Bill Gross to Government: Quit "Flushing Money Down the Toilet"

PIMCO's Bill Gross, often referred to as "The Bond King", today published his August investment outlook which outlines the economic headwinds (past, present and future) due to slowing population growth.

For anyone not familiar with Gross, he and his colleagues at PIMCO run the world's largest private bond fund with over $1 trillion in assets under management. The U.S. Government sells bonds to finance its deficits, and Gross and PIMCO are big (maybe the biggest?) buyers of those bonds. Put simply, when Gross/PIMCO talk government listens. But don't just take my word for it. Ask Clinton campaign manager James Carville, who had the following to say:

"I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone."

Deep Demographic Doo-Doo

Recent demographic forecasts suggest that world population growth will continue to slow and level off around 2050 and then begin to decline.

Should this occur it would be difficult to overstate the implications. As Gross puts it "capitalism itself may be in part dependent on a growing population".

Some countries, such as Japan, Russia and Italy, are already experiencing a decline in population. Depopulation can occur for many reasons (i.e., famine, war, government dictum like China's "one child" policy). There also appears to be a pattern where population growth slows in countries which achieve a higher level of industrialization and development. However, declining population due to a lower indigenous birth rate can be mitigated through immigration.

Gross draws a link in the timing of 1970s slowing population growth and the ensuing credit bubble:

"The fact is that since the 1970s we have never really experienced a secular period during which the private market could effectively run on its own engine without artificial asset price stimulation. The lack of population growth was likely a significant factor in the leveraging of the developed world’s financial systems and the ballooning of total government and private debt as a percentage of GDP from 150% to over 300% in the United States."

What Gross is basically saying is that economic gains over the past four decades were largely driven not by fundamentals (e.g., productivity) but by debt. Debt was used to inflate the economy and assets prices (e.g., houses).

The New Normal

Gross concludes with:

"The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base. Current deficit spending that seeks to maintain an artificially high percentage of consumer spending can be compared to flushing money down an economic toilet."

In other words, Bill is saying that government should not create programs like "Cash for Clunkers" which promote unsustainable levels of debt fueled consumption. Instead Gross states the U.S. should "mimic" other countries and invest in "infrastructure, clean energy, more relevant education and less costly healthcare services."

While a second grand stimulus may not be imminent, medium and long-term investors may want to take a close look at the sectors "The Bond King" is not so subtly advising Uncle Sam to invest in.