PIMCO's Gross Clashes With Buffett & Miller Over S&P Downgrade

(August 8, 2011) — The Standard & Poor’s downgrade of the US’ credit rating has spurred disagreement among PIMCO’s Bill Gross, Legg Mason’s Bill Miller, and Berkshire Hathaway’s Warren Buffett.

“I think S&P has demonstrated some spine; they finally got it right,” Gross, manager of the PIMCO Total Return Fund, asserted during an interview on Bloomberg Television, noting that the US has “enormous problems” in terms of its debt pile.

Gross’ perspective contrasts with those of managers including Buffett as well as Miller, who leads the Legg Mason Capital Management Value Trust. In an interview with Bloomberg, Miller claimed that the S&P was “precipitous, wrong and dangerous” in decreasing the rating after last week’s stock market selloff, adding that as the “most productive economy in the world,” there is no alternative to the dollar as the global reserve currency.

At the same time, Buffett sided with Miller, claiming that the S&P was in the wrong by lowering the US credit rating, asserting that the US deserves a “quadruple A” rating. “Financial markets create their own dynamics, but I don’t think we’re facing a double-dip recession. Clearly what stock markets do have is an effect on confidence, and this sell-off can create a lack of confidence,” he told Bloomberg TV.

This weekend, money manager BlackRock issued a statement regarding the recent credit rating actions related to US government debt. “The downgrade of U.S. sovereign credit by S&P on Friday reflects facts that have been well known to the market for some time,” the release stated. “So, it does not imply a fundamental increase in risk, and we don’t believe that investors should change their behavior based solely on the downgrade. However, in combination with continued economic weakness and regulatory uncertainty, this may provide a signal to some investors to reassess their risk appetite.”

The report echos sentiments obtained by aiCIO from chief investment officers and investment consultants, concluding that the S&P downgrade of America’s debt will have few immediate effects on institutional portfolios outside of expected equity turmoil.

Looking ahead, BlackRock’s report continues: “Addressing the fiscal challenges that confront the United States is a long-term undertaking. Those challenges cannot be overcome through short-term fixes but will require efforts extending over many years. The U.S. economy has historically been the world’s most resilient, but its future depends on policymakers coming together to make the hard decisions needed to arrest the growth of the U.S. public deficit. There is time to address these challenges, but if policymakers fail to do so, this weekend’s credit downgrade will be a sign of continued fiscal deterioration.”