Bill Gross Calls Fed "Most Brazen" Of All Ponzi Schemes, Says 30 Year Bond Market Is Ending, Compares US Economy To Black Hole

Tyler Durden's picture

A surprising amount of truth from Bill Gross this morning. Now if only Bill Gross would explain why he has been buying MBS on margin last month (in anticipation of the last move higher in the "Sammy" scheme no doubt) we will call it quits. Oddly enough, Bill Gross, who for the first time confirms everything Zero Hedge has been saying for almost two years now, is not accussed of hyperventilating... yet

Run Turkey, Run from PIMCO

say a country gets the politicians it deserves or perhaps it deserves
the politicians it gets. Whatever the order, America is next in line,
and as we go to the polls in a few short days it’s incumbent upon a
sleepy and befuddled electorate to at least ask ourselves, “What’s going
on here?” Democrat or Republican, Elephant or Donkey, nothing much ever
seems to change. Each party has shown it can add hundreds of billions
of dollars to the national debt with little to show for it or move our
military from one country to the next chasing phantoms instead of
focusing on more serious problems back home. This isn’t a choice between
chocolate and vanilla folks, it’s all rocky road: a few marshmallows to
get you excited before the election, but with a lot of nuts to ruin the

Each party’s campaign tactics remind me of airport terminals pre-9/11
when solicitors only yards apart would compete for the attention and
dollars of travelers. “Save the Whales,” one would demand, while the
other would pose as its evil twin – “Eat Whale Blubber,” the makeshift
sign would read. It didn’t matter which slogan grabbed you, the end of the day’s results always produced a pot of money for them
and the whales were neither saved nor eaten. American politics resemble
an airline terminal with a huckster’s bowl waiting to be filled every
two years.

And the paramount problem is not that we contribute so willingly or
even so cluelessly, but that there are only two bowls to choose from.
Thomas Friedman, the respected author of The World Is Flat, and a weekly New York Times
Op-Ed author, recently suggested “ripping open this two-party duopoly
and having it challenged by a serious third party” unencumbered by
special interest megabucks. “We basically have two bankrupt parties,
bankrupting the country,” was the explicit sentiment of his article, and
I couldn’t agree more – whales or no whales. Was it relevant in 2004
that John Kerry was or was not an admirable “swift boat” commander? Will
the absence of a mosque within several hundred yards of Ground Zero
solve our deficit crisis? Is Christine O’Donnell really a witch? Did Meg
Whitman employ an illegal maid? Who cares! We are being conned, folks;
Democrats and Republicans alike. What have you really heard from either
party that addresses America’s future instead of its prurient overnight
fascination with scandal? Shame on them and of course, shame on us.
We’re getting what we deserve. Vote NO in November – no to both parties.
Vote NO to a two-party system that trades promises for dollars and hope
for power, and leaves the American people high and dry.

There’s another important day next week and it rather coincidentally
occurs on Wednesday – the day after Election Day – when either the
Donkeys or the Elephants will be celebrating a return to power and the
continuation of partisan bickering no matter who is in charge. Wednesday
is the day when the Fed will announce a renewed commitment to
Quantitative Easing – a polite form disguise for “writing checks.” The
market will be interested in the amount (perhaps as much as an initial
$500 billion) as well as the targeted objective (perhaps a muddied
version of “2% inflation or bust!”). The announcement, however, has been
well telegraphed and the market’s reaction is likely to be subdued.
More important will be the answer to the long-term question of “will it
work?” and perhaps its associated twin “will it create a bond market

Whatever the conclusion, not only investors, but the American people
should recognize that Wednesday, even more than Tuesday, represents a
critical inflection point in determining our future prosperity. Of
course we’ve tried it before, most recently in the aftermath of the
Lehman crisis, during which the Fed wrote $1.5 trillion or so in
“checks” to purchase Agency mortgages and a smattering of Treasuries. It
might seem a tad dramatic then, to label QEII as “critical,” sort of
like those airport hucksters, I suppose, that sold whale blubber for a
living. But two years ago, there was the implicit assumption that the
U.S. and its associated G-7 economies needed just an espresso or perhaps
an Adderall or two to get back to normal. Normal just hasn’t happened
yet, and economic historians such as Kenneth Rogoff and Carmen Reinhart
have since alerted us that countries in the throes of delevering can
take many, not several, years to return to a steady state.

