The Oracle Of PIMCO: Healthcare Will Up Interest Rates, Greece Is Toast

Bill Gross, the most famous fixed income investor in the world, has grown progressively more pessimistic about the financial world’s prospects. In his monthly letter to investors, he spent most of his analysis on the “lie” that health care reform will reduce the national deficit over the next decade. He also said that the notion that Greece could reasonably escape default is a myth.

The suspicion about the health care forecasts have almost all been based on the fact that deficit reduction does not happen over a decade; it happens year by year and month by month. A budget that runs a deficit for nine years and makes it up in the tenth is a budget that build a substantial deficit if that deficit causes a growth in the nation debt. The debt service of the deficits in the early years of health reform will overwhelm the small amount of  money that Obama claims it will make toward the end. In the case of the health care reform package, the cost to the government though the first several years is massive.

Gross writes, in an analysis partly aided by comments from former CBO chief Douglas Holtz-Eakin, “Front-end loaded revenues and back-end loaded expenses promote the fiction that a program that will cost $950 billion over the next 10 years actually reduces the deficit by $138 billion. After all the details are analyzed…it will add $562 billion to the deficit over the next decade. Long-term bondholders beware.”

Having raked the US economy with gun fire, Gross turns to Greece and makes the point that almost all skeptics about the southern European nation have made. Greece has a population that wants to spend and not work, and the global capital markets do not believe that Greece will live up to its promises of reform. Gross writes “…when viewed from an investor’s lens focused on Greece for instance: 1) Greece can’t issue debt in its own currency, 2) its initial conditions and demographics are abominable, and 3) its central bank – The ECB – believes in positive, not negative real interest rates.”

Gross is as astute an investor as there is when it comes to the risk involved with fixed income instruments of any kind whether they be sovereign or corporate. He makes the case, without articulating it directly, that a default on Greek debt will happen sooner rather than later.

Douglas A. McIntyre