Bill Gross' Investment Outlook

December 8, 2010 11:04 AM

In his easily digested and insightful summary of America's long term outlook, Bill Gross writes that we're all living in Billy Joel's Allentown now and that the easy solutions, as is often the case, aren't necessarily the right ones.
posted by jimmymcvee (56 comments total)

He may be right, I may be crazy, but I can't take anyone seriously who spells "alliance" with a "z."

And that hairdo doesn't help either.
posted by entropicamericana at 11:06 AM on December 8, 2010 [1 favorite]

If there's anything this ultrawealthy mutual fund manager knows, it's what it's like to be an unemployed steelworker.
posted by Horace Rumpole at 11:07 AM on December 8, 2010 [10 favorites]

"Fixed-Income Analyst Society Inc. (FIASI) hall of fame"

Somehow I'm disturbed there is even such a thing as this.
posted by HuronBob at 11:08 AM on December 8, 2010 [1 favorite]

Bill Gross has spent the last ten years of career talking his book. Big big big grain of salt needed when you read his stuff. The Allentown scenario is an argument for fixed income not being amazingly overpriced right now, because inflation and higher real rates are unlikely with structurally lower employment and demand. Bill Gross is a fixed income manager. Pimco is also making a big push into EM fixed income and equities.
posted by JPD at 11:10 AM on December 8, 2010 [3 favorites]

That Allentown video always reminds me of the Steelworker's dance party from the Simpsons.
posted by chambers at 11:10 AM on December 8, 2010 [4 favorites]

"Fixed-Income Analyst Society Inc. (FIASI) hall of fame"

Conveniently located in the beautiful Cayman Islands!
posted by theodolite at 11:11 AM on December 8, 2010 [4 favorites]

Simple rule: Anytime anybody anywhere says "competitive in the global marketplace", they mean "continue to destroy the middle and lower classes, and the environmental and regulatory protections than made the US the most powerful economy on the planet."

The goal of these fucks isn't to raise Bangledesh workers to American standards, it's to crush American workers down to Bangledesh standards.
posted by eriko at 11:12 AM on December 8, 2010 [36 favorites]

But my mother didn't dance in the USO ...

Seriously, Bill Gross is among the smartest human beings on the planet. He's like a benevolent supervillain. If only we could harness his brainpower for good...
posted by Cool Papa Bell at 11:14 AM on December 8, 2010 [1 favorite]

That Allentown video always reminds me of the Steelworker's dance party from the Simpsons.

Really, how many steel mills have giant, open-stalled showers right on the smelting floor?
posted by The 10th Regiment of Foot at 11:17 AM on December 8, 2010

Most people I know who are unemployed are living in Margaritaville.

I mean, if we're going to get specific about the metaphorical towns we are living in according to pop songs of the 1980s.

If I may continue.

Clearly these times call for us to build a new city on Rock and Roll (fiscal prudence). Wasteful spenders would prefer to live it up in Swingtown (entitlement spending), but I recommend we head to Kokomo (debt reduction plan) - we can get there fast, but once there it would prudent for us to take it slow.
posted by (Arsenio) Hall and (Warren) Oates at 11:17 AM on December 8, 2010 [12 favorites]

My dad did fight in the Second World War. We spent two weeks on the Jersey Shore each summer, which doesn't really rhyme as well.
posted by fixedgear at 11:20 AM on December 8, 2010

From the article (emphasis mine):

And yes, policymakers at the Fed write trillions of dollars’ worth of checks under the guise of quantitative easing, a policy which takes Charles Ponzi one step further by purchasing the government’s own paper in a last gasp effort to support asset prices.

Isn't "purchasing the government's own paper" pretty much how the Fed sets the Fed rate? What is Bill Gross saying here?
posted by mhum at 11:22 AM on December 8, 2010

Really, how many steel mills have giant, open-stalled showers...