The Fed’s second round of QE, therefore, more closely resembles an
attempted hypodermic straight to the economy’s heart than its mood
elevator counterpart of 2009. If QEII cannot reflate capital markets, if
it can’t produce 2% inflation and an assumed reduction of unemployment
rates back towards historical levels, then it will be a long, painful
slog back to prosperity. Perhaps, as a vocal contingent suggests, our
paper-based foundation of wealth deserves to be buried, making a fresh
start from admittedly lower levels. The Fed, on Wednesday, however, will
decide that it is better to keep the patient on life support with an
adrenaline injection and a following morphine drip than to risk its
demise and ultimate rebirth in another form.

We at PIMCO join with Ben Bernanke in this diagnosis, but we will
tell you, as perhaps he cannot, that the outcome is by no means certain.
We are, as even some Fed Governors now publically admit, in a
“liquidity trap,” where interest rates or trillions in QEII asset
purchases may not stimulate borrowing or lending because consumer
demand is just not there. Escaping from a liquidity trap may be
impossible, much like light trapped in a black hole.
Just ask
Japan. Ben Bernanke, however, will try – it is, to be honest, all he can
do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of
infrastructure spending, he can’t change our educational system, he
can’t force the Chinese to revalue their currency – it is all he can do,
and as he proceeds, the dual questions of “will it work” and “will it
create a bond market bubble” will be answered. We at PIMCO are not sure.

Still, while next Wednesday’s announcement will carry our qualified
endorsement, I must admit it may be similar to a Turkey looking forward
to a Thanksgiving Day celebration. Bondholders, while immediate
beneficiaries, will likely eventually be delivered on a platter to more
fortunate celebrants, be they financial asset classes more adaptable to
inflation such as stocks or commodities, or perhaps the average American
on Main Street who might benefit from a hoped-for rise in job growth or
simply a boost in nominal wages, however deceptive the illusion. Check
writing in the trillions is not a bondholder’s friend; it is in fact
inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public
debt, actually, has always had a Ponzi-like characteristic
. Granted,
the U.S. has, at times, paid down its national debt, but there was
always the assumption that as long as creditors could be found to roll
over existing loans – and buy new ones – the game could keep going
forever. Sovereign countries have always implicitly acknowledged that
the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken
Charles Ponzi one step further. Instead of simply paying for maturing
debt with receipts from financial sector creditors – banks, insurance
companies, surplus reserve nations and investment managers, to name the
most significant – the Fed has joined the party itself. Rather than
orchestrating the game from on high, it has jumped into the pond with
the other swimmers. One and one-half trillion in checks were written in
2009, and trillions more lie ahead. The Fed, in effect, is telling the
markets not to worry about our fiscal deficits, it will be the buyer of
first and perhaps last resort. There is no need – as with Charles Ponzi –
to find an increasing amount of future gullibles, they will just write
the check themselves. I ask you: Has there ever been a Ponzi scheme so
brazen? There has not. This one is so unique that it requires a new
name. I call it a Sammy scheme, in honor of Uncle Sam and the
politicians (as well as its citizens) who have brought us to this
critical moment in time. It is not a Bernanke scheme, because this is
his only alternative and he shares no responsibility for its origin. It
is a Sammy scheme – you and I, and the politicians that we elect every
two years – deserve all the blame.

