Gross, Grantham Put Economy in Perspective

As you make sense of this week's stock market turmoil, consider the opinions of star fund managers Bill Gross and Jeremy Grantham.
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BOSTON (TheStreet) -- The S&P 500 Index had its biggest weekly drop in more than a year, falling 6.3% and prompting Nouriel Roubini and Marc Faber to bring out doomsday predictions. As you make sense of the stock-market turmoil, look to the experts with the track records to justify guru status. Chief among them are Bill Gross of PIMCO and Jeremy Grantham of GMO.

Europe's debt crisis and what appear to be glitches at U.S. stock exchanges helped to pummel shares last week. But over the weekend, European leaders rolled out a $1 trillion rescue package for indebted countries, bolstering global stocks and the euro. Still, at least a quarter of the countries that use the euro shoulder more debt than they've agreed upon. Europe's troubles persist.

Bill Gross manages the world's largest bond fund, the $225 billion

Pimco Total Return Fund

(PTTAX) - Get Report

, which has delivered an 8% annualized return since inception in 1987, making it the eighth-best fund in its category, according to


. Gross also serves as Pimco's co-chief investment officer.

In his monthly commentaries, Gross addresses issues that affect bonds and the U.S. economy. Here are some of his views from the past three months:


: "Citizens have never been as divorced from their representatives, and if that description fits the Democratic Congress now in control then it applies to Republicans as well, past and present. So you watch


or is it


? O'Reilly or Olbermann? It doesn't matter. You're just being conned into rooting for a team that basically runs the same plays called by lookalike coaches on different sidelines."

Bill Gross


: "Passage of health care reform represents a continuing litany of entitlement legislation that will add, not subtract, to future deficits and unfunded liabilities. No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer as asserted by Democrats and, in fact, the Congressional Budget Office."

Gross agrees with former CBO Director Douglas Holtz-Eakin that "front-end loaded revenues and back-end loaded expenses promote the fiction that a program that will cost $950 billion over the next 10 years actually reduces the deficit by $138 billion. After all the details are analyzed, Mr. Holtz-Eakin's numbers affirm a vigilante's suspicion -- it will add $562 billion to the deficit over the next decade. Long-term bondholders beware."


: "Shaking hands with the government was a brilliant strategy in 2009 when it was assumed that governments had an infinite capacity to leverage themselves. But what if they didn't? What if our modern era was similar to history over the past several centuries when financial crises led to sovereign defaults or at least uncomfortable economic growth environments where real GDP was subpar based on onerous debt levels - sovereign and private market alike? What if -- to put it simply -- you couldn't get out of a debt crisis by creating more debt?"

Gross is bullish on the debt of resource-rich nations such as Canada and savings-oriented economies that are becoming consumer-focused, including China, India and Brazil.

Jeremy Grantham, asset allocation strategist at GMO, offers an equally sobering view. In his research, he focuses on identifying potential bubbles and undervalued assets. Grantham steered clear of past bubbles by avoiding Japan in the '80s, tech stocks in the '90s and credit markets in 2008. The following quotes are parsed from his first-quarter outlook:


: "The massive

U.S. bailout program stopped the meltdown of the financial system and engineered at least a temporary economic recovery. We know the obvious cost of this bailout: unprecedented deterioration of the federal balance sheet. So now Bernanke begs us to speculate, and we are obedient. Despite being hammered down twice in 10 years and getting punished for speculating, we again pick ourselves up off of the canvas and get back into the good fight. Such persistence is unprecedented."

Jeremy Grantham

Market extension

: "Speculators are not stupid. They see that after each crash, a long, artificial period of low rates and easy financial borrowing has been delivered. They see that Bernanke is an unreconstructed Greenspanite in that he refuses to address bubbles, but will leap to help ease the pain should a bubble break. With asymmetry like that, why not speculate? And so another bubble appears and then another."

The next bubble

: "If, however, the economy only limps along, which seems more likely to me, then we run a very real danger of a third dangerous bubble in stocks and in risk-taking in general. For in that event, Bernanke will definitely keep rates low quarter after quarter and speculation will surely respond. Again? Yes, I'm afraid so. In that environment Bernanke will do nothing to let the air out gently. His lack of anti-bubble action is pretty much guaranteed."

"Even Bernanke inherited a reasonably solid position from which to fund a second bailout. But a third time? It is hard to work out where the resources would come from to resuscitate the economy if a real shock were to be delivered by another collapse of a major asset class."

Grantham is bullish on large-cap U.S. stocks. He said the "global equity markets taken together are moderately overpriced, and the U.S. part is now very overpriced but not nearly so bad as it could be. Surprisingly, within the U.S. the large high-quality companies are still a little cheap, having been left totally behind in the rally. They are unlikely to do well in a bubbly environment, however long it lasts, but should be great in declines and in the end should win."

-- Reported by Jake Lynch in Boston.