Bill Gross opines on investing in a world of crony capitalism

Bond king Bill Gross has gone populist. He starts his latest monthly investment outlook with an indictment of capitalism as practiced today in the United States that is a frontal assault on the corruption we are witnessing in Washington. As more and more revelations like the Geithner AIG cover-up surface, one must wonder if America is becoming another Banana Republic.

Gross says:

Question: What has become of the American nation? Conceived with the vision of liberty and justice for all, we have descended in the clutches of corporate and other special interests to a second world state defined by K Street instead of Independence Square. Our government doesn’t work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people. Washington consistently stoops to legislate 10,000-page perversions of healthcare, regulatory reform, defense, and budgetary mandates overflowing with earmarks that serve a monied minority as opposed to an all-too-silent majority. You don’t have to be Don Quixote to believe that legislators – and Presidents – often do not work for the benefit of their constituents: A recent NBC News/Wall Street Journal poll reported that over 65% of Americans trust their government to do the right thing “only some of the time” and a stunning 19% said “never.” What most politicians apparently are working for is to perpetuate their power – first via district gerrymandering, and then second by around-the-clock campaigning financed by special interest groups. If, by chance, they’re ever voted out of office, they have a home just down the street – at K Street – with six-figure incomes as a starting wage. [emphasis added]

What I find interesting about this missive is not just the openly hostile tone he takes to the political status quo, it is the rhetoric.  Remember my post On kleptocracy and the sense that we have a one-party system? I echoed Matt Taibbi’s sentiments that neither party – Democratic or Republican – now represents any “change” whatsoever. It’s as if we lived in a one-party system. Gross says exactly the same thing in the next paragraphs.

What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return. The fact is that American citizens have never been as divorced from their representatives – and if that description fits the Democratic Congress now in control – then it applies to Republicans as well – past and present. So you watch Fox, or is it MSNBC? O’Reilly or Olbermann? It doesn’t matter. You’re just being conned into rooting for a team that basically runs the same plays called by lookalike coaches on different sidelines. A “ballot box” pox on all their houses – Senators, Representatives and Presidents alike. There has been no change, there will be no change, until we the American people decide to publicly finance all national and local elections and ban the writing of even a $1 check for our favorite candidates. Undemocratic? Hardly. Get on the internet, use Facebook, YouTube, or Twitter to campaign for your choice. That’s the new democracy. When special interests, even singular citizens write a check, it represents a perversion of democracy not the exercise of the First Amendment. Any chance that any of this will happen? Not one ghost of a chance. Forward Don Quixote, the windmills are in sight[emphasis added again].

So, what does an investor do?  When I remarked on Byron Wien’s prescient calls for 2009, you should have gotten the sense that, despite Wien’s good track record, I felt his accuracy had much to do with luck this past year. After all, the outcome of a majority of his ten picks depended on government fiscal and monetary stimulus. In fact, it was only when I realized that the government would do anything including repeal generally accepted accounting standards on fair value accounting, run sham tests of the banks, and grant the Fed and the FDIC a quasi fiscal role – it was only then that I knew Wien was right about a robust stock market recovery. Mind you, I am not talking about the real economy, but rather the stock market.

And that gets me back to the question: what are you supposed to do when your investment decisions depend not on market fundamentals or even market technicals, but government action? Here’s what Gross says:

Distressed as I am about the state of American democracy, a rational money manager cannot afford to get mad or “just get even” when it comes to investing clients’ money. Still, like pilots politely advertise at the end of most flights, “We know you have a choice of airlines and we thank you for flying ‘United’.” Global investment managers likewise have a choice of sovereign credits and risk assets where stable inflation and fiscal conservatism are available. If 2008 was the year of financial crisis and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of “exit strategies,” during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder “which” government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries [emphasis in original].

So, there you have it, 2010 is the year of government exit strategies.  The days when investment decisions depend on government action are soon to be over – or are they?

See the link below for the entire piece including his investment decisions.


Let’s Get Fisical – Bill Gross, Pimco, Investment Outlook January 2009

  1. Kirk Kinder says

    Gross will probably be right about 2010 being the year of fundamentals. It may not be in the first quarter, but eventually fundamentals rule. Also, the stimulus from the government has been huge relative to other recessions, but the economic growth coming out of the recession has been small. This won’t bode well down the road.

    Two, Gross is a bit hypocritical. His firm has benefitted mightily from the government so he should be careful when throwing stones.

  2. Bob Morris says

    I’m seeing a storm of populism coming. From all sides of the political spectrum. And that’s a good thing.

    I came of age in the 60’s and was a hippie radical. Watched as the counterculture moved in from the edges and then protest and tumult took center stage. Am getting that same feeling again, except this time the tumult is moving in from all of the edges, not just the left.

    1. Edward Harrison says

      polizeros, I agree that it’s not just the left. The problem with any populist movement is how to channel the anger in a way that can be constructive rather than destructive. I’m always reminded that Robespierre ended up losing his head too.

  3. Enno says

    How about Bill Gross for president?

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More