November 1, 2011

Bill Gross and LizAnn Sonders at Schwab Impact: ‘Make Things, Not Paper’

PIMCO's co-CIO and Schwab's market strategist deliver straight talk on Europe, the U.S. economy and 'clueless' political parties

Bill Gross (far left) and LizAnn Sonders speaking to Tyler Mathisen of CNBC on Tuesday at Schwab Impact. Bill Gross (far left) and LizAnn Sonders speaking to Tyler Mathisen of CNBC on Tuesday at Schwab Impact.

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In the opening session at Schwab Impact 2011 in San Francisco, both Bill Gross, founder and co-CIO of PIMCO, and LizAnn Sonders, Charles Schwab’s chief market strategist, spoke bluntly about the global markets and the economy, with Sonders a bit more optimistic than Gross.

Gross, who in his latest monthly commentary lamented the shortfalls of policymakers in both Europe and the U.S. as failing to encourage growth, and that more debt was not the way to get us out of our current debt mess, handled the first question from moderator Tyler Mathisen of CNBC.

In a conversation about the global markets, Mathisen wondered whether, as an investor, he should be worried that “my money seems hostage to a Greek prime minister?”

“You should be very worried,” Gross responded, in reference to Greek Prime Minister George Papandreou’s suggestion that the latest eurozone bailout plan should be put to a referendum by Greek voters. “At this point,” Gross continued, “it’s a question of when rather than if Greece will default.”

When Mathisen followed up by asking if Greece will remain in the eurozone, Gross argued that “they would do better to drop out and then come back.” Ever the blunt speaker, Gross then said that “Iceland is the only country that did it right; they basically told the banks to stuff it.” He suggested that if Greece doesn’t accept its bailout medicine, “it will be in trouble for the next 10-15 years.”

LizAnn Sonders of SchwabSpeaking of market volatility on the second day in a row of tremendous stock market moves, Mathisen then asked whether it was likely that “we will have more days where something exogeneous happens,” like a statement from a Greek prime minister, and the market responds in a volatile way.” Sonders (left) said that “the short answer is ‘Yes.’ We have to face the fact that the movers of the market tend to be high frequency traders,” and she worries that “the market is more reactionary than it's ever been before, and is not playing its proper role.”

As for how advisors and individual investors can respond to such volatility, Sonders suggested that the worst thing was to “try and shorten your [investing] time horizon,” and that investors should try to make volatility work for them partly through regular rebalancing. She also suggested that the demise of MF Global may well have had a significant effect on market movements in the last two days.

Responding to Mathisen’s request for how Gross and Sonders might help solve the U.S. and developed world’s debt problem, Gross said that at PIMCO “we call it the time of ‘new normal’ minus,” that while the United States is doing better than its European developed countries counterparts, “we’d have to grow at four percent for a couple of years” to significantly reduce our debt to GDP ratio.

Sonders said the “developed world has a debt problem” consisting of high debt and low growth plus an eased monetary policy, which in turn has “weakened growth in the developing world as they tighten their monetary policies. We’re in a cul de sac” that may be difficult to emerge from while we’re in a ZIRP environment (zero interest rate policy). She agreed that in the near term, “it would be hard to get more than 2% growth. However, she suggested the emergence of a “budding story that’s not getting the attention it deserves,” saying “we might have a resurgence in manufacturing in the U.S.” citing an Accenture study which found that many American companies with manufacturing operations in China are considering opening such operations back in the U.S.

When an advisor attendee asked what the Occupy Wall Street protesters want, Gross said they are sending a message: they want a job. “Globalization used to work for the U.S., he said, “now it's working for countries with lower labor costs who have taken advantage of technology. People just want jobs.” Echoing Sonders’ suggestion of an underreported story, Gross charged that “for twenty years we've been making paper rather than things, and in the process we created a number of liabilities. We've been like bad squirrels, not putting enough away.”

As for future developments, Sonders suggested that “we may be pleasantly surprised” by the so-called supercommittee in Congress working on deficit reduction. “Expect something in the first week of November so the Congressional Budget Office can score it to get a vote” on legislation by the Nov. 23 deadline, though she said we then get into a “relatively toxic political environment for the next year. Gross is not as hopeful, however. “Both parties are clueless. We can't pay for entitlements until we put the country back to work again … Both parties are dancing around this.”

Click here to read AdvisorOne’s complete coverage of Schwab Impact 2011.

Read about former British Prime Minister Tony Blair's speech at Schwab Impact 2011 at AdvisorOne.

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