President Obama’s First Term Looks Grim, says Gross

Why in the world would anyone want to take on the mess the United States of America has become? Bill Gross of Pimco is wondering himself, and his crystal ball would seem to suggest that Barack's first term in likely to be a difficult one for the wunderkind from Chicago:

By January, home prices will be down another 10 percent or so and our Japanese-style property deflation will be in full stride. Congress will have had its summer recess though and spent September and October on the campaign trail. They had to get re-elected you know, so those homeowners just had to wait.

But you’ll have your tax bill and your healthcare bill and your housing fix, and somehow it’ll all be paid for by wealthy hedge fund managers, oil companies or, pray tell, a robust economy that’s creating good jobs at home instead of exporting them abroad. Uh, I don’t think so, Mr. President. That’s where the “yes we can” morphs into “no we can’t.” Not that you won’t accomplish most of that – the robust economy and the good jobs notwithstanding. It’s just that you won’t be able to pay for it and it’s better to admit it now as opposed to later

So let’s start out by dropping all of that “budget neutral” rhetoric and admit where we’re headed. Your administration will produce this nation’s first trillion dollar deficit! Pimco

The next President will be inheriting a $500 billion fiscal deficit, and will have to throw an additional $500 billion of government spending at the economy to maintain any hope of keeping the U.S.S. America on an even keel, according to Bill's back of the envelope calculations.

If Gross is right in comparing us with Japan circa 1990, we are staring at a long uphill slog. But there is one hope out there:

Still, as our recent Secular Forum concluded, strong global growth spearheaded by developing countries and accompanied by significant commodity inflation should provide a firm background for stimulative U.S. monetary and fiscal policies during your first administration. Importantly as well, current negative real interest rates along with the innovative liquidity provisions by Bernanke’s Fed should promote “re” as opposed to “de“-flation. A trillion dollars of government deficit spending is potent medicine.

Yes, re-flation over de-flation might be the lesser of two evils, but it remains to be seen which way the chips fall. But Gross is right about one thing.

The first term of the next President is not looking particularly investor friendly, at least in the fixed income markets.

Dear President Obama
Pimco Investment Outlook July 2008
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

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