In mock congressional testimony, Bill Gross, co-chief investment officer of Newport Beach-based Pacific Investment Management Co. (PIMCO), said today the U.S. should only nationalize banks as a last resort, that focus should instead be placed on shoring up lending and staving off foreclosures and, most importantly, that he shaved off his mustache at the urging of his mother.
In "Hairy Lips Sink Ships," his March Investment Outlook posted on the PIMCO website, Gross explains, "One thing I've never done is provide expert testimony in front of a congressional subcommittee. Newport Beach probably doesn't have the cachet of Wall Street, or perhaps my style has always been a little irreverent or my brain a little irrelevant-I'm not sure. In any case, I thought I'd create my own virtual testimony to a hypothetical committee delving into the complexities of our financial crisis. What follows is what might have taken place last week."
The 64-year-old billionaire manager of the world's biggest bond fund goes on to trade questions and answers with an unnamed "Madame Congresswoman," who wants to know if we are in a recession or a depression ("We don't know yet"); how the financial free-fall happened so fast ("Trillions of dollars of credit have been sucked out of the financial system over the past 12 months"); and what can be done ("advancing policies in content and magnitude never contemplated since the days of FDR").
Fortunately, Gross dumbed it down for us when it came to explaining the credit crisis: "Think of it this way: If you had three or four pints of blood drained from your body you'd be on life support, very quickly. Same thing now. The solution is for government spending to simulate a transfusion of whole blood, plasma, or whatever's available."
And . . .
"If the economy is viewed as a bathtub filled with water (credit) at two different times with two different levels, then draining it back down to the lower first level might reduce economic activity proportionately. Liquidate debt (credit) to 2003 totals and you just might reduce economic activity (GDP) to 2003 numbers as well. Whoops! That would mean a 10%+ contraction in the economy with unemployment approaching the teens. Keep that bathtub full!"
Trillions will be required to create credit and prevent foreclosures and coordination among nations will be imperative to avoid protectionist measures reflective of failed policies in the 1930s, Gross says.
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Madame Congresswoman, who unlike the rest of us apparently has spare cash, asks Gross where she should invest. He invites her to Newport Beach next month for PIMCO's client conference titled "Evolution or Revolution-The Future of Investing."
"No golf or vintage wines though-just cheeseburgers and interesting conversation," Gross says in an attempt to dispell fears of another AIG fiasco at the St. Regis in Dana Point. The boldface is his: "I'm sure we'll stress our current theme of "shake hands with Uncle Sam" - buying agency mortgages, and other developing areas of government policy support in the credit markets. But we'll talk about the future of stocks too, leveraging and deleveraging, globalization and deglobalization, and why safe secure income may be the most desirable investment in this evolving economic and financial crisis. Tell you what, Madame Congresswoman, if you can't make it I'll write it up in next month's Investment Outlook."
"Well thanks, Mr. Gross, but one last thing," the faux congressman says. "Whatever happened to your mustache?"
" My mother always said there was something shady about a man with hair on his lip, but then she'd never met [PIMCO's] Mohamed El-Erian and Paul McCulley whose mothers undoubtedly approve. I think my mom watched too many Charlie Chan movies in her day, but I can't be sure. We feel the same way about this economy though, Madame Congresswoman. It's hard to trust policymakers; there's too little consistency, not enough boldness, and too much political game playing. Say a little prayer will ya, but tell those Congressmen to shave their lips just in case."