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Fund Times: Bill Gross' Grim Economic Outlook

Plus, news on J.P. Morgan, TIAA-CREF, Barclays, Citizens, Legg Mason, and more.

Morningstar Analysts, 05/08/2006

In his May investment outlook commentary, PIMCO managing director Bill Gross likens auto giant General Motors GM to a canary in the coal mine of the U.S. economy. That is, the problems and struggles GM faces today, according to Gross, are ones the nation may be facing more broadly in the years to come.

Gross argues that General Motors and the U.S. economy share flaws that will lead them to similar fates. "They appear to be conjoined primarily by the uncompetitiveness of their existing labor cost structures and the onerous burden of their future healthcare and pension liabilities." At GM it is estimated that "$1,500 of every.car sold in dealer showrooms goes to pay for current and future health benefits of existing and retired workers, a sum totaling nearly $60 billion. The total future healthcare liability for all U.S. citizens can be measured in the tens of trillions."

While General Motors and the nation seem to face analogous problems, Gross argues that the remedies they are currently undertaking to solve these problems, and those solutions they may embrace in the future, could also be similar.

For example, Gross believes that the survival tactics that General Motors is attempting "in the form of contract renegotiations (the heavy lifting of which is now being expressed via its parts supplier Delphi in bankruptcy court) will likely be replicated at some point via U.S. economic policies emanating from the U.S. Treasury and Federal Reserve." According to Gross, these future policies could include the eventual abandonment of the "strong dollar" policy, protracted periods of historically low real interest rates, legislative changes, and tax increases. These policies, Gross states, could produce "higher inflation.higher taxes, [and] currency devaluation" particularly against the currencies of Asian nations.

He adds that it may be possible for the U.S. to grow its way out of its current difficulties, through "productivity gains, by emphasizing innovation, and upscaling education"; however, as he points out, these are well-known tools that may be difficult to gain an advantage on now.

Though these are longer-term trends, and things will not change overnight, what does this mean for investors? Gross urges investors to move away from U.S. assets and "toward more competitive economies less burdened by health and pension liabilities, those personified by higher savings rates and investment as a percentage of GDP. Need I say more than to sell U.S. assets and buy Asian ones denominated in their local currencies; or if necessary to hire a global asset manager with sufficient flexibility and proper foresight to thrive in an increasingly difficult investment environment."

Many Morgan Managers Dine on Goose Eggs

We were disappointed to see, in a recent regulatory filing, that many managers at J.P. Morgan refuse to eat their own cooking. In fact, fund managers at the firm often have no personal investments whatsoever in the funds they run. To us, this signals a lack of confidence in the funds' investment process and in the future prospects these managers see for the funds.

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