Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., anticipates Barack Obama will be the next president and that his administration may have no other choice than to produce the first $1 trillion U.S. budget deficit.
“You have inherited a mess,” Gross, co-chief investment officer of Pimco, said in an open letter to Obama, the likely Democratic presidential nominee, published on the Newport Beach, Calif.-based company’s Web site Monday. “What do I think you should do as the new president to rectify this mess? All I know is that any solution will come with a high price tag.”
Higher taxes for hedge-fund managers and oil companies will not cover the $500 billion stimulus the economy needs, including the anticipated Obama tax cuts for the poor and middle-class, universal health care and aid to the depressed residential real estate market, said Gross, a longtime Republican. The likely expenditures and increased borrowing suggest that “intermediate and long-term yields on government bonds have already bottomed and will gradually rise” through the next four years and possibly beyond, Gross said.
Gross domestic investment in machines, houses and inventories has fallen by $200 billion since its 2006 peak, Gross said. Domestic consumption will soon be $300 billion short of what’s needed for an economic rejuvenation, he said. With the deficit already pushing $500 billion even before the next president is sworn in, Gross anticipates it will reach $1 trillion deficit by 2011.
Republicans “will blame you for years and label you ‘Trillion-Dollar Obama,’” said Gross, in his analysis that assumes Obama will defeat his presumptive Republican adversary, John McCain. “There is, in fact, not much that you or any other President can do.”
Mark Porterfield, a Pimco spokesman, said Gross wasn’t available for additional comment.
“Bill Gross is correct that higher taxes for hedge-fund managers and oil companies will not cover Barack Obama’s agenda,” Jason Furman, Obama’s economic policy director said in an e-mail response. “Which is why Obama has proposed an ambitious program of spending restraint.”
Obama’s proposals include ending the war in Iraq, cutting subsidies for private Medicare plans and student lenders, eliminating no-bid contracts, and reforming the process known as earmarks where direct funding is allocated to specific projects in legislation, Furman wrote.
Gross draws a comparison with Japan’s efforts to recharge its economy after a 1980s real estate bubble fizzled. Over seven years, expansionary fiscal spending grew the deficit from 2 percent of GDP to 10 percent at its peak, he says. “Our trillion-dollar level in 2011 would equate to something like 6 percent of GDP, a mere pittance by Japanese standards,” Gross said.
Gross expects housing prices to fall a further 10 percent by January, by then a “Japanese-style deflation will be in full stride.” Home prices in 20 metropolitan areas fell the most on record in April, from a year earlier, according to an S&P/Case-Shiller home-price index released on June 24.
Global growth led by developing countries and rising commodity prices will provide a “firm background for stimulative U.S. monetary and fiscal policies” and save the U.S. from Japan’s experience of deflation and near 0 percent interest rates, Gross said.
Pimco, a unit of Munich-based insurer Allianz SE, manages about $800 billion. The Pimco Total Return Fund has about $129 billion in assets under management.