NOT ENOUGH.
posted by nomadicink at 11:23 AM on December 8, 2010 [2 favorites]

As I recall the only thing shining on Reagan's hill was the blinding lustrous golden light of the administration's denial of the exploding HIV crisis. Oh, and maybe the hair of the lead singer in A Flock of Seagulls.
posted by blucevalo at 11:23 AM on December 8, 2010

We didn't start the fire.
posted by studentbaker at 11:23 AM on December 8, 2010

What is Bill Gross saying here?

Quanitative Easing.
posted by JPD at 11:24 AM on December 8, 2010

Flagged. There is already an existing open Billy Joel thread.
posted by Eideteker at 11:25 AM on December 8, 2010 [4 favorites]

All of Billy Joel's greatest hits played at once.
posted by mr_roboto at 11:26 AM on December 8, 2010 [3 favorites]

When the fed engages in Open Market Activities it is buying back debt it previously sold to third parties or it is selling it to them. in quantitative easing it is just selling it to itself to force the money supply to increase.
posted by JPD at 11:26 AM on December 8, 2010

Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and other developing economies, both in asset and in currency space.

What are some ways a US retail investor can effectively invest in developing economies (effectively meaning "have some reasonable decoupling from the negative effects of US fiscal policy")? How does holding USD-denominated "emerging/developing/global markets" mutual funds measure up? Does it actually come down to acquiring the appropriate foreign currencies and then investing directly on foreign exchanges? (which sounds kind of scary to this passive investor). Any middle ground?
posted by kanuck at 11:28 AM on December 8, 2010

Anytime anybody anywhere says "competitive in the global marketplace"...

If you can't think of a single American policy that's both regressive and inefficient, you're not trying very hard.
posted by ripley_ at 11:30 AM on December 8, 2010

Anytime anybody anywhere says "competitive in the global marketplace", they mean "continue to destroy the middle and lower classes..."

Also, anytime anybody anywhere says "the American people", they are trying to peddle bullshit to same.
posted by Joe Beese at 11:30 AM on December 8, 2010 [2 favorites]

Any middle ground?

Maybe but probably not for a passive investor. Investing in emerging economies can have some serious risk and usually calls for some active researching.
posted by josher71 at 11:33 AM on December 8, 2010

Sorry. This is funkytown.
posted by yesster at 11:34 AM on December 8, 2010 [2 favorites]

Nah, it's, like, a crisis of hegemony, man.
posted by Abiezer at 11:35 AM on December 8, 2010

He may be right, I may be crazy, but I can't take anyone seriously who spells "alliance" with a "z."

You aren't crazy, just lacking in a bit of knowledge. Allianz is a German company, not a spoof on "Alliance."


If there's anything this ultrawealthy mutual fund manager knows, it's what it's like to be an unemployed steelworker.

While I understand your point, the heart of Gross' message is that the political squabbling is resulting in the massaging of our structural issue rather than addressing them and equiping our economy for competitive growth moving in a 21st century where global competition has already ravaged our manufacturing base and will not stop at that.


Bill Gross has spent the last ten years of career talking his book. Big big big grain of salt needed when you read his stuff. The Allentown scenario is an argument for fixed income not being amazingly overpriced right now, because inflation and higher real rates are unlikely with structurally lower employment and demand. Bill Gross is a fixed income manager. Pimco is also making a big push into EM fixed income and equities.

Very true. He's not too happy about QE and MP uprooting his playing field.


Simple rule: Anytime anybody anywhere says "competitive in the global marketplace", they mean "continue to destroy the middle and lower classes, and the environmental and regulatory protections than made the US the most powerful economy on the planet."

The goal of these fucks isn't to raise Bangledesh workers to American standards, it's to crush American workers down to Bangledesh standards.

