Bill Gross has always peppered his investment outlooks with uncomfortably intimate tableaux from the Gross family homestead, with topics ranging from his (now ex-) wife's drinking to his own sperm. But increasingly, the stories are serving a new purpose: To distract from the fact that Bill is in a dark, dark place. Late capitalism is crumbling, we're told, and nobody seems to grasp the breadth of economic risks that confront us. But rather than dwell too heavily on doom and gloom in his monthly letters – which are, essentially, entertainment products – Gross is leaning on the folksy family anecdotes to balance out some truly apocalyptic thinking.
So on Thursday we were treated to a discussion between Bill and his kids about the nature of fractional-reserve banking, illustrated by use of an example in which a fictional Bank of USA mints money – out of thin air! – with loans to pizza parlors.
"Pretend," I told the "fam" huddled around the kitchen table, that there is only one dollar and that you own it and have it on deposit with the Bank of USA – the only bank in the country. The bank owes you a buck any time you want to withdraw it. But the bank says to itself, "she probably won't need this buck for a while, so I'll lend it to Joe who wants to start a pizza store." Joe borrows the buck and pays for flour, pepperoni and a pizza oven from Sally's Pizza Supplies, who then deposits it back in the same bank in their checking account. Your one and only buck has now turned into two. You have a bank account with one buck and Sally's Pizza has a checking account with one buck. Both parties have confidence that their buck is actually theirs, even though there's really only one buck in the bank's vault.
Eventually Gross the younger gets Dad's drift.
"And so," my oldest son, Jeff, said as he stroked his beardless chin like a scientist just discovering the mystery of black holes. "That sounds like a good thing. The problem I'll bet comes when there are too many pizza stores (think subprime mortgages) and the interest on all of the loans couldn't be paid and everyone wants the dollar back that they think is theirs. Sounds like 2008 to me – something like Lehman Brothers." "Yep," I said, as I got up to get a Coke from the refrigerator. "Something like Lehman Brothers."
Whether this actually transpired is beside the point. The purpose is to let us know, in a casually confessional way, that the global economic in order is splintering under the weight of trillions of dollars of debt, just one monetary policy goof from crushing the financial system with us beneath it. The fractional reserve banking system that has undergirded capitalist development from 1200 AD until today is basically just one big Lehman. The only solution is to, uh, put your money in the Janus Global Unconstrained Bond Fund and subscribe to Gross's newsletters. As Gross concludes, paraphrasing Will Rogers, “Be more concerned about the return of your money than the return on your money in 2017 and beyond.”
How any of this relates to Gross's investment strategies is a bit of a mystery, but it does raise the prospect of some more darkly entertaining letters in the future:
- Bill teaches his granddaughter about botany and credit derivatives using a handful of seeds stored in his survival bunker.
- At a meeting with the family lawyer over which assets he will soon be surrendering, Bill muses on the inevitability of a global war of all against all.
- On a trip to pick up their New Zealand passports from the embassy, Nick and Bill reflect on the essential absurdity of human existence in a world of subzero benchmark interest rates.
- In the middle of a lighthearted yarn about his last colonoscopy, Bill pauses to note the inescapable conclusion that the prophesies foretold in the Book of Revelations are coming to pass, one by one.
- Bill accidentally kills a bug and begins sobbing uncontrollably.
Show Me The Money [Janus Capital]