Friday, December 3, 2010

[Video] PIMCO's Bill Gross' December Letter - We're All Living in Allentown, PA

PIMCO's Bill Gross' monthly letter for December is out and it speaks to a lot of themes FMMF has been touching on for years - a very nice read for those of you not familiar with his work.  I also embedded a video of an appearance of his yesterday on CNBC.

Full letter below - hit fullscreen to make it easy to read

Some key points:
  • The global economy is suffering from a lack of aggregate demand. With insufficient demand, nations compete furiously for their share of the diminishing growth pie.
  • In the U.S. and Euroland, many policies only temporarily bolster consumption while failing to address the fundamental problem of developed economies: Job growth is moving inexorably to developing economies because they are more competitive.
  • 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 their developing economy counterparts, both in asset and in currency space. 

Two ways the U.S. can address this - the hard (but long term healthy) way or the easy (but long term unhealthy) way.  You can guess which way we will ultimately go....

The right way:
  • The constructive way is to stop making paper and start making things. Replace subprimes, and yes, Treasury bonds with American cars, steel, iPads, airplanes, corn – whatever the world wants that we can make better and/or cheaper. Learn how to compete again. Investments in infrastructure and 21st century education and research, as opposed to 20th century education are mandatory, as is a withdrawal from resource-draining foreign wars. It will be a tough way back, but it can be done with sacrifice and appropriate public policies that encourage innovation, education and national reconstruction, as opposed to Wall Street finance and Main Street consumption.
The more likely way:
  • The second route to the level playing field involves political and financial chicanery: trade and immigration barriers, currency devaluation and military domination of foreign oil-producing nations. It is by far the less preferable route, but unfortunately the one that is easier and, therefore, most politically feasible. Politicians do not get elected on the basis of “sacrifice.” They get elected by pointing to foreign demons, be they in the Middle East or in Asia. The Chinese yuan is a far easier target than the American workers earning ten times their Chinese counterparts and producing an inferior product to boot. Politicians also get elected by promising to keep taxes low, even for the rich, with the argument that small business owners cannot afford the increase. The real beneficiaries however, are the mega-millionaires of Wall Street and Newport Beach. 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.

Bill Gross December 2010 Market Commentary                                                              

[Oct 27, 2010: PIMCO's Bill Gross: Fed QE is "If Truth be Told, Somewhat of a Ponzi Scheme"]
[Jan 26, 2010: PIMCO's Bill Gross: Invest in 'Less Levered' Countries]

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