I can empathize with your point, but can you empathize with his? We saw the plight of the US auto-sector as a result of foreign competition having a more competitive structural cost basis than ours; Ford and GM engineers weren't vastly less competent than their rivals at Toyota and Honda; the production cost in manufacturing their product was far more skewed, which forced the company to cut corners to provide a competitive product in terms of cost. We all know how Americans look for the lowest common denominator when it comes to cost (e.g. Wal-Mart), so their hands were tied.

Of course, this problem is exacerbated by diminished real wage returns over the last decade for middle class consumers, but in effect, we are rooting to the same problem: a vicious circle indeed.

------------

Addressing the Gross' message, I think he omits one key driver to our prosperity in the future: this is squarely education. IMO we have ceded the war in base manufacturing. Our standard of living handicaps our ability to compete with the hungry developing factories. However, we can continue to compete via innovation and skilled labor. In order to address this and productivity as the driver of growth in a developed economy (which cannot simply rely on population growth and basic economic restructuring), we need to take a hard look at our education system and to ensure that it is the envy of the world - not just at the university level, but from infancy to adulthood.

Without a drastically improved education system, the brain-drain will continue to hollow out our economy and we may miss the next home run when the next Zuckerberg or Brin cobbles together his world beater at the New Delhi Institute of Technology, rather than in Boston.
posted by Hurst at 11:39 AM on December 8, 2010 [12 favorites]

There is a negative correlation between growth and returns. Counterintuitive I know, but thats what the historic data will tell you.

EM assets are priced insanely. That misvaluation is going to trump any growth in cashflows.

My absolute favorite factoids being
-Malaysia is considered a better long-term credit risk then Austria despite uhm different approaches to the rule of law and a track record of abuse
-Mexico - a country that has defaulted three times in the last 35 years was able to issue 100 year paper at 6%.
posted by JPD at 11:39 AM on December 8, 2010 [1 favorite]

The goal of these fucks isn't to raise Bangledesh workers to American standards, it's to crush American workers down to Bangledesh standards.

The whole world is going to be like Bangledesh, as soon as every corner of the globe is as crowded as Bangledesh. We can't go back to the living standards of the fifties because THERE ARE TWICE AS MANY PEOPLE NOW. And that's just in the US!
posted by subdee at 11:42 AM on December 8, 2010 [3 favorites]

Gross also ignores that fact that one of the side effects of our insanely loose monetary policy is making our export industries more competitive while making the things we import more expensive. This is good for industral employment.
posted by JPD at 11:42 AM on December 8, 2010 [1 favorite]

Please bear with me on this. I went to Best Buy one day. Looking at computer things. Elderly employer, clearly retired from job and working part time here. I noted that everything made in Far East and that would soon make Americans unable to buy the stuff made out of the country. He straightened me out. Goes like this.
1.large companies are now global and owe no loyalty to the US or any specific country but only to The Company.
2. As poor nations continue to make things, their people get wealthier each year.
3. American workers get poorer. True they will buy less, can afford less.
4. But: India and China etc with huge populations and growing all the time will get on average richer all the time and that means:
5. A MUCH BIGGER AND RICHER MARKET
6. At the same time the much smaller and declining American market means much less.
7. So why worry about the American worker and the smaller market he represents?

I left the store. Didn't buy anything. Didn't feel very optimistic either.
posted by Postroad at 11:46 AM on December 8, 2010 [3 favorites]

JPD: When the fed engages in Open Market Activities it is buying back debt it previously sold to third parties or it is selling it to them. in quantitative easing it is just selling it to itself to force the money supply to increase.

Pardon my ignorance, but I'm not sure how to interpret "it" in the second sentence. I assumed "it" referred to the Federal Reserve. What exactly is the Fed buying from itself? As far as I know, the Fed doesn't issue bonds like the Treasury department does. Is the idea that the Treasury department is issuing a ton of new debt only to have the Fed buy it up? Perhaps I'm completely misinterpreting the situation, but that doesn't seem to jibe with descriptions I've read.
posted by mhum at 11:48 AM on December 8, 2010

Postroad is Rorschach? hurm.
posted by entropicamericana at 11:49 AM on December 8, 2010 [2 favorites]

Ford and GM engineers weren't vastly less competent than their rivals at Toyota and Honda...

