Bill Gross Continues Blasting "The Bernank's" Ponzi Policies, Self-Flagellates "Newport Beach" Multimillionaires

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Yet another odd letter comes from under Bill Gross' pen, in which he continues to bash "The Ben Bernank's" Ponzi policies ("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") while making it all too clear that the only beneficiaries are "Newport Beach mega-millionaires." Has Warren Buffet-style self-flagellation become trendy among the billionaire jet set? Lastly, Gross makes it clear that the American economy is doomed in the long-run absent a "policy revolution" in DC: "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 other developing economies, both in asset and in currency space. The United States in short, needs to make things not paper, but that is not likely unless we see a policy revolution in Washington DC. In the meantime, our unemployed will continue to fill out forms and stand in line." And the Newport-beach mega-millionaires will continue to front-run the Fed. Nothing ever changes indeed.

From Bill Gross' Monthly Investment Outlook (who has been buying MBS on margin like there is no tomorrow).

Allentown



Well we’re living here in Allentown
And they’re closing all the factories down
Out in Bethlehem they’re killing time
Filling out forms
Standing in line
And we’re living here in Allentown

       – Billy Joel, 1982

We’re all Allentowners now. Granted, 90% of the
workforce is still reporting for work on time, but our standard of
living, our confidence in the future – we’re standing in line in
Allentown. Lost in the policy debate surrounding the elections and the
subsequent demonisation of the Federal Reserve’s Quantitative Easing
(“QE2”) policies has been any recognition of why we no longer live on Ronald Reagan’s shining hill or how we might possibly reclaim higher ground. There are two fundamental explanations:

1) The global economy is suffering from a lack of aggregate demand.
In simple English that means that consumers are not buying enough
things and that companies are not hiring enough people because of it.
Growth slows down, especially in developed as opposed to developing
countries, and the steel mills of Allentown, USA and Sheffield, England
close down.

This shortfall of global demand is a nearly
impossible concept to grasp amongst politicians and their citizenry.
Don’t people always want to buy more things and isn’t demand
theoretically insatiable? They do, and it is. Yet economic growth is a
delicate dance between production and finance and when a nation’s or a
family’s credit card gets maxed out, then demand/spending slows
measurably. We are witnessing these commonsensical repercussions across
the entire continent of Europe today and to a lesser extent in the
United States.

Developing nations and
their consumers want to buy things too. And while their economies are
growing fast, their overall size is not yet sufficient to pull along the
economies of Europe, Japan and the US. Their financial systems are
still maturing and reminiscent of a spindly-legged baby giraffe, having
lots of upward potential, but still striving for balance after a series
of missteps, the most recent of which was the trio of the 1997–98 Asian
crisis, the 1998 Russian default and the 2001 Argentine default. And so
their policies are oriented towards export to debt-laden developed
nations instead of internal consumption, leaving a gaping hole in global aggregate
demand. China is a locomotive to be sure, but it cannot pull the global
economy uphill on the basis of mercantilistic exports alone. It needs
to develop many more of its own shopping malls and that will take years,
if not decades.

2) With insufficient demand, nations compete furiously for their share of the diminishing global growth pie.
All look to borrow growth from somewhere else. Nearly a half century
ago, the undisputed champion of global growth was the United States – it
held all the cards: an unscathed post-WWII industrial base, an
acknowledged Bretton Woods reserve currency and an educated workforce
able to out-innovate any and all competitors. No wonder our policies
encouraged open markets and free trade policies that would only feed the
United States hegemon. At some point in the 1970s to 1980s, however,
the rest of the world began to catch up. Japan produced better cars than
Detroit, the Iron Curtain fell, and the rise of China was soon to rock
American/developed economies out of their presumption that the world was
their export oyster. Billy Joel’s Allentown was transformed from an
iron and coke/chromium steel behemoth into an unemployment centre,
filling out forms – standing in line.

And so the United States and its developed
economy counterparts face an unfamiliar crisis of unrecognised
dimensions and potentially endless proportions. Politicians and
respective electorates focus on taxes or healthcare when the ultimate
demon is a lack of global demand and the international competitiveness
to thrive. The solution for more jobs is seen as a simple quick step of
extending the Bush tax cuts or incenting small businesses to hire
additional workers, or in the case of Euroland, shoring up government
balance sheets with emergency funding. It is not. These 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
.
Free trade and open competition, like a stretched rubber band, have
snapped the US and many of its Euroland counterparts in the face. By
many estimates, Chinese labour works for 10% or less than its American
counterparts. In addition, and importantly, it is able to innovate as
quickly or replicate what we do. Jobs, in other words, can never come
back to the level or the prosperity reminiscent of 1960s’ Allentown,
Pennsylvania until the playing field is levelled.

This phrase of a “level playing field” opens up endless possibilities. If, in fact, the solution to how
we can reclaim the vision of Ronald Reagan’s “shining hill” and the
Allentown of decades past is to “level the playing field,” there are
obviously a number of ways to do it. 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 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.

Faced with these two decidedly different routes
to “level the playing field” it seems obvious that the United States is
opting for “Easy Street” as opposed to “Buckle Down Road.” Granted,
“The Ben Bernank” as a YouTube cartoon rather hilariously labelled him,
has for several months importuned Congress and the Executive Branch to
institute substantive reforms, while he attempts to keep the patient
alive via non-conventional monetary policy.
But very few others are
willing to extract their heads from the sand. The President’s debt
commission with its insistence on low personal and corporate income tax
rates and a mere 15 cent increase in the gasoline tax was one example.
The Republicans’ reluctance to advance detailed ideas for budget
balancing is another. And the Democrats’ two-year focus on the biggest
entitlement program since Social Security – healthcare – as opposed to
fundamental reforms to counter our lack of global competitiveness – is
perhaps the most grievous example of lost opportunity. Unlike the United
Kingdom, where Prime Minister Cameron has championed fiscal
conservatism, or even Euroland, which is being forced in the direction
of Angela Merkel’s Germanic work ethic, the United States seems to
acknowledge no bounds to what it can spend to bolster consumption or how
much it can print to support its asset markets. We will more than likely continue to “level the playing field” via currency
devaluation and an increasing emphasis on trade barriers and
immigration, as opposed to constructive policies to make this country
more competitive in the global marketplace
.

If so, investors should recognise that an
emphasis on currency depreciation and trade restrictions are counter to
their own interests. Not only would their dollar-denominated investments
lose purchasing power over time from a global perspective, but they
would do so also via a policy of near 0% interest rates, which are
confiscatory in real terms when accompanied by positive and eventually
accelerating inflation. In addition, although corporate profits are in
many cases broadly diversified across
national borders,
there should be little doubt that the objective of tariffs and trade
barriers is to advantage domestic labour as opposed to domestic capital;
profits, therefore will ultimately not benefit.

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 other
developing economies, both in asset and in currency space. The United States in short, needs to make things not paper,
but that is not likely unless we see a policy revolution in Washington
DC. In the meantime, our unemployed will continue to fill out forms and
stand in line. We’re living here in Allentown.

William H. Gross
Managing Director