PIMCO's Gross: Obama's populism will slice into earnings, GDP growth
In his monthly investment outlook, Gross says investors should not expect capitalism to return to business as usual after financial markets have stabilized and economic growth resumes. Several months back, U.S. Treasury Secretary Timothy Geithner predicted that, "Capitalism will be different." Now, Gross tells investors what he thinks the new era's key feature will be: slower GDP growth, which will weigh on the value of some stocks and bonds.
"Investors should recognize that this grassroots trend signals -- most importantly -- an increasing uncertainty of cash flows from financial assets," Gross wrote. "Not only will redistribution and re-regulation lead to slower economic growth, but the financial flows from it will be haircutted and 'burden shared' by stakeholders."
Gross, managing director of PIMCO, which manages $756 billion, also called 2009 a key year because it represents a demarcation point between free market, laissez-faire capitalism and an evolving public-private partnership that will take years to mature. Further, although Gross credits the current administration for addressing risks that were "long swept under the rug of prior administrations," the center point of policy change, and its philosophy, is clear: President Obama "has shed his predecessor's regal robes for a populist's cloak."
Next expansion: Non-euphoric
Accordingly, Gross said investors should not be "deceived by the euphoric sightings of 'green shoots' and the claims of new bull markets in a multitude of asset classes." Under Obama's populist programs, that can't occur, Gross says, in so many words, hence "stable and secure income is still the order of the day."
Further, although Gross supports investors who choose to buy debt stakes in companies in which the federal government also has an investment stake, he adds that investors must remain on-guard for further shifts in public policy -- ones that could affect that investment stake. "If the government indeed becomes your investment partner, you should keep the big Uncle in clear sight and without back turned," Gross said.
Economic Analysis: PIMCO's Gross presents a fair assessment of the intervention. On the one hand, intervention will mean lower GDP growth in the new era of 'capitalism with limits', and that has to lead to a lower return on equity than during this decade's wild, wild west period of 2002-2007. On the other hand, Gross views the intervention as prudent, given that the alternative was, at minimum, continued deterioration of credit markets and commercial conditions.
Gross also noted that he voted for President Obama, praises him for tackling problems that were swept under the rug by prior administrations, and supports efforts to decrease the gap between the rich and poor. On the other hand, he laments the fact that a more interventionist government means a slower rate of growth in an era destined to be less free-wheeling for capital. As Gross put it, as "capitalism is bridled, saddled, and taught to trot instead of gallop over the investment plains."
What to make of Gross' analysis? That may depend on your view of the intervention. If you don't view it as necessary, you may view the era of lower earnings growth as something that could have been avoided. If you favor the intervention, you may view the actions as stabilizing the financial system and averting a worse outcome.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.