Monday, May 04, 2009

PIMCO's Bill Gross: Two plus two is still four

Bond guru Bill Gross of PIMCO has released his latest Investment Outlook, for May, entitled "2 + 2 = 4" which basically reminds us of classic advice of uber-investor Bernard Baruch during the Roaring 20's stock market that "two plus two equals four and no one has ever invented a way of getting something for nothing" and then a few years later in the depths of the depression a variation of the same advice: "Two plus two still equals four and you can't keep mankind down for long." As Bill puts it:

... his words, first of caution and then of optimism, typify the way that fortunes were, and still are, made in the financial markets: Get your facts straight, apply them to the current valuation of the market, take decisive action, and then hold on for dear life as the mob hopefully comes to the same conclusion a little way down the road.

Bill refers to several "demarcation points" (inflection points?) in recent decades and alerts us that:

2009 is a similar demarcation point because it represents the beginning of government policy counterpunching, a period when the public with government as its proxy decided that private market, laissez-faire, free market capitalism was history and that a "private/public" partnership yet to gestate and evolve would be the model for years to come. If one had any doubts, a quick, even cursory summary of President Obama's comments announcing Chrysler's bankruptcy filing would suffice. "I stand with Chrysler's employees and their families and communities. I stand with millions of Americans who want to buy Chrysler cars (sic). I do not standÂ…with a group of investment firms and hedge funds who decided to hold out for the prospect of an unjustified taxpayer-funded bailout." If the cannons fired at Ft. Sumter marked the beginning of the war against the Union, then clearly these words marked the beginning of a war against publically perceived financial terror.

The term "financial terror" certainly captures precisely how a lot of people feel about what has happened on Wall Street.

He refers to government involvement as a redistribution of wealth and tells us that it will inevitably lead to slower growth:

... as wealth is redistributed, and the invisible private hand of Adam Smith begins to resemble more and more the public fist of government, then asset values should be negatively affected. First comes the haircutting and burden sharing, most recently evidenced by Chrysler and soon to be played out via the stress testing and equity dilution of government ownership of ailing banks. In those footsteps, however, will follow a slower rate of economic growth, not just in the U.S., but worldwide as heretofore libertarian capitalism is bridled, saddled and taught to trot instead of gallop over the investment plains.

He once again reminds us of risk:

Capitalism is about risk taking and if you're not a risk taker, you should have your money in the bank, Treasury bills, or a savings bond, not the levered investment of a bank or an aging automobile company. Let there be no company too big, too important, or too well-connected to fail as long as the systemic health of the economy is not threatened.

Alas, he does not delve into the nature of detecting (in advance) the negative condition of an institution of "as long as the systemic health of the economy is not threatened." That is the trick that "the authorities" face. For example, is GM a threat to "the systemic health of the economy"?

-- Jack Krupansky


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