Pimco's Gross: U.S. Lawmakers "Don't Get" Implications of Debt Ceiling Debate
Interest-Rates / US Debt Jul 16, 2011 - 04:50 AM GMTBy: Bloomberg
Bill Gross of Pimco spoke to Bloomberg Television's Tom Keene this afternoon about the economy, the debt debate in Washington and the European stress tests. Gross said that he doesn't expect QE3, but that he expects the Fed to reiterate language. He also said that lawmakers "don't get" the long-term implications of the debt debate and that they "need to approach it gradually" when it comes to cutting spending.
Gross on whether the Fed will issue QE3:
"I think QE3, and I am pretty certain on this - this is a high probability for me - QE3 will take the form of language and perhaps, in terms of a lower probability, some kind of cap on 2, 3 or 4 year Treasuries as opposed to any outright purchases. We might see some extensions that Bernanke hinted yesterday at in his testimony, but any trillion dollar QE3 program is really not in the cards. There is too much dissention between the hawks and doves and the Fed. It's going to be sort of a sneak attack in terms of language in terms of policy rates staying at 25 basis points."
On President Obama's speech today and whether it's just getting a discussion going:
"It does. I suspect something of a Medicare extension from 65 to 67, but that does not take place for three or four years. It's a kick the can or as the new generation would call it, a fake it till you make it proposition, and the market won't be fooled by that."
On the August 2nd deadline and whether Washington understands to not mess with the debt ceiling:
"Whether it is August 2nd or later, or perhaps earlier based on the necessity to print some legislation, I think they get it. What they really do not get are the implications going forward. The U.S. has a $60 trillion net present value liability burden and that constitutes Medicare, Medicaid and Social Security in combination. That is 4-5 times GDP and it certainly exceeds those liabilities in Greece, Portugal and Spain. Ultimately, the U.S. has a big, big problem. What needs to be done, as Chairman Bernanke suggested yesterday, is that we need to approach it very gradually. You cannot cut two or three trillion dollars of spending over a year or two and expect the economy to survive."
On a higher 30-year yield relative to a lower 5-year yield and what this signals about the debt ceiling debate in Washington:
"Two things from the Fed - one, if they stay at 25 basis points for a number of years it's an inflationary moment and it suggests that the shorter end of the curve will do better than the longer end of the curve. Secondly, from the standpoint of the budget deficit to the extent that the U.S. is downgraded, that we do not see a $4 trillion package, it's the long end that's going to get hurt the most. To the extent that the McConnell compromise, the $1.5 trillion in out years that the markets expect them to be, then the deficit really is not solved, and so the long end gets hurt based on inflationary expectations and demand going forward."
On how the American people can convey to Washington that there needs to be a rhetorical responsibility:
"The private side is de-levering. Some of that is because of home defaults which automatically subtracts debt relative to prior experience. The federal side, the government side in terms of their balance sheet, is absorbing the blow. That is why we have a 10% deficit to GDP. Keynesian economists would basically argue that those numbers are required to keep the economy above the line. That is the debate between Republicans and Democrats. I tend to fall in the Democratic side, but recognize that over a longer-term basis we need to bring deficits down and to reduce debt to GDP if we're going to retain our primacy as a creditor."
On the education debate in America:
"In terms of an entrenched bureaucracy, there is no doubt that the university system is a primary candidate for number one as opposed to Washington with their tenured professorships and with their curriculum that stresses liberal arts as opposed to something more meaningful like science and mathematics and so on. We as a nation need to move in that direction. We need to become competitive as a nation to produce something that the rest of the world once. I do not think the rest of the world wants our philosophy degrees nor our liberal arts education, although those things are important terms of citizenship. Nevertheless, becoming competitive as a global marketeer requires something more specific."
On the European bank stress tests:
"In euro land we all know that many of the banks are weak, that most have invested in the peripheral countries to a substantial extent, so the banking system, although stressed and I suppose this stress test will indicate 10 to 15 smaller banks in Spain and perhaps Greece that are at risk in terms of the core 1 5% capital requirement--but in any case the banking system and the countries themselves are connected and interlinked so it's not necessary a question of stress on the banks, but stress on the sovereigns themselves."
On what the stress tests indicate about the larger European crisis:
"Europe lacks the political leadership to cure the crisis. Even Greece's Papandreou complained about a cacophony of voices with few results except for additional burdens on Greek citizens. The result may be two radical corner solutions - one, acknowledged haircuts, default and departure from the euro by Greece and maybe other nations - or two, a move towards fiscal union with cross guarantees. In terms of an outcome, both of these are lower probabilities, but we would favor the first outcome rather than the second."
On what he wants to see out of Europe that would allow Pimco to invest there:
"We want to see some agreement and some action. I think Papandreou is right in that the waiting should be over and policymakers should come together with some type of solution - either an exit or an entrance in terms of intertwining liability assumptions. The strinking reality in euro land is that as a bloc, they have less dept to GDP than the United States. It's north vs. south and the south can't devalue. If the second corner solution comes into play in terms of cross guarantees, Germany has to recognize that it's benefiting at the expense of the south as its exports become more competitive vs. Spain, Italy and Greece. So they have to give up something or give something back because they're taking something by the inability of these countries to devalue."
On whether he is buying Proctor & Gamble this afternoon:
"Not this afternoon. It is a decent play. It is a global company with a steady cash flow and a dividend that approximates 3% and compared to negative yields in terms of Treasury yields, I think it's a decent example."
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