Still, as I’ve indicated, a Sammy scheme is temporarily, but not
ultimately, a bondholder’s friend. It raises bond prices to create the
illusion of high annual returns, but ultimately it reaches a dead-end
where those prices can no longer go up. Having arrived at its
destination, the market then offers near 0% returns and a picking of the
creditor’s pocket via inflation and negative real interest rates.
similar fate, by the way, awaits stockholders, although their ability
to adjust somewhat to rising inflation prevents such a startling
conclusion. Last month I outlined the case for low asset returns in
almost all categories, in part due to the end of the 30-year bull
market in interest rates, a trend accentuated by QEII in which 2- and
3-year Treasury yields approach the 0% bound. Anyone for 1.10% 5-year
Treasuries? Well, the Fed will buy them, but then what, and how
will PIMCO tell the 500 billion investor dollars in the Total Return
strategy and our equally valued 750 billion dollars of other assets that
the Thanksgiving Day axe has finally arrived?

We will tell them this. Certain Turkeys receive a Thanksgiving
pardon or they just run faster than others! We intend PIMCO to be one of
the chosen gobblers.
We haven’t been around for 35+ years and not
figured out a way to avoid the November axe. We are a survivor and our
clients are not going to be Turkeys on a platter. You may not be
strutting around the barnyard as briskly as you used to – those near 10%
annualized yields in stocks and bonds are a thing of the past – but
you’re gonna be around next year, and then the next, and the next.
Interest rates may be rock bottom, but there are other ways – what we
call “safe spread” ways –to beat the axe without taking a lot of risk:
developing/emerging market debt with higher yields and non-dollar
denominations is one way; high quality global corporate bonds are
another. Even U.S. Agency mortgages yielding 200 basis points more than
those 1% Treasuries, qualify as “safe spreads.” While our “safe spread”
terminology offers no guarantees, it is designed to let you sleep at
night with less interest rate volatility. The Fed wants to buy, so come
on, Ben Bernanke, show us your best and perhaps last moves on Wednesday
next. You are doing what you have to do, and it may or may not work. But
either way it will likely signify the end of a great 30-year bull
market in bonds and the necessity for bond managers and, yes, equity
managers to adjust to a new environment.

If a country gets the politicians it deserves, then the same can be
said of an investor – you’re gonna get what you deserve. Vote No to
Republican and Democratic turkeys on Tuesday and Yes to PIMCO on
Wednesday. We hope to be your global investment authority for a new era
of “SAFE spread” with lower interest rate duration and price risk, and
still reasonably high potential returns. For us, and hopefully you,
Turkey Day may have to be postponed indefinitely.

William H. Gross
Managing Director

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scratch_and_sniff's picture

Bill Gross said this, HAAA WTF!

1100-TACTICAL-12's picture

Sounds like Bill, has had a Jerry Maguire moment...

ZakuKommander's picture

Heh, Bill buys crapola thinking there's going to be "shock and awe" next week, then gets the word it's going to be lame.  Hilarity (not to mention bitterness) ensues.

B9K9's picture

Actually, reality is beginning to hit home even for Bill. No, not in the pocket book, but the constant visual assault.

There are plenty of 'for lease' signs in CDM, Fashion Island and along the PCH in W Newport Beach. But the real kicker is the slow progress being made in El Morro.

Bill must be appalled by the view, both out his window, and as he drives north and sees the shambles @ Crystal Cove.

What Bill probably realizes is that nowhere will be safe if even protected coastal enclaves begin to look the leeward side of Oahu. There are already fleets of 'bandit RVs' prowling the beach cities.

SWRichmond's picture

These guys know what the reality is and they just want to have something they can point to and say they're on the right side of history.

Dont Taze Me Bro's picture

That's what I think too. 

His article is actually pretty stupid. Similar to a heroin addict saying: I do this shit and it's going to kill me, but I have no choice,  I have to do it. wtf???

Wynn's picture

Bill loves stamps. Perhaps he dreams of being on one someday. As a tribute to swindlers, or something.

MeTarzanUjane's picture

Bill buys based on promises from the originators.

He gets pissed when the promises are broken and no remedies are made to satisfy the losses.

