Bill Gross, the founder of bond giant Pimco, has been giving some thought to Pepé Le Pew, the cartoon skunk who spends his time trying to woo female companions, tempting them with a bad French accent and promises of a bungalow filled with little Pepés.
The closely watched bond king has concluded that the US Congress is very similar to the little French cartoon skunk. "It is easy to love a skunk, but only on the silver screen, and if in real life, at a considerable distance. I think of Congress that way" said Gross in his monthly note to clients.
"Every two to six years, they dress up in full makeup pretending to ... change, vowing to correct what hasn't been corrected, promising discipline as opposed to profligate overspending and under-taxation, and striving to balance the budget when all others have failed," he said.
"Oooh Pepe—Mon Cheri! But don’t believe them—hold your nose instead," said Gross.
Gross' point is thatCongressional spending remains out of control,with 75 percent of the budget non-discretionary and entitlement-based.
“Without attacking entitlements—Medicare, Medicaid and social security, we are smelling $1 trillion deficits as far as the nose can sniff. Entitlement of spending is where the money is and you need to reform it” said Gross.
And that $9 trillion federal debt pales into insignificance, Gross said, when compared with the unfunded liabilities of Medicare and Medicaid, which are calculated to stand at $22.8 trillion and $35.5 trillion, respectively.
"It is like comparing Pluto to Saturn and Jupiter," he said. "This country appears to have an off-balance sheet, unrecorded debt burden of close to 500 percent of GDP; we are out-Greeking the Greeks."
Gross sees four ways out of this problem for America. They don't make very nice reading.
"The only way out of this dilemma, absent of very large entitlement cuts, is to default in one of four ways: 1) Outright default via contractual abrogation, surely unthinkable 2) surreptitiously via accelerating and unexpectedly higher inflation 3) deceptively via a declining dollar and 4) stealthily via policy rates and Treasury yields far below historic levels, paying savers less on their money and hoping they won’t complain,” he said.
Gross is only kidding Congress, he said, and he admits they don't have bushy tails and black-and-white stripes. But to him, the Le Pew comparison stands up to scrutiny.
"Perhaps there’s just a stink bomb that the Congressional sergeant-at-arms sets off every time they convene and the gravel falls to signify the beginning of the people’s business. Perhaps. But in all cases, citizens of America—hold your noses. You ain't smelled anything yet.”