Bill Gross: Debt Binge Worthy of Future Scorn

Bill Gross says future generations will view the global debt run-up of the past 6 years like we now view smoking on airplanes…misguided or just plain stupid.

Janus’ Bill Gross released an investment outlook today that is a painfully good read.

His thesis: That future generations are going to look at this one and say “How could they do that?” when it comes to running up debts the way we have in the past several years.

For those scoring at home, the U.S. National Debt stands above $18 Trillion as of today. That, of course, looks trifling in the face of the U.S.’s $115 Trillion in unfunded liabilities. Regardless of what you call them, they are promises to pay; and they are big ones.

An always interesting link is the U.S. Debt Clock. Try it out; but keep a bucket handy.

The U.S., of course, isn’t alone; and that is what makes Gross’ read so interesting. There may be no place left to hide soon.

In his outlook, Gross lodges multiple protests. He states that while debt fueled recoveries from debt caused recessions are possible, they must have three preconditions to be so…

1. A non-fatal structural starting point (that is, countries can’t be insolvent at the start…)

2. Alignment of monetary and fiscal policies (especially that fiscal policy should take advantage of loose money to invest in accretive infrastructure)

3. Willing participation by private investors (they have to stay in the market even as yields are driven down and asset prices up beyond any realistic point of further appreciation).

It’s clear that all preconditions are/were not present in all countries pursuing the “borrow or monetize your way to freedom” strategy. At the end of the day, fiscal, monetary, and investment indicators have to point toward kickstarting consumption and investment in the real economy. It’s not clear to Gross (or me) that this has happened. If anything, Gross points to massive inconsistencies in political and market sentiments.

This is a fantastic read. One that is well worth your time.

The implication? Well, I posted last week about lower energy prices being a wake up call for business leaders to re-set scenarios for the future. In this case, Gross is essentially saying that financial investors might do well to get out of markets sooner rather than later. His quote:

Markets are reaching the point of low return and diminishing liquidity. Investors may want to begin to take some chips off the table: raise asset quality, reduce duration, and prepare for at least a halt of asset appreciation engineered upon a false central bank premise of artificial yields, QE and the trickling down of faux wealth to the working class.

Ouch. That’s the implication. Bursting of high valuations by investors fleeing to quality and going short could very much signal a period of deflation; then who knows what…?

Photo credit: Lendingmemo