Is Bill Gross Playing Us? - John Rothe | Portfolio Manager, Quant, Tech Geek, And Sometime Superhero To My Kids

Is Bill Gross Playing Us?

PIMCO fund manager, Bill Gross (who manages the world’s largest bond fund) most recent investment outlook is predicting a US default.

Some interesting quotes:

“75% of the budget is non-discretionary and entitlement based. Without attacking entitlements – Medicare, Medicaid and Social Security – we are smelling $1 trillion deficits as far as the nose can sniff. Once dominated by defense spending, these three categories now account for 44% of total Federal spending and are steadily rising.”

“…after defense and interest payments on the national debt are excluded, remaining discretionary expenses for education, infrastructure,agriculture and housing constitute at most 25% of the 2011 fiscal year federal spending budget of $4 trillion. You could eliminate it all and still wind up with a deficit of nearly $700 billion!”

“Previous Congresses (and Administra- tions) have relied on the assumption that we can grow our way out of this onerous debt burden. Perhaps we could, if it was only $9.1 trillion, as shown in Chart 2. That would be 65% of GDP and well within reasonable ranges for sovereign debt burdens. But that is not the reality. As others, such as Pete Peterson of the Blackstone Group and Mary Meeker, have shown much better and for far longer than I, the true but unrecorded debt of the U.S. Treasury is not $9.1 trillion or even $11-12 trillion when Agency and Student Loan liabilities are thrown in, but $65 tril- lion more! This country appears to have an off-balance-sheet, unrecorded debt burden of close to 500% of GDP! We are out-Greeking the Greeks, dear reader.”

“the only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways:

1) outright via contractual abrogation – surely unthinkable,
2) surreptitiously via accelerating and unexpectedly higher inflation – likely but not significant in its impact,
3) deceptively via a declining dollar – currently taking place right in front of our noses, and
4) stealthily via policy rates and Treasury yields far below historical levels – paying savers less on their money and hoping they won’t complain.”

So is Mr Gross predicting doom and gloom – OR – trying to get a better entry point for his portfolio?

Earlier in the year, Bill Gross mentioned that he sold his entire portfolio of US Treasuries. This week in an interview with Reuters,  Mohamed El-Erian (who is PIMCO’s CEO and  former president and CEO of Harvard Management Company, the entity that manages Harvard’s endowment and related accounts) stated that PIMCO may get back into Treasuries if they got cheaper.

I think if you are predicting default, you wouldn’t want to get back into US Treasuries at all – even at a cheaper price.

Anyway, here is Bill Gross’s April Investment Outlook. He does raise some interesting points, but I also think he is trying to move the bond market a bit in his favor.

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