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Bill Gross and his Good Ship Lollipop

May 5, 2011

Bill Gross, bond market tycoon and manager of the world’s largest bond fund, apparently believes his fellow millionaires and billionaires are divinely entitled to positive risk free real returns on their hoards.  And because the US government hasn’t been providing them lately, he aspires to be the “captain” in a “Caine Mutiny” “revolt” against this rising “repression”.  It’s class warfare, plain and simple.

U.S. Treasuries and the bond market in general are being “repressed,” “capped” or simply overvalued compared to the prior 30 years. Bond investors forced to invest in dollar government bonds either through indexation, convention, regulatory guidelines or simply falling asleep at the helm are being shortchanged by 1 to 2% annually compared to historical norms and in many cases receive negative real yields…

Bond – and stock – investors have been sailing on the “Good Ship Lollipop” for over 30 years following the Volcker Revolution and the return of high real interest rates to investment markets. Now, however, with governments attempting to impose financial repression, bond investors should revolt.

PIMCO advocates not so much a mutiny but a renewed vigilance on this new ship, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies.

This is what we’re up against.  These immensely wealthy and powerful individuals portray themselves as “investors” but they’re nothing of the sort; they’re riskless arbitrage hunters.  Investing implies the taking on of risk in a productive activity.  Gross isn’t in search of that; he seeks only free profits from the simple, passive, and non-creative process of holding government bonds.  And this after much of his holdings were bailed out by the very same governments.

Gross’s hand isn’t quite as powerful as he would have us believe.  Where else would these parasites park their hoards if not the bonds of the US, European Union, or Japan?  The world is only so big and these three account for over half of global GDP.  China is the next largest economic entity but it’s only 1/3 the size of the US.

If AAA quality is your requirement, then Canadian or Australian bonds may also fit your horizon.

Come on!  The GDP of Canada and Australia are each less than 10% of the US.  Does Gross think a massive global transfer of “investment” into the bonds of these relatively tiny countries would do anything other than reduce their yields and create huge currency distortions?

Real riskless returns on government debt are nothing but needless transfers from society to wealth.  It’s far past time for this pseudo captain and his merry band of mutineers to disembark from their Good Ship Lollipop.  There’s no basis – moral or economic – for riskless returns.

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4 Comments
  1. Tom Hickey permalink

    Under the present monetary regime, issuance of Treasury securities is operationally unnecessary. Being operationally unnecessary, the interest on Treasury securities constitutes a subsidy.

  2. Max permalink

    As far as I know, economists rarely (if ever) consider the rent seeking aspects of monetary policy. It’s one of their blind spots.

    Cash investors are very unhappy with the current situation. Note that this includes hedge funds since such funds normally invest their collateral in cash, so the investor return is the return on cash plus the difference between long and short positions.

  3. Max,

    Most economists seem to have a blind spot to anything that hurts the well kept class. They’re the priests of capitalism.

    Jim

  4. An excellent post!

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