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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.


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