The latest investment outlook from top bond manager Bill Gross reads a bit like a script for a Hollywood disaster movie.
The PIMCO star says despite important institutions calling for the US to change its ways, attention is not being paid.
Unless drastic steps are undertaken the US fiscal volcano will explode and the ‘damage would likely be beyond repair’, says the manager of the world's biggest mutual fund the $260 billion PIMCO Total Return Bond fund.
He starts off by questioning all the naysayers on the state of the US economy.
‘How could the US still not be the first destination of global capital in search of safe (although historically low) prospective returns?'
How could the US not be considered the world’s ‘cleanest dirty shirt’ with a federal debt/GDP at less than 100%, Aaa/AA+ credit ratings, and the benefit of being the world’s reserve currency?
With its world-class universities, a mobile labour force and a firm hand on the tech industry there are still a lot of positives, he says.
‘Well, Armageddon is not around the corner. I don’t believe in the imminent demise of the US economy and its financial markets. But I’m afraid for them.’
He is not the only one, he says, and when global institutions like the IMF, the CBO (Congressional Budget Office) and the BIS (Bank of International Settlements) begin to speak in unison, attention must be paid.
‘What they’re saying is that when it comes to debt and to the prospects for future debt, the US is no “clean dirty shirt.”’
‘The U.S., in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth. Uncle Sam’s habit, say these respected agencies, will be a hard (and dangerous) one to break.’
All three are saying that the US’ fiscal gap must be closed with spending cuts, tax hikes or a combination of both which keeps a country’s debt/GDP ratio under control.
The distressing situation the US finds itself is highlighted further when you compare it to other countries current predicament, he says.
Using his 'Ring of Fire' analogy, Gross says the US is alongside Japan, Greece, the UK, Spain and France in a rogues’ gallery of debtors.
Looking at countries which have their budgets and fiscal gaps under relative control we find Canada, Italy, Brazil, Mexico, China and a host of other developing as opposed to developed countries, says Gross.
‘What the updated IMF, CBO and BIS “Ring” concludes is that the US balance sheet, its deficit and its “fiscal gap” is in flames and that its fire department is apparently asleep at the station house.’
‘These studies (when averaged) suggest that we need to cut spending or raise taxes by 11% of GDP and rather quickly over the next five to 10 years.’
Those are the warning signs and in the final act, Gross reveals what potential outcome awaits the US if nothing is done.
‘Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline.’
‘Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive within the “Ring of Fire.”’
‘If the fiscal gap isn’t closed even ever so gradually over the next few years, then rating services, dollar reserve holding nations and bond managers embarrassed into being reborn as vigilantes may together force a resolution that ends in tears.’
‘It would be a scenario for the storybooks, that’s for sure, but one which in this instance, investors would want to forget. The damage would likely be beyond repair.’