I don't know if the engineers are necessarily the ones to blame, but it's pretty indisputable that American cars were far inferior to Japanese ones in every way possible for a large number of years. Unsafe, gas-guzzling, over-priced pieces of junk.
posted by DU at 11:51 AM on December 8, 2010

You aren't crazy, just lacking in a bit of knowledge. Allianz is a German company, not a spoof on "Alliance."

Huh, I'll be damned. BUT VHY IST IT NACHT AXIS INVESTOREN?
posted by entropicamericana at 11:54 AM on December 8, 2010

He's absolutely right, both in his description and prescription. He doesn't really hammer enough on the fact that we're in trouble, and demand is dropping, because we have too much debt, and that consumer growth for the last twenty years or so has mostly been debt-fueled. (pretty much ever since Reagan, in fact.)

The way to pay down debt is to make and sell stuff, or else export services that help OTHER countries make and sell stuff. It all comes down to production, and we've gotten ourselves hugely into debt buying unproductive things.

There is no easy or "good" way forward from here. All paths will hurt. We've eaten a lot of our seed corn. Things are certainly salvageable, with sensible policies from government, but sensible policies are also deeply unpopular, because they all involve pain now to avoid more pain later.

And there is nothing, nothing that voters hate more than economic pain, so no matter how bad it will hurt us in the long run, they'll vote for the people promising short-term relief.
posted by Malor at 11:54 AM on December 8, 2010 [1 favorite]

The good old days weren't always good and tomorrow ain't as bad as it see-ee-eems.
posted by goethean at 11:55 AM on December 8, 2010

It pretty much all boils down to "too many people, not enough food/job/resources".
posted by Old'n'Busted at 12:02 PM on December 8, 2010 [1 favorite]

He may be right, I may be crazy, but I can't take anyone seriously who spells "alliance" with a "z."

And that hairdo doesn't help either.

Allianz = Aliens
posted by inconsequentialist at 12:02 PM on December 8, 2010

mhum - my writing is lazy. Yes the treasury creates the debt in both circumstances. The fed manages money supply.
posted by JPD at 12:03 PM on December 8, 2010

I can't take anyone seriously who spells "alliance" with a "z."

That's German for "alliance," smart guy. Allianz SE, the parent company, is based in Germany.

Bill Gross has spent the last ten years of career talking his book.

This is the correct perspective on this analysis. Bill Gross runs PIMCO. Everything everything EVERYTHING he does or says is an effort to sell bonds.

Generally speaking, bond vendors have an incentive to spread economic doom and gloom (up to a certain point) because when corporate profits tank, or are expected to, their equity shares ("stock") tank and so everyone flees to investments in bonds. Even when the economy picks up, though, the price of bonds can't be suppressed too far because if you hold a bond to maturity, it pays you back principal + interest. Hence, bonds are conventionally regarded as a very, very stable investment vehicle.

But before you start to regard Bill Gross as some smart, sanguine investor who is On To Something, consider that the two primary ways that bond values can be negatively impacted are defaults and devaluation of the currency in which the bond was offered. Well, what do you know, currency devaluation is also a great way to kick start the export sector and get an economic recovery going. And the US banks and government have already gone to extraordinary lengths to avoid bond defaults via massive bailouts which amount to government (i.e., taxpayer) guarantees, which has wrecked the US fiscal situation and severely curbed our collective ability to put that money where it actually needs to go, i.e., into the hands of the unemployed.

