Why the markets aren’t reacting to debt ceiling talks

Marketplace Staff Jul 25, 2011

Why the markets aren’t reacting to debt ceiling talks

Marketplace Staff Jul 25, 2011

Kai Ryssdal: There are now, after a lot of Washington staff work I’m sure, two competing proposals on the — oh, wait, hang on.

Voice: At the tone, there will be eight days, five hours, 54 minutes and 30 seconds until the debt limit is broken. Beep!

Anyway, there are now two competing proposals on the table. One from House Republicans. One from Senate Democrats. The president’s going to speak later tonight.

But if you want to know what the markets are saying, you’ve got to talk to a guy who speaks market-ese. For that, we’ve got Bill Gross on the line. He runs the biggest bond fund in the world for PIMCO, the Pacific Investment Management Company down the road from us. Bill, welcome to the program.

Bill Gross: Thank you, nice to be here.

Ryssdal: Go back to Friday afternoon with me. I have to confess, I got a little excited because I figured that was the time the markets were going to say, ‘All right, Washington gets it. There’s going to be a panic and everything’s going to go kerflooey come Monday morning.’ And here we are, and nothing happened. Why aren’t the markets doing more?

Gross: Well I was in the same camp. I have a sense in terms of an explanation, though, that this was never a Sunday evening liquidity event a la Lehman Brothers or the TARP, because in this case, the liquidity has not been threatened; there’s simply lots of money available, whereas back then, investment positions by necessity were being liquidated. That’s one particular difference. The second one might be that the stock market, which is only down a quarter of a percent today — these are global companies and not necessarily U.S. companies, and they continue to benefit from Asian growth, which is picking up. And they are less dependent on the situation in the United States.

Ryssdal: Yeah, but wait a minute, because for weeks now, the White House and Secretary Geithner and other folks have been saying the markets need stability; they need to know what’s going on, on the theory that, you know, the market talks to us, right? And you’re one of the people the markets talk to, you figured out how to decipher the markets. What are they saying, in fact?

Gross: Well today, they’re saying all is well and/or the crisis will be resolved in a constructive fashion. I suspect it will. I think there’ll be some resolution to the debt ceiling; the debt ceiling will be raised and we’ll move on to bigger things. The bigger things, however, would be the actual state of the budget deficit and whether or not it can reduced over time. So we shall see from that point.

Ryssdal: Your colleague Mohamed El Erian, who runs PIMCO, came out over the weekend with a statement that said, you know what, a Triple-A rating is, in essence, as good as gone, because we’ve been dithering so much. Do you buy that, do you agree with that?

Gross: I think so.

Ryssdal: You were pretty quick to say that — that’s a little disheartening that you would be so quick.

Gross: Well we’ve been looking at this for a long time. We think the United States has substantial problems. We’re comparing it this morning actually in our investment committee to Euroland countries, to Japan, to the United Kingdom, and you know, it’s actually close to the top of the list in terms of problems. We have a present value of future liabilities — I know this is complicated, but I’m talking here Medicare, Medicaid, Social Security, you put them all together — basically of $60 trillion. And that’s about six times the current debt of the United States. In other words, we owe that much money, we’re just not obligated to pay it yet.

Ryssdal: You’re an economics guy, you’re a markets guy, but clearly all of this hinders on politics. Do I hear you’re right that the markets basically believe what’s going on in Washington right now is all politics and posturing and they’re going to fix it because they have to?

Gross: The markets do believe there’ll be a fix to the debt ceiling; whether or not they believe there’ll be a fix to our budget crisis is another matter. I think what this debt crisis demonstrates more than anything, though, is the dysfunctionality of the American political system, and what it bodes for future years. A parliamentary system like Canada or the U.K. has can produce a rather immediate thumbs up or thumbs down on fiscal direction, but in the United States, a divided Congress and a perpetual election mode lead to inaction.

Ryssdal: Bill Gross, co-chief investment officer at PIMCO down in Newport Beach. Bill, thanks a lot.

Gross: My pleasure, thank you very much.

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