Bill Gross: Assets Are $15 Trillion Overvalued And Fed Will Keep Rates At 0% Forever To Keep The Fantasy Alive

Henry Blodget |

PIMCO’s Bill Gross with a great monthly letter. Here are the key points:

  • Over the past 30 years, paper asset prices rose 2X as much as they should have based on economic fundamentals
  • This was the result of leverage
  • The asset price rise in turn pumped up the economy’s fundamentals (Soros’s reflexivity)
  • The government wants to restore the “old normal” (2007) not the “new normal” (slower growth as asset prices return to trend)
  • Therefore… The Fed will keep rates at 0% for at least 18 months into sustained 4% growth
  • Next year, when the inventory restocking effect wears off, 4% will be tough

Bill Gross:

[I]n a New Normal economy (1) almost all assets appear to be overvalued on a long-term basis, and, therefore, (2) policymakers need to maintain artificially low interest rates and supportive easing measures in order to keep economies on the “right side of the grass.”

Let me start out by summarizing a long-standing PIMCO thesis: The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up – then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services…

My point: Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don’t go up – economies don’t do well, and when they go down, the economy can be horrid.

To some this might seem like a chicken and egg conundrum because they naturally move together… if long term profits match nominal GDP growth then theoretically stock prices should too.

Not so. What has happened is that our “paper asset” economy has driven not only stock prices, but all asset prices higher than the economic growth required to justify them…

[L]et me introduce Chart 2 a PIMCO long-term (half-century) chart comparing the annual percentage growth rate of a much broader category of assets than stocks alone relative to nominal GDP. Let’s not just make this a stock market roast, let’s extend it to bonds, commercial real estate, and anything that has a price tag on it to see if those price stickers are justified by historical growth in the economy.


Lao Tzu on Continuity

“Looked at but cannot be seen – it is beyond form;
Listened to but cannot be heard – it is beyond sound;
Grasped at but cannot be touched – it is beyond reach;
These depthless things evade definition,
And blend into a single mystery.

In its rising there is no light,
In its falling there is no darkness,
A continuous thread beyond description,
Lining what can not exist,
Its form formless,
Its image nothing,
Its name mystery,
Meet it, it has no face,
Follow it, it has no back.

Understand the past, but attend the present;
In this way you know the continuity of Tao,
Which is its essence.”

–Lao Tzu (Tao Te Ching – Peter Merel’s Interpolation)

Lao Tzu on Love

“Embracing Tao, you become embraced.
Supple, breathing gently, you become reborn.
Clearing your vision, you become clear.
Nurturing your beloved, you become impartial.
Opening your heart, you become accepted.
Accepting the World, you embrace Tao.

Bearing and nurturing,
Creating but not owning,
Giving without demanding,
Controlling without authority,
This is love.”

— Lao Tzu (Tao te Ching — Peter Merel’s Interpolation)

What the Matrix Can Teach us About Life and Rules

Morpheus in this conversation with Neo (‘the One’) in the first Matrix movie:

‘I’ve seen an agent punch through a concrete wall. Men have emptied entire clips at them and hit nothing but air. Yet their strength and their speed are still based in a world that is built on rules. Because of that, they will never be as strong or as fast as you can be.’

‘What are you trying to tell me, that I can dodge bullets?’

‘No, Neo. I’m trying to tell you that when you’re ready, you won’t have to.’

Many years ago, I entered this movie without a clue of what to expect. Incidentally, I find that these kinds of unexpected surprises, are often the best kinds of transformative experiences. The mind has no time to prepare any expectations for the experience. Instead the mind is just hit with the new reality and must quickly transform itself in response; there is no time to filter or deflect the experience.

The Matrix exceeded my wildest expectations and instilled a newfound curiosity towards the very nature of our experiential reality. At first there was a stream of thought to the effect that, maybe we are literally plugged into a mechanical device which simulates our reality. This further brought about thoughts such as, “What in fact is reality anyways?”

If our conscious reality is simply impulses arriving via the nervous system, then the reality is quite literally a projection in our own minds and is therefore holographic in it’s very nature. This essentially means there is not a solid, tangible, world out there, as our rational minds often like to think. Instead, we have this biological operating system which constructs these rule sets, which govern our impression of reality, in order to function more effectively (by it’s own definition, of course) in our environment.

What I am getting at here is the fact that our minds have a basic rule-set by which they operate, in order to survive in the current environment. This rule-set is generally set-up for the basic survival of our biological envelopes (bodies). However, by no-means are these foundational rules concrete; they are simply the consensus that we have, as a collective, chosen to instill via the socialization process.

When I imply that the rules are not concrete, I mean there may be a different, perhaps more succinct, set of rules; which will at some point, allow us an even deeper connection with the world around us. We have to be willing to look at the current set of rules in a critical light, in order to enable our selves to do this. Clearly there is an inherent resistance to this, which seems to be a product of the Ego not wanting to let go.

If we, on an individual level, can genuinely undock from this control grid, as many have done in the Matrix; then I foresee many of the limitations which now impede our day-to-day lives falling by the wayside.

If such a movement were to come to fruition, perhaps the people who made this conscious decision to undock from the control grid and redesign reality, will again build great societies, where they and their descendants can better self-actualize. A society where novelty is in great abundance, where individuals are no longer a drain on resources; but instead a priceless asset which compounds novelty as they reflect it from their own unique perspective in order to generate a richness of experience which most of us can only dream of in today’s world.

Lao Tzu on Utopia

“Let your community be small, with only a few people;
Keep tools in abundance, but do not depend upon them;

Appreciate your life and be content with your home;
Sail boats and ride horses, but don’t go too far;
Keep weapons and armour, but do not employ them;
Let everyone read and write,
Eat well and make beautiful things.

Live peacefully and delight in your own society;
Dwell within cock-crow of your neighbours,
But maintain your independence from them.”

–Lao Tzu (Tao te Ching — Peter Merel’s Interpolation)

The Value of Worthlessness

The trees on the mountain can be used to build and so are cut down.

When fat is added to the fire it consumes itself.

Cinnamon can be eaten and so is harvested.

The lacquer tree can be used and so is slashed.

Everyone knows the usefulness of the useful

But no one knows the usefulness of the useless!

— Chuang Tzu

A certain carpenter was traveling with his helper. They came to a town where a giant oak tree filled the square. It was huge, with many limbs spreading out; large enough to shade a hundred oxen and its shade covered the entire square. The helper was amazed at the potential lumber contained in this one tree but the carpenter passed it by with a mere glance. When his helper asked him why he had passed up such a magnificent specimen the carpenter replied that he could see at once that the great oak’s branches were useless to him.

“They are so hard,” he said, “that were I to take my ax to them it would split. The wood is so heavy that a boat made of it would sink. The branches themselves are so gnarled and twisted they cannot be made into planks. If I tried to fashion house beams with it they would collapse. If I made a coffin from it you would not be able to fit someone inside. Altogether it is a completely useless tree. And that is the secret of its long life.”

— Chuang Tzu

Gold Moves into Uncharted Territory

The price of gold has cleared the former all-time high, reaching into the $1040 (USD) range for the first time in the history of the yellow metal.  The chart below illustrates how gold formed and broke through a bullish inverted head & shoulders formation, broke through the top of a consolidation wedge, and broke through a wedge in the MACD indicator.

With an RSI reading of 70, gold is one hot commodity.  This should start ringing some alarm bells at major money centers around the world.  It is becoming ever-more apparent, that we are experiencing a serious rout of inflation which could very well turn into a devastating wave of hyper-inflation in due time.

Gold Breakout Chart: October 7, 2009
Gold Breakout Chart: October 7, 2009