FEDbuster's picture

No "shock and awe" next week.  They have been too successful with the trickle of POMO on a weekly basis, nudge not shove.  Our demise will be like what is referred to as "Chinese water torture" drip, drip, drip....  Death by a thousand little ($1-10 billion) injections.

Unless they have to bail out the TBTF banksters from Foreclosuregate, then they will boost the balance sheet by whatever it takes to save "the system".

MeTarzanUjane's picture

I predict a romantic candlelit dinner for two at Moonshadows of Malibu on the PCH. Apologies and promises resurrected.

Taxpayers footing the bill.

FEDbuster's picture

Don't forget a promise to buy all the defective MBSs PIMCO bought on margin at a discount for full face value.  Kiss, kiss, hug, hug...

centerline's picture

Wasn't there already an analogy to a putter?  (As opposed to pulling out the oversized driver).  God forbid.

Fearless Rick's picture

Take a break. World Series starts in 3, 2, 1...

Dollar Bill Hiccup's picture

Sounds like Bill lit up a big fat one ...

Vote no to everyone and vote yes for PIMCO which supports the FED even though he is telling you it should not, except for the fact that he is frontrunning inside info, so it would be unwise to get off of that gravy train ... hence, vote yes for PIMCO !

midtowng's picture

Bill Gross is famous for talking his book.

Sean7k's picture

What a piece of horseshit. Attempting to absolve the FED, who own the representatives in government, who dictate there every action in the form of legislation, who run treasury from the comfort of the NYFRB, of all blame and placing it on the Parties they control and from whom we have to pick candidates who speak different dogma, but vote in the exact same way.

The same Bill Gross who picked the tranche components of GS for his profits, who got inside info from the FED on his bond purchases before the POMO game started. Now, he attempts to pay them back with this garbage. 

Tyler, I know you try to be fair and perhaps this was just an opportunity to pile on, but what a steamy pile of crap.

NumberNone's picture

The Fed does what it does because our government can't stop spending...the drivers behind it all may be up for debate but if the government lived within its means there would be no need for a Ponzi scheme.  

MarketTruth's picture

The Fed wants to be dissolved so the SAME owners can then launch the IMF's SDR. Think of it as folding up your small operations in the USA for enhancing your larger operations that encompass the USA, Europe, etc. Call it a consolidation of power by the same owners.

wisefool's picture

HoneyPot. Reminds me of the movie "Contact" with Jody foster. They made a huge effort to let everyone know exactly where the launch site was. It is attacked by terrorist. Meanwhile the real launch site was in Japan.

Maybe we should buy Yen?

TeamAmerica's picture

Not exactly.   There were TWO "launch sites".   The one that was destroyed was not a decoy.


wisefool's picture

Right. Not splitting hairs, but in IT, honeypots are real computers. Have similar capabilities, costs, maintenance, etc. They just don't have the same mission expectations as the others......

Monday1929's picture

I've always suspected that the FED would be sacrificed, (after it was loaded up with all the criminalbanks losses), to be re-formed under a different guise. This is the first time I've seen this voiced by another.

Also, does anyone know if it is true that the entire banking system can be called upon to make good the FED's losses, by law?

Walter_Sobchak's picture

mold in a petri dish can't grow forever, neither can our economy.  We might have been able to grow and continue to consume if all the jobs weren't gone, but now that they are, the only way the American worker can compete is to lower himself to chinese slave labor standards.  Growth is gone, people don't want to conspicuously consume anymore.  the old road is rapidly fading.

downrodeo's picture

Haha, the government has no means save what we allow it.

Wait, that is wrong.

The government has no means save what it forcefully rips from our wallets at the point of a gun.



i know what you're saying though.

DarkMath's picture


Bill Gross is pure bull shit. He's saying the Bond Bubble will end and then saying how it will not end all in the same paragraph. The Bond Bubble will go on for years to come as the Fed continues to print money to purchase Treasury Debt. There's nothing to see here.

