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Shake Hands With Uncle Sam

Posted by Larry Doyle on February 27, 2009 5:30 AM |

uncle-samWhen trading bonds on Wall Street, I always wanted to know what the largest accounts were doing. A handful of these accounts were so massive that in order to make a meaningful change in their portfolio they had to execute trades of monstrous size. In executing trades with these clients, there was enormous risk. That said, if I did not provide enough liquidity to the accounts then we would stop seeing their inquiry. Information is everything, so not seeing their business was even more dangerous than printing some of it. Given this balancing act, I would try to pick and choose my spots. Amongst these clients is the largest bond manager in the country, Pacific Investment Management Company, otherwise known as Pimco, headed by the legendary Bill Gross (one of our Economic All-Stars highlighted in the lower left sidebar).   

Bill offers his thoughts on a monthly basis. Anybody with even passing interest in the markets should read his remarks. I will offer an overview:

1. Thoughts on recession versus depression?
Not yet determined.

2. How did this happen so fast?
He comments on the collapse of the shadow banking system, which I highlighted in a piece on November 12th,  The Wall Street Model Is Broken…and Won’t Soon be Fixed”

3. How bad could this get?
His estimates of the drop in GDP and employment are better left unprinted. It’s not pretty.

4. What can be done?
Policies in content and magnitude not contemplated since FDR need to be implemented.  We need credit creation and foreclosure prevention, not bank nationalization. Trillions must be provided along with global coordination.

5. Are there negative consequences from going “all in”? Will politics destroy capitalism while trying to save it?
The Faustian bargan is acceptable if only to stabilize an even more dangerous deflationary debt liquidation.

6. Why do we assume the United States can unilaterally do whatever it wants?
Watch the dollar. If it falls hard there may be nothing policy makers can do to restore the ensuing financial crisis.

7. What about nationalizing banks?
Roubini and other proponents of this policy have not thought this through. It would be very destabilizing. 

8. How should I invest my money? 
Shake hands with Uncle Sam, meaning purchase government guaranteed assets. (Treasurys, government guaranteed debt such as GNMAs)

In summary, Mr. Gross offers that it is hard to trust policymakers in Congress. There is too little consistency, not enough boldness, and too much political game playing in Washington. Not exactly a ringing endorsement.

I hope I have whet your appetite. He does not disappoint. Read his entire Investment Outlook  and make a point to read him every month.


  • fiscalliberal

    “In summary, Mr. Gross offers that it is hard to trust policymakers in Congress. There is too little consistency, not enough boldness, and too much political game playing in Washington.”

    Lets see – is he not the guy who picked up Alan Greenspan as a consultant who is supporting nationalization which is kind of a reversal of Greenspans Ayn Rands ideology.

    So – some thing is not ringig true here.

  • Larry Doyle

    Fiscal…I guess the point is Mr. Gross is wearing one hat as the world’s largest bond manager representing his investors and another hat as a manager/citizen offering his insights on our political process.

    Your instincts are accurate but on this one I will actually give Mr. Gross credit for openly criticizing Congress. Most managers would look to gain Greenspan’s leverage without the willingness to make the public criticism.

    In summary, one can say that Mr. Gross is trying to have his cake and eat it too.

    I post his outlook here for the very simple reason that given that he manages THE largest bond portfolio I want to know what he is thinking and doing, much as I did when I was trading. I do not necessarily take everything he says at face value.

  • Larry Doyle

    Fiscal…Given your interest and instincts on the impact of CDS, I think you would find the lead piece on Greg Mankiw’s blog to be of interest. Greg is one of our Economic All Stars in the left sidebar. He writes about The Formula That Killed Wall Street.

    Wish I could say, “Enjoy” but certainly of interest.

  • fiscalliberal

    Please understand, I think your premis in terms of publishing the view of the major bond holder is right on. In fact, on CNBC, I make it a point to listen to the PIMCO people as they seem to be more balanced.

    I was just surprised to see he had hired Greenspan and what value could he add to their claity of thinking.

    In general, I think we need to come to the view that the last 8 to 10 years has been dominated by a bunch of ideologues in many area’s and they were allowed to dominate. I absolutely buy into the markets, however these people turned out to be corrupt people expecting things to go their way. Kind of like mama’s boy’s who never had to face reality.

    What is disconcerting is the rest of the market let them go with out reigning them in. Now we are expected to subsidize them with no morket discipline. That is the thing that I find grating. I agree with Gross that Washington is corrupt. However his hiring Greenspan identifies him with the group more than he would like.

    What one does outshouts what one says

  • Larry Doyle

    Well said…

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