Bill Gross: Investment Outlook (June 2012)

Wall Street Food Chain

June 2012

by William H. Gross, PIMCO

• Soar­ing debt/GDP ratios in pre­vi­ously sacro­sanct AAA coun­tries have made low cost fund­ing increas­ingly a func­tion of cen­tral banks as opposed to pri­vate mar­ket investors.
• Both the lower qual­ity and lower yields of such pre­vi­ously sacro­sanct debt rep­re­sent a poten­tial break­ing point in our now 40-year-old global mon­e­tary system.
• Bond investors should favor qual­ity and “clean dirty shirt” sov­er­eigns (U.S., Mex­ico and Brazil), for exam­ple, as well as empha­size inter­me­di­ate matu­ri­ties that grad­u­ally shorten over the next few years. Equity investors should like­wise favor sta­ble cash flow global com­pa­nies and ones exposed to high growth markets.

The whales of our cur­rent eco­nomic soci­ety swim mainly in finan­cial mar­ket oceans. Inno­va­tors such as Jobs and Gates are as rare within the priv­i­leged 1% as giant squid are to sharks, because the 1% feed pri­mar­ily off of money, not inven­tion. They would have you believe that stocks, bonds and real estate move higher because of their wis­dom, when in fact, prices float on an ocean of credit, a sea in which all fish and mam­mals are now increas­ingly at risk because of high debt and its delev­er­ing con­se­quences. Still, as the sys­tem delevers, there are win­ners and losers, a Wall Street food chain in effect.

These eco­nomic and/or finan­cial food chains depend on lots of lit­tle fishes in the sea for their longevity. Decades ago, one of my first Invest­ment Out­looks intro­duced “The Plank­ton The­ory” which hypoth­e­sized that the mighty whale depends on the lowly plank­ton for its sur­vival. The same applies in my view to Wall, or even Main Street. When exam­in­ing the well-known wealth dis­tri­b­u­tion tri­an­gle of land/labor/capital, the Wall Street food chain seg­re­gates cap­i­tal between the haves and have-nots: The Fed and its mem­ber banks are the metaphor­i­cal whales, the small investors earn­ing .01% on their money mar­ket funds are the plank­ton. Yet sim­i­lar com­par­isons can be drawn between cap­i­tal and labor. We are at a point in time where prof­its and com­pen­sa­tion of the for­tu­nate 1% – both finan­cial and non-financial – dom­i­nate wages of the 99% and the imbal­ances between the two are as dis­torted as those within the cap­i­tal food chain itself. “Ninety-nine for the one” and “one for the ninety-nine” char­ac­ter­izes our global econ­omy and its finan­cial mar­kets in 2012, with the obvi­ous under­stand­ing that it is bet­ter to be a whale than a plank­ton. Not only do Wall Street and New­port Beach whales like myself have blow­holes where they can express their omnipo­tence as they occa­sion­ally sur­face for pub­lic com­ment, but they don’t have to worry as yet about being some­one else’s lunch. (more)