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Five Things You Need to Know: Pimco's Gross Lets the Freak Out


PIMCO's Gross calls for the government to buy financial assets.


Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

The Freak is Out . . . The Revelations Playbook . . . You Never Know What Water You Will Drink . . . Feeding the Beast, the Rise of Alan Greenspan . . . Where Did It All Go Wrong?

The Freak is Out

There comes a point in every junkie's descent when the tentative restraint of self-consciousness and self-image loosens up just enough to let the freak out. For most of us, once that line is crossed there's no going back, ever. Naturally, no one knows when that moment will arrive. Indeed, the unpredictability of it is what lends the trip down the chute from recreational abuser to full-on foaming-at-the-mouth dope fiend its delusional aura of impossibility; the conviction that It Just Won't Happen to Me. For Bill Gross, that moment came today.

It's conventional journalistic wisdom that you can't go off half-cocked calling the managing director of the world's largest bond fund, in this case the Pacific Investment Management Company, a metaphorical junkie and freak without some kind of substantiation and context. In the old days, people were beaten and thrown in jail for far less.

But this is The Age of Self-Evidence. Waist-deep as we are in facts based on theories disseminated by Washington D.C. Federal agencies and weird anti-truths assembled from half-baked rumors and innuendo bubbling up from Wall Street, what's a little more kindling on the fire going to hurt? In the metaphorical land of the blind, the one-eyed man is king.

This is the kind of story that would ordinarily require the marshaling of all available resources and legitimate reporting skills, but there's little time for that now. The Managing Director of Pacific Investment Management Company, PIMCO, just called for the government to start buying financial assets. The freak is out.

The Revelations Playbook

"If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury," Gross wrote today on his firm's Web site. "[A] systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami," he added.

If that kind of talk seems terrifying, it's probably because it is taken almost verbatim from the book of Revelations, an increasingly popular source book for Federal Reserve lackeys and financial types these days. It's hard to blame them. If I was doomed to work in the Federal Reserve, or if I managed the world's largest bond fund, I'd be scared too.

You Never Know What Water You Will Drink

"You never know what water you will drink."
- Ancient Chibchan aphorism

A good fix is hard to come by these days. Supply of credit is in absolute and total lock-down mode. The usual dealers are frozen in both place and time. Hell, they have their own vicious back monkeys to deal with. And that's a lesson worth keeping in mind. When the Ponzi scheme's scaffolding begins to finally shake loose and gyrate, it's every man for himself.

It is under such dire circumstances that the social order begins to disintegrate and people find themselves doing things they previously would have thought unimaginable; drinking nail polish remover, sniffing airplane glue, tying a bag filled with fresh spray paint over your head. Hence, the Ancient Chibchan aphorism: "You never know what water you will drink." Only a fool would tromp recklessly on Chibchan wisdom. Or an ignoramus. These days it's hard to tell the difference between the two, and normally safer to quietly tiptoe around the situation when someone like Gross lets the freak slip out. But the stakes have been raised to a point where we all have something on the line now. It's like watching someone stuff hundred dollar bills into a crooked slot machine and then waking up to the realization that that someone is you.

Feeding the Beast, the Rise of Alan Greenspan

No one sets out with the intention of becoming a toothless meth head. That's the kind of thing that slowly creeps up on you while you're busy feeding the beast, working to keep it far down deep inside and well-hidden.

The United States managed to feed its own beast for two full decades with only a handful of behavioral lapses. The main supply was operated out of a Washington D.C. quasi-public, bureaucratic branch office of the United States Federal Reserve, then headed up by Alan Greenspan, a former disciple of Ayn Rand with a rumored-to-be fake doctorate degree from NYU.

That a Randian Objectivist would suddenly find himself at the helm of largest credit creation machine in the world is as implausible as it is horrifying. Make no mistake, I'm no fan of Rand's Objectivism. Apart from being badly written, her philosophy, such that it is, flaps angrily in the wind, rootless, mistaking mere success at something for heroism.

Then again, from that standpoint alone, Greenspan's tenure as the chief supplier was remarkably heroic. We are now, stem to stern, the most deeply indebted society in the history of the world. While credit appetites ran huge during Greenspan's years at the Fed, it was his willingness to shower the Street with a seemingly endless supply of it that both enabled and reinforced excessive.... no, EGREGIOUS risk taking... even while soothingly spouting off econo-gibberish before politicians in Washington and on national TV. That's something only a fake doctor could get away with.

Perhaps most incredible is Greenspan's sheer durability. Even in retirement, he remains the Fountainhead, and it was this source that likely pushed Gross over the edge.

You can't make up that kind of storyline.

Where Did It All Go Wrong?

For Gross we can only speculate on where it all went wrong. And my guess is somewhere between Greenspan and Dow 5,000.

Gross predicts Dow 5,000
September 6, 2002 (CNN/Money)

The manager of the world's biggest bond mutual fund predicts the Dow Jones industrial average could fall another 40 percent to 5,000 because the stock market remains stubbornly expensive despite a more than two-year decline.

The point here is not that Gross was Wrong. Or maybe Early. Or any of the other useless hindsight that passes for pseudo-analysis. The point is that, for ordinary Americans, the Dow at 5,000 is an outright national disaster, and in 2002, when Gross was making his dire predictions for the Dow, the nation was moving toward hunkering down behind the closed doors of their then affordably mortgaged and yet-to-be-foreclosed homes, many likely even cashing out any stock they owned in exchange for stakes in PIMCO-run bond funds.

By June of 2003, Greenspan's Federal Reserve bludgeoned savers and basically enacted mandatory real estate speculation by taking short-term interest rates down to 1%. Dow 5,000 subsided... but you can only keep the beast hidden for so long before it leaps out and causes all manner of hysteria and mayhem. It's too much for decent, hard-working people to bear.

So today, as Gross nervously writes about the need for the government to support assets, the Dow is a mind-numbing 50% higher than where it was when Dow 5,000 was feared. That raises the obvious question, Why now? To the average American, the wheelings and dealings of the world's largest bond fund manager are as inscrutable as a dolphin's bark. Still, we can't help but wonder why now? Why did the freak slip out at this particular moment in time? Why not back in 2002? The answer is that, because then, it was only stocks plunging. Today, everything is plunging... at the same time.

Despite delusions of permanent inflation, asset prices are deflating across the board. For the first time since the Great Depression, stock, bond and real estate prices are deflating at an unimaginable pace, down 10% year-over-year.

Gross wrote today, "[T]he more [these leveraged assets] decline, the more frequent and frenzied the margin calls, and if the additional cash flow is not provided, not only an asset liquidation but a debt liquidation follows." Good lord, if that's not enough to let the freak out, nothing is.

The junkie's dilemma, whether we're talking about crystal meth, heroin or cheap credit, is that the spiral of addiction inevitably overwhelms any reasonable judgment about what constitutes a "cure." That is precisely why a junkie can never be relied upon to offer up an honest, sensible path to good health. No matter what treatment or plan is offered, the only goal is to get the supply to the beast... at all costs. Today, Gross let the freak out. And the plan is simply to open up the government's balance sheet to the beast... at all costs.

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