Tag Teaming Alongside Bob Murphy

Yesterday, Bob announced at his blog, Free Advice, that he has placed CNBC contributor, Patricia Chadwick, right next to CNBC's Jim Cramer, on his never read again list.

The sin that warranted this banishment by Bob, according to Bob was :

I have criticized Chadwick before. But that was nothing. In today's "article," she offers absolutely zero arguments. She simply asserts that the American people are idiots--though understandably so, in Chadwick's condescending pity--for thinking the Paulson Plan a bad deal. And then, in order to placate those readers who maybe
wanted some evidence or something, Chadwick links them to a Tom Friedman (!!) oped on why Americans should support the bailout. You know, noted economist and
successful day trader Tom Friedman?

So I wandered over to CNBC to get a sense for what was going on. And Bob, the only thing I can say is LET ME IN THE RING!

Not only does she not provide any sound argument, but in her appeal to authority she not only uses Tom Friedman ( And Bob, this guy Friedman is an analyst. He writes in his column that he's frightened for the country and it has happened before: "I’ve been frightened for my country only a few times in my life: In 1962, when, even as a boy of 9, I followed the tension of the Cuban missile crisis." The guy was frightened at 9, Bob. Not for himself, but for his country! AT 9! So what were you doing at 9, Bob? I didn't even, independent of Ludwig von Mises, discover the Regression Theorem until I was 11. )

In addition to Friedman, she drags out Pimco's Bill Gross as an expert:

Unfortunately, despite dire warnings from sage and respected investors such as Warren Buffett and Bill Gross...

Oh yeah, the sage and respected Bill Gross. That's the same guy who jumped up and down on CNBC screaming that the government needed to bailout Freddie and Fannie. And we learned only later that the Pimco portfolio he managed was loaded with so much Freddie and Fannie paper that the portfolio increased over a billion dollars after the bailout was announced. And she thinks this Newport Beach hustler can be trusted?

I am only giving her a pass on Buffett because at the time she wrote, Buffett had only pigged out on Goldman Sachs and had not yet feasted at the table of that other insider monster G.E., and, also at the time, it still wasn't clear that Buffett is likely to be the largest beneficiary of Paulson's Plan.

So Bob, I got your back on this one. I think we are ready.

-Robert Wenzel

A Gross Bailout

In the days leading up to Treasury's bailout of Fannie Mae and Freddie Mac, Bill Gross had been hyperventilating on CNBC and other media venues, aggressively calling for a government bailout of the two. 

FT with  details of the Gross result:

The Bill Gross-managed Pimco Total Return fund reaped a $1.7bn payday following the US government takeover of home loan giants Fannie Mae and Freddie Mac.

While shareholders in Fannie and Freddie suffered deep losses, the world’s biggest bond fund saw its highest ever one-day rise against its benchmark index on Monday, benefiting from the bet made by Mr Gross on mortgage bonds issued by the agencies.

Gross had made a big shift out of US Treasuries and corporate bonds over the past year and into agency bonds, betting that the government would support Fannie and Freddie Mac. By May this year, more than 60 per cent of his $132bn fund was in mortgage debt.

-Robert Wenzel

Dear President Obama

Say what? Don't we have an election coming up first?

Bill Gross, Managing Director and Chief Investment Officer of PIMCO, one of the largest specialty fixed income managers in the world, with more than $800 billion in assets under management, is obviously taking Obama Kool Aid intravenously. Yes, directly into the veins.

In his July, 2008 Investment Outlook report, he writes an open letter to Obama titled: Dear President Obama. The letter vacillates between bad economics and fawning over Obama.

In the fawning department, he calls Obama "too nice of a guy to distort reality." Gross has obviously never read or absorbed Friedrich Hayek's brilliant book, The Road to Serfdom, which includes the chapter, Why The Worst Get On Top. There is no such thing as a "nice guy" coming anywhere close to being president of the United States.

Leo Durocher was an optimist when he said, "Nice guys finish last." Nice guys, especially in politics, never get in the game.

And, as far as distorting reality, Obama has done his share. Obama, like any aggressive politician, can take any side of an issue when it is necessary or convenient, see Obama’s Two Faces and Forked Tongue.

Gross obviously gets his jollies from watching Obama on television. He writes:

Come to think of it, “President Obama” does have a certain ring to it. When I listen to your speeches, you even have me half convinced!

All the best, and a fist bump to ya!

As for Gross' economics, he reveals his complete Keynesian, tax and spend self, in his letter to Obama.

He endorses Obama's call for higher taxes:

I myself won’t enjoy paying that near 50 percent marginal tax rate after you remove the current cap on the payroll tax, but my wealthy neighbors and I in Newport Beach should just look at it this way: we’ve had an eight-year lease extension on the “high life.” Now it’s time to give something back...

He endorses government healthcare meddling and calls for more government meddling in mortgage crisis:

Anyway, so you’re gonna do the tax thing, Mr. President, and throw in some form of universal healthcare to boot that your buddy Hillary will help spearhead. You hope you can get a lot of this passed despite a potentially long string of filibusters from a Senate that won’t quite have sixty Democrats. In addition, you’ll need to provide some immediate relief to homeowners in the form of FHA (Federal Housing Administration) subsidies and low mortgage rate loans that somehow have been studied and studied in Congress for the past six months yet still haven’t been passed into law.

As if the "Bank America" Bill wasn't enough abuse of the taxpayer, he calls on Obama to spend another $500 billion on some kind of stimulus program:

....this economy will need an additional jolt of $500 billion or so of government spending real quick.

Who knows where Gross thinks this money will come from, or is he so under the influence of Obama Kool Aid that he thinks it will come out of thin air?

Oh, I get it, just increase the deficit by $500 billion, to a trillion:

According to that old C + I + G formula (scratch the trade deficit for now) when C + I is reduced by $500 billion, then G should increase by that amount in order to fill the gap. The G, Sir, is you – the government deficit, the fiscal stabilizer popularized by Keynes following the Depression. And since the fiscal deficit for 2008 is likely to press $500 billion even before you take the oath of office, well there you have it: $500 billion + $500 billion = $1 trillion big ones, probably by sometime in 2011 or so. It takes time to spend those types of bucks.

Amazingly, this Kool Aid drinker does understand the destructive impact of what he is proposing:

A trillion dollars of government deficit spending is potent medicine. Its potency regarding inflation will not be felt fully during the peak deficit period. Rather, inflation will accelerate during the subsequent recovery as the government bonds acquired during the recession are transformed once again into risk bearing assets and high levels of investment. That suggests that intermediate and long-term yields on government bonds have already bottomed and will gradually rise throughout your first, and perhaps second Administration. Your term will not go down in history as investor friendly.

Oh, what some will do, say or advocate for the love of Obama.

Rising interest rates are certainly in the future, especially if another $500 billion "stimulus" package is launched, but Gross' timing on the accelerating inflation is off. The acceleration is already occurring. And somewhere, early on, in the next administration, whether it is an Obama or McCain administration, the inflation rate could very well hit 20%, if the Federal Reserve continues to print money at double digit rates.

Oh and, one more thing, government bonds, which are 20 and 30 year obligations, are not magically "transformed" into risk bearing assets. I have no idea where Gross gets this notion.

When issued, such debt would either be bought by investors, thus crowding out the ability of corporations from raising private debt. Or, the Federal Reserve buys the debt by printing even more money, thus creating and even more serious inflation problem.

All in all, I have never before seen an investment letter that so completely lowers the stature of a high profile money manger.