This is all to say that essentially, Gross and other bond vendors have long since gone beyond predicting economic pain to actively seeking it, so that they may usher in policies that benefit themselves and their clients. This article is simply part of a PR campaign to validate this approach in the public consciousness.
posted by rkent at 12:03 PM on December 8, 2010 [10 favorites]

To rkent's point - PIMCO implored the federal government to take over Fannie and Freddie. Gross was lobbying behind it behind closed doors Why? becuase they knew crystalizing the mooted federal guarantees, into actual announced federal guarantees would be good for them. (And then of course once they were taken over it actually was economically rational for them to be run in a manner that virtually guaranteed their insolvency)

He's a very smart guy, he's also famously self-interested.
posted by JPD at 12:08 PM on December 8, 2010

It pretty much all boils down to "too many people, not enough food/job/resources".

It all boils down to operating Spaceship Earth correctly.
posted by mrgrimm at 12:11 PM on December 8, 2010

Also I should add by way of clarification:

If so, investors should recognize that an emphasis on currency depreciation and trade restrictions are counter to their own interests. Not only would their dollar-denominated investments lose purchasing power over time from a global perspective, but they would do so also via a policy of near 0% interest rates, which are confiscatory in real terms when accompanied by positive and eventually accelerating inflation.

The elephant in the room here is that a huge segment of the US population has nearly nothing in terms of hard assets and is not an "investor" in any way that Gross is using that word. Apparently in 2004 the median family net worth (and this includes their house, if any) was just over ZERO for the bottom 20% of the population, around $40K for the next 20%, and under $200K for the middle 20%. Remember, that's 2004 - how do you think that has changed since, say, 2008?

In short, currency devaluation and inflation are actually good for the bottom rung, probably as much as the bottom 1/3, of American families. When your debts are large compared to your assets, you want inflation to shrink the real value of those debts. Currency devaluation doesn't hurt your purchasing power if you buy domestic products, and if it helps increase production and therefore secure you a job, then it's a clear winner for you.

But if you own lots and lots of dollar-denominated assets, and people are obligated to pay you interest on them (bonds!!), then inflation and devaluation are terrible for you. Which side is Gross on? And how would his policy recommendations actually impact the people most severely affected by the economic downturn?
posted by rkent at 12:24 PM on December 8, 2010 [3 favorites]

Today, we Americans all work at Mister Cacciatore's down on Sullivan Street, across from the medical center.
posted by RobotVoodooPower at 12:28 PM on December 8, 2010 [3 favorites]

There's nothing "insightful" about this. He correctly identifies the problem, "[t]he global economy is suffering from a lack of aggregate demand."

He then launches into a vague tirade, and the only concrete suggestions within are *further demand suppression*, from his criticism of low personal tax rates to his praise of David Cameron (!?). (Wait, make that- !?!?!!!!!!!)
posted by bonecrusher at 12:43 PM on December 8, 2010

Billy Joels' Cosmic Latte?
posted by notyou at 12:53 PM on December 8, 2010

While trying to determine whether 'Movin Out' is a critique of materialism, I am, instead, reminded that Dipset never met a sample they didn't like.
posted by box at 1:08 PM on December 8, 2010

Look you can say that economics is just a collection of just so stories and contradictory assumptions about human behavior that economists combine until they get the results they want.* In other words, combining statements like this:

a) People need to work enough to support themselves
b) Therefore, poor people should get paid less so they'll work harder

- or -

a) People will invest their time in whatever produces the most utility
b) Therefore, rich people should get paid more so they'll work harder

well, that's just Standard Economic Practice (although you should replace the English sentences above with rhos and lambdas to disguise the fact that you never went past freshman calculus).

But Gross can't even get that part right. The correct collection of folksy wisdom^H^H^H^H^H^H^H^H^H^H^Hsophisticated economic analysis is one of these:

1:
a) The world suffered a massive demand shock due to a massive devaluation in speculative instruments.
b) Therefore, governments should supply another source of demand, with deficit spending, low taxes, low interest rates, etc

- or -

2:
a) The world economy is massively unbalanced, with developed economies providing demand by massive trade deficits and developing economies proving supply with
massive trade surpluses
b) Therefore, developed economies should develop their export industries and stop selling debt to developed countries

Gross is combining 1a with 2b. He can't even come up with a consistent set of platitudes to support his ideology. The internet is chock-full of better BS-artists.

