Pimco’s Gross Says Debt Deal Fails to Make Dent in Deficit
Gross Says Debt Deal Fails to Make Significant Dent
Tim Boyle/Bloomberg
Bill Gross, co-chief investment officer of Pacific Investment Management Co., speaks at the Morningstar Investment Conference in Chicago on June 8, 2011.
Bill Gross, co-chief investment officer of Pacific Investment Management Co., speaks at the Morningstar Investment Conference in Chicago on June 8, 2011. Photographer: Tim Boyle/Bloomberg
Aug. 2 (Bloomberg) -- Bill Gross, who runs the world's biggest bond mutual fund at Pacific Investment Management Co., talks about the U.S. debt ceiling compromise passed by Congress and signed into law by President Obama, the outlook for U.S. tax policy and the state of the economy. Gross, speaking with Carol Massar on Bloomberg Television's "Street Smart," also discusses Federal Reserve policy and Pimco's investment strategy in the current climate. (Source: Bloomberg)
April 8 (Bloomberg) -- Douglas Grose, chief executive officer of Globalfoundries Inc., talks about the company's operations and expansion in upstate New York, and challenges facing U.S. manufacturing. He speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)
Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co., said the debt ceiling compromise reached by Congress won’t make a “significant dent” in U.S. deficits.
“In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at net present cost,” Gross wrote in a monthly investment outlook posted on the Newport Beach, California-based company’s website today.
Trillions of dollars in future spending cuts and tax increases are still necessary to stabilize the U.S. debt ratio as a percentage of gross domestic product to maintain a AAA credit rating, Gross wrote. President Barack Obama signed into law a debt-limit compromise bill that will defer decisions on the nation’s finances to a bipartisan panel and may only modestly reduce deficits while slowing economic growth.
“It’s a Republican tea party victory,” Gross said today in an interview on Bloomberg Television. “Tax hikes have to be a part of the equation. It needs to be a balanced approach. The markets are very skeptical in terms of any plan.”
Yields on 10-year Treasury notes dropped to 2.60 percent, the lowest since Nov. 9. Treasury 30-year bonds dropped to 3.9 percent, in the biggest drop since May 2010 on concern about slow economic growth. The Standard & Poor’s 500 Index erased its gain for the year.
Quantitative Easing
“We are at a tipping point,” Gross said, adding that the firm has reduced its forecasts for economic growth in the second half of the year to a range of 1 percent to 2 percent, from 2 percent to 3 percent.
“There’s the potential for QE3, but that may take the form of extended language,” Gross said, referring to the Federal Reserve’s prior stimulus measures that have become known as quantitative easing. “The Fed is in the business of providing emergency liquidity and reducing the cost of credit. They are approaching a dead end in that all they can do have been done.”
Investors should buy assets of countries with “cleaner dirty shirts” and higher real interest rates, including Canada, Mexico, Brazil and Germany, Gross wrote in his outlook. The difference between the yield on benchmark 10-year Treasury notes and the year-over-year consumer price index, known as the real yield, dropped today to negative 100 basis points, the lowest level since October 2008, according to Bloomberg data.
‘Being Shortchanged’
“If the Treasury is borrowing money from you or PIMCO at 0.5 percent for the next six months and CPI inflation is averaging 3 percent, then lenders, savers are being shortchanged beyond even rather egregious historical examples,” Gross wrote. Inflation “puts more money in government coffers to pay their bills and less money in your pocket to pay yours,” he wrote.
Gross has more than doubled his investments in non-U.S. developed countries to 13 percent in June from 6 percent in April, according to data released last month. His $245 billion Total Return Fund’s had 11 percent of its holdings in emerging markets. It holds about 9 percent of Treasuries in its portfolio, up from 8 percent in June, Gross said in the interview on Bloomberg Television. In July 2010, the fund had 54 percent of its holdings in government-related debt, a category that included Treasuries.
Gross highlighted balancing the budget, inflation, currency depreciation and so-called financial repression of keeping interest rates low as ways that a government can employ to reduce future liabilities. Growth at an annual pace of 2 percent to 3 percent makes it unlikely that the U.S. will be able to grow its way out of its $1.5 trillion deficit, Gross said.
‘Unsolvable Dilemma’
“Sisyphus would be familiar with this seemingly unsolvable dilemma,” Gross wrote, referring to the mythological king who was punished by being repeatedly compelled to roll a boulder up a hill, only to have it roll back down again.
Obama signed the debt-limit compromise on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.
The Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan Aug. 1.
Standard & Poor’s placed the U.S. AAA rating on “CreditWatch” July 14, saying there’s a 50 percent chance it would be cut within 90 days even if an agreement is reached by the deadline. S&P said it needs to see “a credible solution to the rising U.S. government debt burden.”
Mohamed A. El-Erian, the co-chief investment officer along with Gross at Pimco, said July 25 that the U.S. may lose its AAA rating.
The Total Return Fund has returned 5.86 percent in the past year, beating 71 percent of its peers, according to data compiled by Bloomberg. It gained 1.32 percent over the past month, beating 35 percent of its competitors. The firm manages $1.3 trillion in assets as of March 31.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net; Carol Massar in New York at cmasser@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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