What's more interesting to me is Bill Gross's double speak. Why would he say this when he knows he'll continue to make millions  going long US G'ment debt? The answer is simple, just like Greenspan Bill Gross has to make himself right with the History books. Bill Gross has to "find religeon" in print. The fact that he's busy sinning his ass off makes no difference to him. If he really felt this way he'd sell everything in the Pimco Total Return fund and put it all on Gold and Farmland.

Blano's picture

That's what I was wondering.  If the SHTF re: bonds, why not just cash out and return the money to shareholders before the blowup??

DollarDive's picture

Darkmath - Couldn't agree with you more.  Actions speak louder than words.  He's so full of shit.

Dadoomsayer's picture

how do you spell scumbag?  BILL GROSS

tells the fed that if they do not start buying mortgage paper he will dump all his in middle of the crisis, then when they say they will he front runs them and buys more.  this guy should be in jail.

MeTarzanUjane's picture

Actually he has done a lot to raise the tide for all parties involved.

theXman's picture

>> Vote NO in November – no to both parties. Vote NO to a two-party system that trades promises for dollars and hope for power, and leaves the American people high and dry.


Wow, didn't know Bill Gross was a closet TEA bagger. LOL

Glad that he came out. Join the crowd, bro!

AbandonShip's picture

2 books come to mind:

1. This Time is Different (Rogoff and Reinhardt) which Gross alluded to in the piece above.

2. Dime's Worth of Difference (documents 2 party failure pretty well)



chopper read's picture

string this fucker up by his ankles and hang him from the Brooklyn Bridge for high treason. 

anarkst's picture

This guy is one of the most self-serving parasites ever to be hatched on the surface of this planet.

jkruffin's picture

Anyone else notice how Reuters issues a PR today regarding the $1 trillion cash that US companies are hoarding?  I guess they have to get the real stories from ZH and BoomBustBlog,  because the media is a dollar late and a dollar short everyday.  ZH had already reported this several times.  Nice Job Tyler and company.

We are you going to get your TV show and put CNBC out of business?

lynnybee's picture

I'd love to see CNBC morph back into what they started out as in 1980's, a CONSUMER AFFAIRS channel !   I remember when they had programming aimed at finding bargains & consumer rip-offs     what I wouldn't give to see that damn JOE KERNAN'S smug face gone.   

reading's picture

Personally, I hope they turn it into a home shopping channel...

Unlawful Justice's picture

Selling only toilet paper for there own brand of commode.

RockyRacoon's picture

It already is like HSN.   Touts overpriced baubles with a guarantee of being a great investment.  Trouble is, like HSN, they are not liable for their libel.

mrhonkytonk1948's picture

Kudlow makes me vomit in my mouth.

wisefool's picture

They (CNBC) are struggling hard today. And it is not just the market drop. Last night Pento was on Kudlow. Nothing new or radical but Kudlow let him talk. That might have been what got Gross going for whatever motive he is trying to play out with this piece. It will probably be cleared up when we see him talk today.

Fearless Rick's picture

I am so with you on that. To see Kernan's smug, Republican-ass-licking, I'm-so-with-it grill underneath Les Monves' thumb would be worth double his weight in gold. And that's a lot of gold.

Rahm's picture

Agree, except the media is $2mm short and 2years late.

huntergvl's picture

I saw that too, Jk, and had exactly the same thoughts.....There was no mention of the almost $4 Trillion in debt. Thanks mucho, Zerohedge. My thinking also is that if the corporations do have favorable debt terms and can actually put some of that $1 Trillion excess to use, it sure as hell won't be in US markets. More money heading OUT of US markets. Gross says this in his essay as well.

I am still holding PTRAX as it has been very good to me for a few years now, but once stocks capitulate (sometime before May 1st 2011), and the run to safety boosts PIMCO one more time, I will likely be a seller, eschewing 3-4% returns from PIMCO for attractive valuations in hard asset stocks for the long term. I particularly like Transocean, especially if the lawsuits drive the price down further. 2011 will be a great year, again!!!