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The Wisdom of Bill Gross
By JLP | January 18, 2008
This is from Part 1 ($) of the Barron’s Annual Roundtable that was published in this week’s Barron’s:
Barron’s: It looks like we’ll have a few things to talk about this year. Let’s start with Bill, the only person in the room who mentioned last January the possibility of a credit disturbance. Bravo, Bill.
Gross: So, I’m the first of the grim reapers. I’ll start with the economy. It’s important to distinguish between the U.S. economy and the global economy; the U.S. economy is much worse, and is nearing an inflection point. We’re looking at slow growth, and maybe, in a quarter or two, negative growth. Risk markets are at risk, and without the ability to pump up consumption through asset inflation, we’re going to have a difficult time in 2008 and beyond. For years the economy’s growth has been predicated on asset inflation — stocks in the 1990s, then housing. There are no large, classic asset categories left to inflate, and as some assets deflate — namely housing — credit contracts. Economic growth will be below zero or mildly above it for a long time, and nothing like what we’ve grown used to in the past 10 to 15 years. Get used to anemic growth or a mild recession in terms of the economy, job creation and wealth creation. It’s not a favorable forecast.
I want to emphasize his main point:
“Risk markets are at risk, and without the ability to pump up consumption through asset inflation, we’re going to have a difficult time in 2008 and beyond. For years the economy’s growth has been predicated on asset inflation — stocks in the 1990s, then housing. There are no large, classic asset categories left to inflate, and as some assets deflate — namely housing — credit contracts.”
He’s right!
Of course we can always count on the government to come along and bail everyone out. Yeah, right… Although that may “work” in the short run, eventually the market’s bull run has to be based on something substantial.
Topics: Investing | 3 Comments »
January 18th, 2008 at 8:59 pm
It all comes back to our lack of savings as a nation. Not only are foreign governments the largest purchaser of our Treasuries, but they are now buying our other financial assets. All of the banks are receiving cash infusions from foreigners who are bogged down with dollars.
We are a nation that depends on debt to grow. This cannot continue. No one or nation has gotten rich through debt. The one positive about a recession is it typically motivates folks to save. The savings then creates wealth as it is invested in new business and industry.
January 19th, 2008 at 6:23 am
if Bill was only talking about a credit disturbance last january, then he must have been living in la la land like many other people. we were talking about the credit disturbance, especially in mortgages, ever since ARMs and interest only loans started to gain popularity among the masses a few years earlier. It isn’t rocket science that if people cannot afford something to begin with, and do not have the unlimited cash printing ability or write off ability, that there would be something painful to come.
as far as debt, you can’t have appreciation and positive growth without it. debt is required for capital investment. there are very few companies and people who can simply pay in cash outright for any purchase. the whole stock market is essentially debt. so talking about how bad debt is, is really ignoring the fundamental basis for how the economy works. moreover, who cares that more foreigners are spending the dollars that they have hoarded? just means that someone else is buying our goods and services, which to me sounds exactly like what the economy needs. if americans are strapped for cash, then the people with the u.s. dollars will be the ones to help out.
there is a classic asset to inflate that Goss is forgetting about. The dollar. the currency balances foreigners hold and will start to spend will invariably lead to appreciation in other classic assets like housing. he’s also wrong about u.s. economy versus the global economy. many other western countries have and have had worse economic fundamentals (i.e. higher unemployment, higher inflation, etc); moreover, since the u.s. is a huge consumer juggernaut, talking about the u.s. economy itself is rather useless.
January 19th, 2008 at 1:21 pm
I think an important part of this problem is jobs and the underpinnings of wealth creation in this country — we’ve simply allowed too many jobs to go offshore and we’ve come to depend too much on consumerism to keep the economy going.
I’m not opposing the creation of jobs in other countries — I don’t begrudge China, India or any other country wanting to build their infrastructure or the citizens of those countries wanting to have an increasing standard of living or better jobs.
What I do think is wrong is incentivizing the growth of those economies by moving our own manufacturing base (and increasingly our services base) out of this country.