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Bill Gross Gives Sage Advice

Posted by Larry Doyle on May 7, 2009 5:30 AM |

Bill Gross provides a healthy perspective on the market in his May 2009 Investment Outlook. Gross is a seasoned professional. While many money managers blatantly display their biases, Gross is too polished not to shoot straight. I share his views in this piece including:

2007 was a screaming mimi with the subprimes – if only because the liar loans and no-money-down financing were reminiscent of a shell game, Ponzi scheme, or some other type of wizardry that was bound to lead to tears. 

Stating the obvious here, but I appreciate the fact that a Wall Street pro will implicate those within his industry for effectively running a scam. 

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 stand…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.

I have defined the future of investing as a Brave New World. In a similar tone, Gross is highlighting the shot across the bow taken by President Obama. As an investor, one needs to be on guard and not turn our back on Uncle Sam.  

The threat, of course, falls under the broad umbrella of “burden sharing” and is a difficult one to interpret and anticipate, if only because the concept is evolving in the minds of policymakers as well. But clearly, as this financial crisis has morphed from Bear Stearns to FNMA, Lehman Brothers, AIG and now Chrysler, the claims of stockholders and in some cases senior debt holders have suffered. Please hear me on this. That is the way it should be. 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.

Gross is making a stand here for capitalism and against the non-systemic government bailouts.  I personally believe some basic tenets of capitalism have suffered excessively in the process of promoting Obama’s social agenda. 

How does one invest during such a transition? Investors should recognize that this grassroots trend signals – most importantly – an increasing uncertainty of cash flows from financial assets. Not only will redistribution and reregulation lead to slower economic growth, but the financial flows from it will be haircutted and “burden shared” by stakeholders. In turn, the present value of those flows should reflect an increasing risk premium and a diminishing multiple of annual receipts.

Gross’ commentary here is telling us that with slower growth we should not expect rising equity markets (despite the recent rally). Look for wider bond spreads and/or higher rates given the increased risks and uncertainties in cash flows. 

Slower growth can be a public good if it avoids the cataclysmic effects of double-digit unemployment, escalating foreclosures, and fear of financial insecurity. But the Obama cannon shot will have financial consequences. Do not be deceived by the euphoric sightings of “green shoots” and the claims for new bull markets in a multitude of asset classes. Stable and secure income is still the order of the day.

Gross is not pulling any punches in telling us not to “be deceived by the euphoric sightings of green shoots.” Gross is not buying the perceived improvements in the economy. Given his rapport with those in Washington, he would not make this statement publicly.    

Sage advice from a seasoned pro.


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