Bill Gross- What’s In A Name?

Mayor Michael Bloomberg in a February trip to his state capital to discuss pension funding told a legislator that “if I can give you one piece of financial advice, it’s: If somebody offers you a guaranteed 7% on your money for the rest of your life, you take it and just make sure the guy’s name isn’t Madoff.” So names, it seems are important to othersoutside the Gross family and I probably should hold off changing the “Bill” and even the “Gross” if only because it’s not Madoff. That 7% return though – I’m not sure it’s possible in this era of the New Normal where negative real rates on Treasuries and its incumbent financial repression dominate bond and asset markets alike. Aside from the 7% return expectation however – which many pension funds and liability structures assume at a bare minimum – what struck me about the Mayor’s comment was the assumption that there were legitimate guarantors of investment returns throughout the world. Even assuming that Madoff and his Ponzi lookalikes are now under lock and key, recent events have shown that not only banks and insurance companies with their presumed “money good” guarantees, but sovereign nations as well cannot all be counted on to guarantee a return of principal, let alone a return on investment that comes anywhere close to matching 7% in nominal terms. What does Greece tell us if not that money, credit and financial investments dependent on ever expanding growth of credit are sometimes subject to buzz cut defaults with scalp level clippers, as opposed to a trimming of the bangs with haute couture scissors. 7%? Greek, Spanish and almost all non-Germanic Euroland bond investors would be happy for much less – they’d request a modern day Will Rogers haircut, which was defined in the 1930s when he said, “I’m more concerned about the return of my money than the return on my money.” Trillions of global investment dollars, Euros and Yen would settle for just that if they could only reclaim their prior investments at par, and then silently deposit them in a mattress for safekeeping.

What global investors, fixated on historical cyclical trends as opposed to secular delevering dynamics fail to appreciate is that economies and their financial markets historically have taken several decades as opposed to several years to renormalize once the fatal grip of too much debt wreaks havoc on the assumed perpetuity of capitalism’s prosperity machine. Can a debt crisis be cured with more debt? Yes, if initial debt levels are reasonable and central banks are able to rejuvenate the delicate dance between debtor and creditor – each believing that they are getting a good deal in terms of risk, reward and the deployment of funds between now and some future maturity. But when debt as a percentage of GDP, or debt service as a percentage of household income, or the appropriateness of the term structure (short vs. long) on both borrower and lender balance sheets becomes imbalanced, then the well-oiled capitalistic engine may sputter and in some cases – as in Greece – freeze up. That’s when a debt crisis can’t be cured with more debt, be it in the form of QEs or LTROs, or implicit firewalls created or to be created by Eurobonds, ESMs, the IMF or any other agency that presumably is money good. The fact is that the current burden of global debt is only being lightly alleviated via zero-bound interest rates. None of it, other than Greek PSI or minor amounts of private U.S. mortgage debt has been extinguished over the post-Lehman era; it has only been transferred from one pocket to another. Banks, insurance companies and mutual funds have passed the peripheral Old Maid from their hands to that of the ECB, or to Spanish and Italian banks, and ultimately on to the German core. Does it matter that Greece decides to stay with the Euro or that the Southern peripherals move towards austerity, or that the U.S. in November decides to go Red or Blue? Not much. Solutions for real growth matter only at the margin. An authentic debt crisis – which the world is now experiencing – can only be ultimately cured in two ways: 1) default on it, or 2) print more money in order to inflate it away. Both 1 and 2 are poison for bond and stock holders, which is why 7% returns – guaranteed or not – are so comical.

Full article here.