NEW YORK (Reuters) - To halt a “financial tsunami”, the U.S. government should give the Treasury the right to buy debt and other assets, said Bill Gross, chief investment officer of Pacific Investment Management Co, or Pimco on Thursday.
“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,” wrote Gross, who manages the world’s biggest bond fund, in his September Investment Outlook on the firm’s Web site.
Pimco’s clients and contacts around the world are “sitting on their hands as well,” waiting for a major buyer to come into asset markets, Gross said, speaking on CNBC television.
A Treasury spokeswoman declined comment on Gross’ warning.
“This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami,” Gross wrote.
The two-year decline of the U.S. housing market, which many analysts regard as the cornerstone on which the economy’s fate now rests, shows no sign of ending soon.
The prices of mortgage-backed securities tied to that market and a host of other assets including corporate bonds and stocks are all vulnerable to further declines, as a slowdown in consumer spending has hurt manufacturing companies. At the same time, a year-old global credit crunch is exacting a toll on banks and continues to crimp lending.
“To ultimately stop this asset/debt deflation, a fresh and substantial new source of buying power is required,” Gross wrote.
Across financial markets, liquidity is drying up and investors’ risk appetites are “anorexic.” Despite a recent resurgence in the stock market, asset prices are mostly falling, including those of commodities, Gross noted.
In this uncertain environment, private-sector investors are increasingly reluctant to risk committing any more of their own capital, he wrote.
Over $400 billion in bank and finance-related capital has been raised over the past year, of which Pimco has bought “a decent amount”, Gross wrote.
“Too bad for us and for everyone else who bought too soon,” since the value of many of these investments has fallen, he wrote.
Because of this poor performance, Pimco, as well as sovereign wealth funds and central banks “are reluctant to make additional commitments,” Gross wrote.
“We have been buying distressed mortgages and that’s attractive,” said Gross, speaking on CNBC television.
The U.S. government’s willingness to support mortgage finance giants Fannie Mae FNM.N and Freddie Mac FRE.N is also a key factor influencing Pimco’s investment decisions, he indicated.
“Basically we are trying to anticipate what government officials and policy-makers will do,” Gross said.
“You want to buy what they are going to be buying, hopefully over the next several months, and that’s to buy Fannie and Freddie mortgages,” he said.
Gross manages the $130 billion Pimco Total Return Bond Fund.
Reporting by John Parry; Editing by Tom Hals