Also, that song sucks.


* You can say this because, well, it's true.
posted by bonecrusher at 1:24 PM on December 8, 2010 [5 favorites]

I'm trading in my Chevy for a Cadillac-ack-ack-ack-ack-ack.
posted by kirkaracha at 1:25 PM on December 8, 2010 [1 favorite]

"Fixed-Income Analyst Society Inc. (FIASI) hall of fame"

It was originally "Fixed-Income Analyst Society Co." until they tried to make an acronym.
posted by aught at 1:49 PM on December 8, 2010 [3 favorites]

it's pretty indisputable that American cars were far inferior to Japanese ones in every way possible for a large number of years. Unsafe, gas-guzzling, over-priced pieces of junk.

Which is pretty easy to explain given the significantly higher cost of manufacturing the same car. In order to compete on price, American car manufacturers basically cut corners.

Although more fairly, I'm not sure that the US manufacturers actually 'cut' corners as much as they just didn't have them to begin with. They were in many ways just producing the same cars that they always had, but suddenly the Japanese were producing better cars, and the US manufacturers couldn't compete.

(The fact that they produced gas guzzlers really isn't much of a criticism, since until pretty recently that was exactly what consumers wanted. The only reason GM is even around in its shell-of-itself state is because they were able to sell really profitable trucks and large SUVs throughout the 90s and early 2000s that the import manufacturers were slow to compete with. You may not like those cars, but lots of people did, pretty much right up until gas hit $3/gallon.)

It's not like there was some magic engineering sauce that Toyota had that the Big Three didn't. The Japanese manufacturers had a cost structure that was lower, and it allowed them to do things like insource parts suppliers, increase quality control, and generally produce better cars. American companies couldn't compete on those things and almost certainly knew it, and given that limitation instead chose to try to compete on brand recognition and styling and by trying to anticipate the market better.

And in some respects it wasn't as stupid a decision as it might appear; even with their "far inferior" cars, GM sold the most popular vehicle in the US up until 1982, when Ford took it; a Japanese company wouldn't take the top-seller title until 1991. Together, American car companies managed to tread water for a very long time, although they did it at the expense of gaining a reputation for an inferior product, a move that it's difficult to assess the cost of.
posted by Kadin2048 at 3:07 PM on December 8, 2010 [1 favorite]

As someone who worked for Pennsylvania, with Pennsylvanians, I feel compelled to inform you, as they do me, that "Allentown" was based on Bethlehem, not Allentown. There weren't steelworks in Allentown. But it is more euphonious than Bethlehem.
posted by oneironaut at 4:12 PM on December 8, 2010

Kadin2048: "And in some respects it wasn't as stupid a decision as it might appear; even with their "far inferior" cars, GM sold the most popular vehicle in the US up until 1982, when Ford took it; a Japanese company wouldn't take the top-seller title until 1991. "

From your link, a good reason why the top car isn't as straightforward an indicator as you might imagine:

"Even though Honda, Toyota, Datsun, and Volkswagen had been building a fan base with multiple small car offerings in the '70s, Ford's offering of only one subcompact resulted in a high enough number of sales of it to achieve the number one position."

So if the argument is that fuel efficiency didn't matter, you'd rather look at total revenue.
posted by pwnguin at 5:04 PM on December 8, 2010

Clearly these times call for us to build a new city on Rock and Roll (fiscal prudence)

I feel compelled to point out that such a city would be the worst city ever.
posted by philip-random at 6:17 PM on December 8, 2010 [1 favorite]

The singularity can't get here soon enough.
posted by bardic at 7:10 PM on December 8, 2010

We can sell cool, but I guess I really mean ads.
posted by MNDZ at 7:56 PM on December 8, 2010