when bankers gain control of the currency.

dearieme said...

I used to rate Gross's writing pretty high, but about a year ago he suddenly - it seemed to me - changed direction. I wonder why. I presume that he's not suddenly found God or found Love, so I assume he's found fear.

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