By Tom Bradley

With all of us wondering how we’re going to get out of this mess, I thought this month’s Investment Outlook by Bill Gross of Pimco was a good read.  Mr. Gross is known as the ‘King of Bonds’ in the U.S. and has led Pimco to the top of the heap.  The firm has roughly $750 billion in assets under management.  

I am not one to worry about economic labels, but I nonetheless found his definition of recessions and depressions useful.

“Recessions are cyclical downturns of a relatively brief time frame, characterized by inventory corrections and addressed by low interest rates and mild doses of fiscal stimulus.  Depressions are more extreme with double-digit levels of unemployment but defined more importantly by credit contraction and debt liquidation.  The deflation that normally accompanies a depression is dangerous not because prices are going down, but because the “for sale” sign goes up on the credit markets which have always made capitalism possible.”

By that definition, we better start getting used to the ‘D’ word.

His comments about liquidity and the need for credit are also interesting.  Like everyone, he would rather not have increased government involvement in the banking sector, but feels that it’s necessary to stabilize asset prices.  Inevitably there will be consequences. 

“The private system is the heart of capitalism and generates most of its productivity, so more government usually involves less prosperity and certainly more inflation.”

And on inflation... 

“Will those checks [from government stimulus programs] create inflation?  Let’s hope so provided it is low and stable over time.  Policymakers are more than vocal about attempting to reflate the economy...”

These are a few excerpts that caught my attention, but to do it justice, you should read the full four pages.  Like everything we read these days, it isn’t a ‘feel good’ piece.  We’ve got serious issues that have serious consequences. 

As investors, however, we need to take the next step which is to determine how much of the news/views/headlines are factored into the markets.  With stocks trading at half of what they were 18 months ago and credit markets as bad as they’ve ever been, Mr. Market is not oblivious to what Mr. Gross is saying.