Bill Gross,the billionaire founder and co-chief investment officer of Pimco, is pissed. The Fed, in an attempt to get money off the bench and into the economy, has the nerve to maintain artificially low bond rates and it is costing Bill greater returns. Something must be done damn it, or he is going to have to invest his money somewhere else.
The perception of US policy action in this supposed evil plot consists of the Federal Reserve purchasing massive amounts of bonds resulting in artificially low interest rates. These low rates effectively serve as a tax on savers, providing potentially net negative yields over their term when factoring in the inflationary bogey man, and in turn, making Mr. Gross very angry. While Gross has an enviable track record at Pimco, (and I personally admire him, especially his investment outlook podcast with its fabled, moral based explanations) his interests as an investor, without heed for employment or wider economic concerns are misplaced when it comes to the identity of the real foil to his investment strategy.
If you think this is overly dramatic bear in mind that his "solution" to this problem, increased rates, are recognized to have a negative impact on expected economic output. I don't mean to be flippant, it is a brutal situation, many risk averse investors are losers in the current scenario and on this point Gross is correct. However, bond holders and bonds, generally represent one of the safest bets as investments go, and to the extent that the Fed and Treasury deem the problem to stem from a lack of private sector investment, they provide the incentive, albeit negative, to act differently whether Gross likes it or not. The Feds view their role as being to coax those funds, the low hanging fruit of liquid investment, into action, ie to yield productive investment.
The real issue and question that Gross should be raising with respect to this strategy is whether the Fed’s current course of action is correct for reviving the economy. Is stimulating investment from the top, ie banks, via "business investment" some how filtering through to the workers going to lead to recovery? and another - Where are inflation expectations coming from and why are they so high?
Well, anyone paying attention to recent economic indicators will easily tell you that it is NOT based on any positive measure of the real economy. A recovery in employment? No, ticking back up. Financial marketing stabilization? Have you heard of Greece or Ireland? Overall global demand? No, global output is below pre-crisis levels. Commodity prices increasing costs? Bingo! However, as Wikileaks cables between Saudi authorities and the US government highlight, they are trying their best not to create demand destruction, supplying oil to maintain a $70-80 barrel price but continue to get bid up by speculation. The negative feedback loop from this cost push inflation where energy costs garner an increasing percentage of household income or corporate profits, has the net effect of lower overall consumer spending, disposable income and investment. Mr. Gross would be better served to put his considerable clout with the media and his keen eye for inequity on this issue, to pressure policy makers to do the right thing.
Toward that end the McClatchy reporting on the Wikileak cables is very insightful. What would Saudi Arabia have us do to lower prices for oil? Quoting the cables, "The Saudis have struck a steady theme for years that something should be done to curb the influence of banks and hedge funds that are speculating on the price of oil." Majid al-Moneef, Saudi Arabia’s governor for the Organization of Petroleum Exporting Countries, cited “improving transparency” referring to the unregulated nature of oil trading while also proposing position limits.
The Commodity Futures Trading Commission, formerly headed by Brooksley Born under Clinton who was alone in promoting regulation that would have limited some bank activities that led to the financial crisis, has hardly begun to pick up this fight. Only last week, formally suing James Dyer of Parnon Energy and Nicholas Wildgoose of Arcadia Energy in a fraud dating back to the summer of 2008. They are accused of buying up huge amounts of stored oil creating a perceived shortage and driving prices up. Then betting prices would fall before selling off their holdings to actually send prices down. Still the commission hasn’t enacted a proposal to limit the percentage of oil contracts a financial company can hold or preferably denying them access all together. Estimates are that these firms represent up to 70% of the trading in futures contracts with only 30% legitimate cost hedging. Senators Maria Cantwell and Bernie Sanders have been prodding the CFTC to act to limit this activity as outlined by the Dodd-Frank financial reform legislation but with no plan for action expected until the fall.
When it comes to Federal Reserve activity there is always much to argue about. However, this crisis is full of lessons stemming from inaction in areas outside of those generally managed by the Fed. Both then and now regulatory action well under the supervision of the Commodity Futures Trading Commission would have served to limit the extent of the crisis. I fear this broken record of shadow finance is due another spin just in time for the next crisis. Perhaps if Mr. Gross and others of his financial stature would cast a wider net of critique on economic activity, we might begin to make some progress toward more sustainable policies and perhaps even better bond yields.
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