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Bill Gross Explains Why He Is Not Buying Portuguese Debt (Read: Is Short), And Gives His Latest Muni Bond Outlook

Tyler Durden's picture





 

While the fact that PIMCO is not a big fan of Europe is not surprising, nor is it surprising that Bill is talking his BAB book, and is therefore bullish on the muni question (especially on a relative basis, in essence saying that the US Treasury is in the same insolvency boat as California), what is surprising is that Newportbeachian, at least superficially, appears honestly confused what happens in June when QE2 ends. Which is funny: Fed's Fisher earlier said that the central bank has reached its limit of asset purchases... barring unexpected shock. Which of course means completely expected to the Fed. And since the Fed has to continue monetizing all the deficit issuance, it has no choice but to continue QE2. The conclusion is that in April or May, something "unexpected" will happen to give the Fed ammo to continue monetizing. May 6 anniversary anyone?

From a Bloomberg TV interview earlier with Margaret Brennan:

Gross on Portugal:

"We do not blame Prime Minister Socrates for touting his market.  That's the name of the game in these days, not just in Portugal, but in other countries.  They're not like Greece, in other words.  And yes, I guess we can give it to him in terms of 80% foreign participation and yes, we can give it to him in terms of a well-bid auction, but basically these auctions are prearranged sales.  They are not really auctions.  They are bought by domestic banks within euro land and then they're rediscounted to the central bank.  So it is internal buying.  There are claims of Japan and China and so on, but they're really looking for the private institutions like PIMCO and other insurance companies to buy, and we just have not done that yet." 
 
On Spain and Italy when they come to market:

"They'll come successfully if success is defined by selling bonds.  Portugal did sell at 10-year but slightly under 7%.  To me that is not a successful yield.  It speaks in the long term to Portugal not being able to service its debt simply because its primary deficit is increasing based upon those high yields.  Something has to be done.  It is being done at least in terms of the talking stage by Merkel and others in terms of extending the blanket that the EU so to speak in terms of EU bonds ahead. It helps to spread the benefit from Germany outward, but I am not optimistic in terms of the peripheral countries, and we would not invest in them at the moment." 
 
On bond vigilantes reaching the US:

"The Fed is buying most of the issuance.  They don't do it directly, of course, they do it in different maturities and on separate days in some cases.  The Fed will stop buying at the end of June and that becomes the ultimate question as to what will happen at the end of June.  Bond yields and bond prices will be dependent upon inflationary expectations, and ultimately on Fed policy, not through quantitative easing but through the length of time they keep the policy rate at 25 basis points.  We think that extends for the next two years at least.  There's some type of magnet that pulls interest rates down, not just in 5s and 10s, but also in 30s that keeps them from going to 4.5% to 5% at least temporarily. 
 
On at what point the U.S. should get nervous about economic growth:

"Ultimately the size of the deficit, the ultimate amount of debt relative to GDP, which in terms of gross debt in the United States is 90% of GDP, a level that Reinhart and Rogoff suggest slows economic growth ultimately by 1% or so.  The deficit, the debt level, the cost of that debt ultimately bears a significant burden on an economy.  In the U.S., for instance, if interest rates went up by 50% or double, then the deficit as a percentage of GDP would probably increase by a good half a percent or 1%.  Probably in dollar terms by a good $300 to $400 billion.  Ultimately the future interest cost will be a problematic focal point for bond investors in and for policymakers."
 
On his theory of Americans as male praying mantises: 

"I used the praying mantis metaphor in my recent investment outlook pointing out that there are consequences for mindless political thrusting and Washington spending policies.  We as Americans eventually lose our heads the way a male mantis does in the process of reproduction.  Americans' answer to a bulging deficit seems always to be manana.  Debt commission recommendations are always dead on arrival, bipartisan compromises result in no tax increases for anyone and an increase in $500 to $800 billion in the fiscal deficit.  The point is the current and future generations of American mantises, male or female, will pay for this in terms of a price.  They pay for in a number of ways.  One in terms of dollar depreciation going forward.  And two in terms of lower real wages and lower real interest rates, which are a cost for investors." 
 
On if states should be allowed to bankrupt like municipalities are allowed to do:

"It's very difficult for them to do so and certainly if they can and want to.  I do not perceive that as a prospect.  Ultimately municipal bankruptcies will be at a lower level.  I do not subscribe to the theory that there will be lots of them, but there will be increasing amounts of them.  In terms of the states, there are some actions being taken.  Illinois raised income taxes from 3 to 5% in a secret session last night.  That is progress.  Jerry Brown in California is doing something, I suppose, to affect some changes and some balances.  States will continue to have problems as long as Congress does not subsidize them, and it does not look optimistic from that standpoint.  Spreads will be wide, but I do not see a significant bankruptcy at the state level." 
 
