Tuesday, November 2, 2010

A Monetary Walk of Shame

Photo: PacificCoastNewsOnline.com
Preceding this week’s highly anticipated midterm elections and two-day Federal Reserve meeting, PIMCO'S Bill Gross published his monthly investment outlook containing some shift in sentiment toward the very system that he advocated just over a year ago.  Gross, PIMCO'S longtime Co-chief investment officer, has long been lauded as the “Bond King” and stands at the rarified investment pulpit with the likes of Warren Buffett, Jack Bogle, and Benjamin Graham.  His investment outlooks are considered must-reads for anyone in financial services,  as they provide insight into what the investment elite are pondering.   In this piece entitled “Run, Turkey, Run,” (LINK) Gross predicts that the upcoming Fed meeting: “will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.”
Is Gross crafting PIMCO'S own obituary with a statement like this or does this signify PIMCO’s entrance into the equity world as he surrenders to fewer return opportunities in the bond market?  Or is the “Oracle of Orange County” taking the first step in a monetary walk of shame, conceding that policies which made sense before have become runaway fiat freight trains that he jubilantly rode?
While Gross has always appeared to have an anti-big-government bend to his commentaries, he was not afraid to partner with the government and even imitate the Fed in 2009 when the United States was peering into the economic abyss. In his January 2009 outlook he wrote, “PIMCO’s view is simple: shake hands with the government; make them your partner by acknowledging that their checkbook represents the largest and most potent source of buying power in 2009 and beyond...For now, our Ponzi-style economy and its policy remedies encourage bond investors to mimic Uncle Sam and its global compatriots. Buy what they buy, but get there first.” (LINK) At the time, it was perfectly acceptable to run the printing press in support of our great nation as managers were desperately seeking refuge from the crisis of 2008.  (In other words, "it seemed like a good idea at the time but i do remember having a few too many drinks.") 
In his February 2009 outlook, Gross congratulated the Fed and showed optimism towards the unprecedented efforts at a time when markets were particularly fragile.  He applauded the Commercial Paper Funding Facility and the Fed’s purchase program for agency backed mortgages opining that these two programs “have been the major policy successes to date…because they have supported and increased asset prices whose decline has been the major deflationary thrust behind the real economy. Stop asset prices from going down and with a 12-month lag, unemployment will stop going up, and President Obama’s targeted three million new jobs will have a fighting chance of being achieved” (LINK).
Today, Gross feels that the Fed and government which he admittedly partnered with in 2009 have gone too far.  In his most recent note he says, “Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme…Now, however, it seems the Fed has taken Charles Ponzi one step further.”  Even though the idea that developed nation’s public debt being a Ponzi scheme is not new, Gross has reached his own proverbial tipping point (in other words Gross has been sleeping with the enemy).
So why the sudden change of heart? When did we transform from the collective supporting of asset prices to what he now calls a “Sammy Scheme” (Uncle Sam’s version of a Ponzi scheme that has been orchestrated by politicians and subsequently enabled by the voters that elected them)?  Maybe this is the way it always was and no one wanted to admit it?  Gross is coming to grips with the reality that the Federal Reserve, despite its alleged independence, is a highly politicized tool used not only to support asset prices and provide liquidity, but fuel deficits, and rather large ones at that.  I would not want to wake up and rollover to that realization either. 

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