Wednesday, February 2, 2011

PIMCO's Bill Gross' February 2011 Letter - Devil's Bargain

Bill Gross is out with his monthly letter and as always it is an entertaining read.  Much of this month's piece delves on topics we've discussed here the past 3+ years - how incentive programs in the U.S. have led to the economy serving the banking system (rather than vice versa as intended!), how we are herding our best and brightest into shuffling of paper, and how Ben Bernanke is engineering a grand theft from the saver class to the debtor & banking class.  While Gross is a recipient of great wealth due to the system, unlike most others in the industry at least he admits that sucking on the host like a leech is not exactly "God's work".

I am pleased that topics talked about in this relatively small corner of the internets (sic) are now being promoted by those with much more prominent voices.  When I say it, it is one thing (a few thousand people might agree) - when Bill says it, hundreds of thousands will read it.  That said, I don't think it matters because our political class and regulators are captured - and we live in a world of dogma (sacrifice all else for the bottom line, everything else will work out...or trickle down).  But at least it lets us to pretend that someday public servants that represent the masses will once more return to power.

Full letter here - a few clips below.
  • Money would also become the economic and political wedge for profound changes in American society. Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the “golden” route from Los Angeles to Honolulu. Today the yellow brick road begins on Wall Street or the City. 
  • Aside from supernova innovators such as Steve Jobs or Mark Zuckerberg, the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living. 
  • One of this country’s premier investment banks paid each of its 26,000 employees an average of $370,000 in 2010, nearly ten times the take-home pay of other American workers. Almost a quarter of the 400 wealthiest people on Forbes annual richest list make their money from money, whereas only 8% could make that claim in its first issue in 1982, and probably close to 0% when I first read my economic primer in 1966.
  • Having been part of this process and even a member of the rogue’s gallery itself, I know one thing for sure: This is not God’s work – it has the unmistakable odor of Mammon.    As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital: The S&L debacle of the early 1980s, the Asian crisis, LTCM, dotcoms, subprimes, Lehman and the resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money.
  • We may be categorized as “opportunists,” to be generous, but society’s “paragons” and a legitimate destination for a significant percentage of college graduates? Hardly. To paraphrase Paul Volcker, the only productive invention to come out of the banking industry over the past generation was the ATM.

Here is the "fat chance" section:
  • This country desperately requires a rebalancing of priorities. After readjusting the compensation scales via regulation and/or free market common sense, America needs to anoint a new set of Mensans who can create something more than a cash machine and make this country competitive again in the global marketplace. We need to find a new economic Keynes or at least elect a chastened Congress that can take our structurally unemployed and give them a chance to be productive workers again. 
  • We must have a President whose idea of “centrist” policy is not to hand out presents to the right and the left and then altruistically proclaim the benefits of bipartisanship. We need a President who does more than propose “Win The Future” at annual State of the Union addresses without policy follow-up. 
  • America requires more than a makeover or a facelift. It needs a heart transplant absent the contagious antibodies of money and finance filtering through the system. It needs a Congress that cannot be bought and sold by lobbyists on K Street, whose pockets in turn are stuffed with corporate and special interest group payola. Are record corporate profits a fair price for America’s soul? A devil’s bargain more than likely.

On to The Bernank, and the only solution central bankers know for every problem on Earth - flood the world with easy money, laying the ground for the next bubble and implosion.  At which time, they will (wait for it)... flood the world with easy money.
  • Today’s rock-bottom yields, however, have less to do with disinflation and more to do with providing fuel for an asset-based economy that promotes unsustainable wealth creation and a false confidence in perpetual capital gains. Real 10-year interest rates fell from over 5% in the early 1980s to just under 1% in recent months and have arguably been responsible for 3,000–4,000 Dow points and 2–3% annual appreciation in bonds over those three decades.  Today’s negative real yield on a 5-year TIPS (Treasury Inflation Protected Securities) is perhaps reflective of a market that has lost its fundamental value anchor. 
  • ..... The second and more surreptitious policy maneuver of currency devaluation raises import prices and lowers a country’s standard of living while allowing politicians to hold up their heads higher than countries that simply say – “Hell no, we won’t pay.”  
  • ....Fourth, and perhaps most deceptive in the barbershop quartet of policy tools that lessen debt loads, is the aforementioned “negative” or exceedingly low real interest rate that central banks impose on savers and debt holders.
  • To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools. And the asset class holder that it affects, or better yet, “infects,” is the small saver and institutions such as insurance companies and pension funds that hold long-term fixed income assets.
  • This is the framework that has been created by modern-day policymakers who have innovated far beyond their biblical counterparts. To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation. 

Those last dew points could have been taken verbatim from my piece a year ago [Mar 31, 2010: Ben Bernanke Content to Sacrifice American Savers to Recapitalize Banks and Benefit Debtors]

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