Monday, June 30, 2008

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.

1 comment:

  1. Robert,

    You are an utter moron. Obama is going to take this country to new heights. Wait and see. McBush will try to steal the election but us upstanding citizens are not going to let it happen. All hail Barack. He is going to turn this country around and greedy, bitter old fools like you will see the errors of your ways.