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PIMCO’s Gross: The Days Of The Markets As Saviors Are Over

Filed by KOSU News in Business.
August 10, 2011

Bill Gross, founder and managing director of PIMCO, runs the world’s largest mutual fund. What he had to say about the markets to Michele Norris on today’s edition of All Things Considered was pretty gloomy.

Michele asked him what advice he would give to friends and family facing economic uncertainty and tumbling markets. He said first of all they should “lower their expectations.”

He also said they should listen to the words of Will Rogers, a newspaper columnist, who said “I’m more concerned about the return of my money as opposed to the return on my money.”

But here’s the grim part: “The ability of markets to be the savior I think is over,” he said.

Gross, if you’re not familiar, has a tendency to be right. Bloomberg declared today that Gross was right about the long term prospects of the U.S. economy.

Essentially, Gross endorsed a scenario where the U.S. economy grew at a below-average rate for a long period of time and some, including former White House economic advisor Lawrence Summers vehemently disagreed. Gross called it the “new normal:”

Now Gross and co-chief investment officer Mohamed El-Erian, who coined the term more than two years ago, have been vindicated by the U.S. Federal Reserve, which said yesterday that the economic recovery is “considerably slower” than anticipated, following the biggest stock market loss since December 2008. Being right on the big call hasn’t prevented Gross from making a tactical miscalculation when he stayed out of Treasuries just as concern about the economic slowdown fueled a rally in U.S. debt.

In his talk with Michele, Gross had more bad news: He said the consumers on both this side of the Atlantic and across the pond are “tapped,” and that means that instead of spending they are saving and that means that countries will experience growth that is close to zero or in recession.

As for the United States, he says that approached in a very simple way, Standard and Poor’s was wrong to downgrade, because the chance of default for the United States is pretty much zero. In that way, the country is a quadruple-A country, as Warren Buffett put it.

But the U.S. has what Gross calls “debt walking liabilities.” That means it’s not just on the hook for the $12 trillion in debt it owes now, but it has $60 trillion in additional liabilities for what it has to pay Americans in Medicare, Social Security and Medicaid in the future.

“This country,” he said, “has $60 to $70 trillion worth of debt, relative to a $15 trillion GDP. And that approaches Southern Europe [levels].”

Much more from Gross on All Things Considered. Tune into your local station or we’ll add audio, here, a little later tonight. [Copyright 2011 National Public Radio]

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