Gross Calls Spending to Maintain Consumption a Waste
Bill Gross, co-chief investment officer of Pacific Investment Management Co. Photographer: Tim Boyle/Bloomberg
Pacific Investment Management Co.’s Bill Gross said deficit spending by governments that seek to maintain artificial levels of consumption “can be compared to flushing money down an economic toilet.”
Without acceleration in population growth, developed countries finance more consumption to maintain economic growth, the world’s biggest bond-fund manager wrote in his August commentary today on Newport Beach, California-based Pimco’s website. Leveraged spending, he said, is not a substitute for demand created by people.
“I will go so far as to say that not only growth but capitalism itself may be in part dependent on a growing population,” Gross wrote. “Production depends upon people, not only in the actual process, but because of the final demand that justifies its existence.”
Deficit spending will be unsuccessful in what Pimco calls the “new normal” because deleveraging, re-regulation and de- globalization produces structural headwinds that lead to slower growth and lower-than-average investment returns, Gross said.
Japan is the modern-day example of what deleveraging in the face of a slowing and now negatively growing population can do, Gross said. Prior deleveraging periods, such as what the U.S. and European economies experienced in the 1930s, exhibited a similar demographic with the lowest levels of fertility in the 20th century and extremely low population growth, he wrote.
Budget Deficit
“It means investors start to shift money from stocks to bonds because those are more certain,” Gross said during a “Bloomberg Surveillance” radio interview today with Tom Keene. “Near term, it’s bond friendly but long-term negative for inflation and investments in general.”
The U.S. budget deficit in 2009 was 9.9 percent of gross domestic product on Sept. 30, the end of the fiscal year, compared with a six-year high of 7.4 percent in Japan. The ratio in Japan peaked at 11 percent in 1998.
Gross boosted holdings of government-related debt to the highest level in eight months in June as the U.S. recovery showed signs of waning. His $234 billion Total Return Fund’s investment in the debt was increased to 63 percent of assets in June, from 51 percent in the previous month. Emerging-market debt was raised to 10 percent, breaking the 9 percent record set last month.
The fund has returned 13 percent in the past 12 months, beating 64 percent of its peers, according to data compiled by Bloomberg. It gained 1.24 percent over the past month, a performance outpacing 68 percent of competitors. Pimco, a unit of Munich-based insurer Allianz SE, managed $1.07 trillion of assets as of March 31.
Record Low Yield
U.S. government debt continues to draw strong demand, pushing the two-year note yield to a record low of 0.5516 percent on July 23, on evidence of a slowing global economic recovery and low inflation.
Investors are concerned that the recovery will falter more than a year after President Barack Obama signed the $787 billion stimulus package and the Federal Reserve cut its target interest rate for overnight loans between banks to a range of zero to 0.25 percent. The Obama administration so far has pushed for targeted additional aid, and some economists anticipate the government will be required to enact further stimulus measures.
Pimco’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the firm’s website.
To contact the reporter on this story: Alex Kowalski in New York at akowalski13@bloomberg.net
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