What about a bubble? From today's chicago tribune
<<President Richard Nixon once declared, "We are all Keynesians now."
Things have come a long way since Nixon glibly justified his decision to intervene in the economy, violating the principles of Republican conservatism and following the teachings of the interventionists' icon, economist John Maynard Keynes.
Nixon imposed federal wage and price controls, he said, because he believed that the economy, left to itself, would damage him politically.
Today, William Gross tells us, "We are all vigilantes."
Gross is an icon of the bond market. Chicago-based mutual fund research firm Morningstar named him fixed-income fund manager of the year for 1998. A few years earlier, Pensions & Investments, the bible of institutional investors, called Gross the most influential person in the business.
Gross, 56, a wiry tenor who spent four months just after college in the late 1960s playing blackjack nonstop, is the chief investment officer for California-based PIMCO Advisors, which has nearly $225 billion under management.
He holds no public office and is in no position to impose wage or price controls.
But his buy and sell decisions and those of others in the financial markets have dramatic effects on economic trends and have reduced greatly the ability of governments to manage their economies, especially when government policy runs afoul of markets. The power of the bond market was a lesson President Clinton learned early in his tenure, thanks to Federal Reserve Chairman Alan Greenspan.
Speaking to a conference of the Society of American Business Editors and Writers last week, Gross explained that investor vigilance against inflation and other government policies unfriendly to stock and bond holders has become a principal component of the favorable economic outlook.
"We've increased our awareness in the financial markets," he said. "It's a vote that signals not just to politicians but to central bankers that what we want is stable economic growth, a stable currency, low rates of inflation and a balanced budget. I don't think these signals back in the '60s and '70s were sent the same way. If you are vigilant, things don't get out of control so quickly."
Every Bill Gross wanna-be, gaping at the CNBC screen or glued to TheStreet.com Internet site, is part of that vigilance, no matter how ill-informed he or she may be.
Professional and amateur investors alike pummel a company's shares when it misses its quarterly earnings-per-share estimate by a penny. The least surprise in a routine economic report reverberates immediately and globally in bond prices and interest rates.
Financial market vigilance--along with economic globalization, demographic trends toward more investing, and productivity gains from technology--underpins the economy as well as stock and bond prices, Gross said. Investors are on guard around the clock around the world.
Gross acknowledged that the most important thing he learned as a youth in his blackjack binge was that you must never get up from the table. That's what he means by being a long-term investor.
"Hearkening back to the blackjack days, the way I learned that was that when I was at the tables and I had a streak of bad luck, I'd take a break," he said. "What I didn't figure was the longer I sat at the table, as opposed to wandering through the casino, the more money I made."
Indeed, with more players at the table more of the time, many investors have been winners over the last decade, at least, creating a self-fulfilling rosy scenario for financial markets and the economy. But the streak of winning bets creates a paradox, Gross said: The upbeat outlook remains in place, with one big risk.
"The financial bubble stands a chance of throwing a monkey wrench into the equation," he said. In his view, the lure of successful betting sows the seed of destruction. "I think we're in fine shape, absent the bubble. It's the only thing that can turn off the prosperity we have going forward."
In other words, the hordes of financial market vigilantes, shooting first and asking questions later, have created favorable conditions for a bull market now and a serious sell-off later.
Fed chief Greenspan has become obsessive about the risk of exuberant stock prices, Gross said.
"Alan Greenspan is increasingly becoming phobic on the stock market in terms of his comments, and with some justification. It's a question for the bond market as well. Bonds these days are dominated by stocks.
"Inflation increasingly is a function of the stock market," Gross, said, noting the belief that consumer spending is fueled in part by the paper wealth that many Americans enjoy in their stock portfolios.
If overconfidence, not vigilance, explains the bullish stock market, all bets are off. Overconfidence, of course, can diminish vigilance.
With bond yields not far above historic lows and with oil prices and wages rising, there's not much room for a flight to quality in bonds to jump-start an economy crippled by a sustained stock market decline, Gross said. Bond prices easily could fall along with stocks if the bubble Gross describes is pierced.
What would happen then? Greenspan already has hinted broadly that the Federal Reserve stands ready to bail out overconfident investors, Gross said.
The vigilantes riding across the financial market landscape are wearing Nixon masks. And Nixon was right: "We're all Keynesians now.">>
chicagotribune.com
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