The U.S. government needs to start using more of its money to support markets to stem a burgeoning financial tsunami, according to Bill Gross, manager of the world’s biggest bond fund.
Banks, securities firms and hedge funds are dumping assets, driving down prices of bonds, real estate, stocks and commodities, Gross, said in commentary posted on the firm’s Web site today.
If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury.
The government needs to replace private investors who either new assets or have been burned by losses, Gross said. Pimco, sovereign wealth funds and central banks are don’t have the money to buyreluctant to fund financial firms after losses on investments they made to support the companies, Gross said. The world’s biggest banks and brokers have raised $364.4 billion in new capital after more than $500 billion in writedowns and credit losses since the beginning of last year.
Since financial markets seized up a year ago as the subprime-mortgage market collapsed, the Standard & Poor’s 500 Index has fallen 13 percent and home prices are down more than 15 percent.
Gross cast a bleaker view for the prospects of the world’s financial markets than in previous notes to clients. The fund manager has previously called on lawmakers to support housing with legislation passed in July that allows lenders to forgive some of homeowners’ debt and then refinance them into government-insured loans.
As Fannie and Freddie, banks, securities firms and hedge funds shrink, yields on all debt assets will rise compared with benchmark rates and volatility will increase, Gross said. The declines will end once sellers have depleted their assets and sufficient capital has been raised, Gross said. Unless new balance sheets emerge, prices of almost all assets will drop, even those of impeccable quality, he said.
There is an increasing reluctance on the part of the private market to risk any more of its own capital, Gross said. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning.
The decline in home prices hasn’t been seen since the Great Depression, Gross said. That drop translates to an even bigger decline in overall wealth as the effects ripple through markets, Gross said.
Makes you just want to keep shorting this market.