In his latest monthly missive to investors, Bond King Bill Gross admits to having an amnesia of sorts. Maybe that’s why his investment insights are becoming increasingly less cogent.
From getting the demise of the equity risk premium wrong to advising individual investors to buy low and sell high, the manager of the biggest mutual fund in the world — the $278 billion PIMCO Total Return A (MUTF:PTTAX) — hasn’t been doling out a lot of useful information lately.
Now, in his October note, Gross tells us a lot of what we already knew and, unfortunately, throws a sop to the gold bugs with the fatuous canard that the U.S. is in danger of becoming Greece.
The Greece thing? Again?
“Well, Armageddon is not around the corner,” Gross writes. “I don’t believe in the imminent demise of the U.S. economy and its financial markets. But I’m afraid for them.”
Fair enough. And well that we all should be. The federal government is no doubt a serial offender when it come to debt and the prospects for future debt. As Gross puts it, we’re “an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth.”
But what does not compute is Gross’ contention that the U.S. will begin to resemble Greece before the turn of the next decade if the federal government fails to bring its debt-to-GDP ratio under control.
The U.S. is already in what Gross calls a rogue’s gallery of debtors — a “Ring of Fire” that includes Japan, the U.K., Spain, France and Greece.
However, Spain, France and Greece do not control their own currency. And that is why the U.S. is not Greece.
As Cullen Roche at Pragmatic Capitalism explained months ago, the U.S. can’t go bankrupt because when the Treasury holds bond auctions, primary dealers (big banks), are required to bid. Unlike Spain, France or Greece, the concern that a bond auction could fail doesn’t exist.
As Roche says:
“The key here is that there’s no solvency constraint as in, ‘running out of money.’ Greece doesn’t have this arrangement. In fact, since the ECB is essentially a foreign central bank there is a real solvency constraint. So banks and private investors have become hesitant to buy Greek bonds because of this flawed institutional arrangement and the lack of an implicit guarantee. It’s apples and oranges compared to the USA.”
And as for rampant debt causing hyperinflation that would “burn bonds to a crisp,” well, you can’t point to Japan as evidence of that. Japan is the worst offender in Gross’ mixed metaphor of a rogue’s gallery of serial-offender-debt-meth-addicts residing in a Ring of Fire.
Indeed, Japan is far and away the world’s worst debtor, with the highest structural fiscal gap of any nation when it comes to debt as a percentage of GDP.
But Japan’s problem isn’t inflation — its deflation. Heck, it’s been stuck in a brutal deflationary spiral for two decades.
The U.S. is not — repeat, not — Greece. And while inflation might worry some folks, there’s no sign of it in prices or in the market’s expectations. Armageddon, as Gross says, is not around the corner.
And if it is, well, inflation is always preferable to deflation, especially when you’re loaded up with debt.
Just ask Japan.
As of this writing, Dan Burrows held no positions in any of the aforementioned securities.