Curious why we dedicate precious virtual real estate to periodically bring to you the "billionaires behind the best presidents money can buy"? Bill Gross explains why?
Time To Vote, from PIMCO's Bill Gross
I’ll tell you what isn’t new. Our two-party system continues to play ping pong with the American people, and the electorate is that white little ball going back and forth over the net. This side’s better – no, that one looks best. Elephants/Donkeys, Donkeys/Elephants. Perhaps the most farcical aspect of it all is that the choice between the two seems to occupy most of our time. Instead of digging in and digging out of this mess on a community level, we sit in front of our flat screens and watch endless debates about red and blue state theologies or listen to demagogues like Rush Limbaugh or his ex-cable counterpart Keith Olbermann. To express my discontent, Genie, along with my continuing patriotism, I’ve created a modern-day version of our Pledge of Allegiance. Place your hand over your clock and recite after me:
I pledge allegiance to the flag of
the fragmented state of America,
and to the plutocracy for which now it stands,
a red and blue nation,
under financial gods
with liberty and justice for the 1(%).
Perhaps I should have asked Flavor Flav something more important. iPhones and next year’s 10-year Treasury yield aside, the biggest bet being wagered in financial markets these days is the bet on “financial repression,” “quantitative easing,” and the ultimate effect of both on the real economy. Of course even a genie couldn’t come up with a simple answer to that complex question. Sounds like something to be asked of a shrink from a couch, as opposed to a genie in a bottle. Whatever. But let me try and answer the repression and QE question with a little anecdote that I tell visiting clients.
About four years ago I opened up our family brokerage statement and searched with some effort to find the yield on our money market account. Interest rates, as I knew from my desk in Newport Beach, were plunging and I wondered just how much of a penalty we were being charged for the privilege of holding cash. My eyes finally fixed on the appropriate disclosure – hidden though it was – and it said “.01%.” Impossible! I thought. There must be a mistake here. Surely the decimal point was misplaced. Wasn’t “.01%” really 1% or even .1%, but definitely not “.01%.” That was close to nothing! Having counted cards at the blackjack table in my youth, I quickly calculated that over the next 12 months, our $10,000 balance would earn exactly $1.00. “Buy yourself a pair of shoes,” I said to Sue standing near my shoulder, “a pair of sandals at the weekend garage sale.” The remark was not well received. It seemed Sue was as sensitive about shoes as I was about interest rates. Note to self: Do not mention shoes with Sue except in the phrase “what a cute pair of shoes.”
Anyway, I quickly drifted back to my childhood days when I had a passbook at the local bank. Deposit rates were usually 4% or so back then, so I wondered how much money I would have needed then to produce the same $1.00 of interest I was receiving now. Twenty-five bucks! Whoa, $25 vs. $10,000! Seems like it was much better to be a saver back in 1958 and much better to be a spender in 2012. I could now take the $9,975 difference, spend it, and still have the same $1.00 of interest that I had back then! And that, Mr. Genie, with the Flavor Flav clock, is what is known as “financial repression.” By lowering interest rates to near zero through Fed Funds policy and quantitative easing, Ben Bernanke and his fellow central bankers are trying to force all of us to spend money.
Admittedly, the Fed’s theoretical foundation takes a different route to the same destination than does mine. Chairman Bernanke would say that by lowering yields, investors would logically sell their bonds to the Fed (QE I, II and III) and invest in something riskier and higher returning (high yield bonds, stocks and real estate). My $10,000 then, would do what capital has always done – gravitate to the highest reward/risk ratio available and in the process, stimulate investment and create jobs. The theoretical $9,975 that I might have chosen to “spend” in my first example would in the Chairman’s construct be eventually spent as well but in this case via investment and job creation, which in turn would lead to a virtuous cycle resembling the “old” as opposed to the “new” normal.
The difference between these two hypothetical models is critical. Is the money that is being made “available” through zero-based interest rates and quantitative easing being “spent” – or is it being “invested?” If it’s being spent, then at some point the game will come to an end – my $9,975 will have provided me and the economy some breathing room and some time to kick the future “big R” or “little d” down the road; but it will end. If it is being invested and invested productively, then we might eventually see the Old Normal on the horizon, reduce unemployment to less than 6% and return prosperity to the middle class.
Well, as President Obama might tell Governor Romney – “just do the math.” Or as Chris Berman might say on ESPN – “let’s go to the tape.” In the past three years of quantitative easing and financial repression, can we see a noticeable effect on investment as opposed to consumption? Is the Bernanke model working or is the $9,975 being spent on consumption? At first blush, an observer might vote for the Bernanke model. After all, the stock market has doubled in three-plus years, risk spreads are at historical lows, and housing prices are moving up – 10% higher in Southern California alone. Yet the real economy itself seems no different – still in New Normal gear. Surely by now, if the Bernanke model was as advertised, we would be seeing a pickup in investment as a percentage of GDP and a willingness to start saving “seed corn” as opposed to eating “caramel corn.” As Chart 1 points out – we are not. At the same time, we continue to consume at an “Old Normal” pace as shown in Chart 1 as well.
Well, Chart 2 confirms the evidence. Over the past three years, our net national savings rate has been negative, and lower than it has ever been in modern history. The last time this occurred was in the Great Depression.