On if Gross would buy munis in California right now:

"I would agree that that is where the pain will be born.  That's in California and that is what Jerry Brown is suggesting, shift the burden from the states to the local communities and have them consolidate their operations, police and fire, etc.  That makes reasonable sense. In the process there may be some bankruptcies as well.  At the local level we should be very observant and aware in terms of potential bankruptcy, but at the state level when you have 300 to 350 basis points spreads on California bonds, ultimately those are attractive relative to the U.S. Treasury, which is in a similar predicament."

 

 


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Wed, 01/12/2011 - 15:46 | Link to Comment centerline
centerline's picture

Keeping his cards tight against his chest.  But, who can blame him?  He's got skin in the game and he's gonna play it until it can't be played any more.

Wed, 01/12/2011 - 22:57 | Link to Comment Buck Johnson
Buck Johnson's picture

Thats exactly what I took from the conversation especially with regard to the Muni's. 

Wed, 01/12/2011 - 15:52 | Link to Comment akak
akak's picture

I would rather hear a four-hour rant by Lyndon LaRouche, delivered in Steven Hawking's robot voice, than listen to the thready, frightened little girl whining of Bill Gross.

Wed, 01/12/2011 - 16:11 | Link to Comment tsx500
tsx500's picture

... I    would rather gargle Oprah's diarrhea  than listen to this sheister  .....

Wed, 01/12/2011 - 17:27 | Link to Comment Jaw Knee Cash
Jaw Knee Cash's picture

I would prefer to gargle Margaret Brennan's diarrhea.

Wed, 01/12/2011 - 15:56 | Link to Comment AccreditedEYE
AccreditedEYE's picture

The conclusion is that in April or May, something "unexpected" will happen to give the Fed ammo to continue monetizing.

Under normal conditions, I would say that the market is a forward discounting mechanism. (One can have an entire debate on this stmt alone) However, saying that even in this bizzaro world we live in that this is still true, we should be seeing the effects of the spigot being turned off much sooner. (Read: this month. lol)

Wed, 01/12/2011 - 15:56 | Link to Comment Sophist Economicus
Sophist Economicus's picture

The word Putz comes to mind...

Wed, 01/12/2011 - 16:06 | Link to Comment virgilcaine
virgilcaine's picture

The half smirk with grin was a nice touch.. thanks for that riveting interview. Margaret takes this stuff so seriously, no booze filled underwear waving scenes from her. (though I did hear a faint chuckle)

Wed, 01/12/2011 - 16:03 | Link to Comment StopInvesting
StopInvesting's picture

Why does anyone believe the fed will stop buying treasuries in june?  it's much like the debt  ceiling, it will continue past any short term deadline.  

Wed, 01/12/2011 - 16:04 | Link to Comment Salinger
Salinger's picture

 

 

One arrested in threats against Seattle congressman FBI: California man (Charles Turner Habermann) admitted calls, said he wouldn't risk his $3 mil. trust fund by hurting McDermott

http://www.seattlepi.com/local/433303_congress12.html

Wed, 01/12/2011 - 16:05 | Link to Comment Bahamas
Bahamas's picture

I've read that Meredith Whitney is forecasting 50 to 100 USA municipalities to defaul within days.

Wed, 01/12/2011 - 16:08 | Link to Comment Alcoholic Nativ...
Alcoholic Native American's picture

BULLSHIT, I've been saying it for a while, even gotten kicked out of forums **cough** market ticker forums **cough** but it's frankly no longer about fiscal responsibility, it's a national security issue.  UNLIMITED FUNDS TO PREVENT SOCIAL UNREST!

Wed, 01/12/2011 - 16:24 | Link to Comment youngman
youngman's picture

"UNLIMITED FUNDS TO PREVENT SOCIAL UNREST" that is definately a factor...and a big one...that is why the pumping of the stock market...and keeping interest rates low...they forgot the gas and food thing though

Wed, 01/12/2011 - 16:12 | Link to Comment AccreditedEYE
AccreditedEYE's picture

Seeing the margin calls from such an event would be glorious...

Wed, 01/12/2011 - 16:11 | Link to Comment Rockfish
Rockfish's picture

MW was on cnbc this morning along with Gross making that call and and flat out disagreeing with Gross.

Thu, 01/13/2011 - 01:30 | Link to Comment Cameli
Cameli's picture

I'd like to take that bitch out to the woodshed. Sure she's on the air warning the poor, ordinary folks about the dangers of imminent municipal defaults because she is a caring soul and couldn't bear to see the average Joe lose his retirement nest egg. Wake up suckers. These people all have agendas. She's short municipals.
.

Wed, 01/12/2011 - 16:06 | Link to Comment Alcoholic Nativ...
Alcoholic Native American's picture

For a while there, you would have to be crazy to bet against America, now it seems its collapse in General. Goldilocks and mustardseeds BITCHES, the world economy is TBTF.

 

Wed, 01/12/2011 - 16:06 | Link to Comment Tic tock
Tic tock's picture

Well, that sounds like the crash is right here and now

Wed, 01/12/2011 - 16:10 | Link to Comment buzzsaw99
buzzsaw99's picture

Illinois raised income taxes from 3 to 5% in a secret session last night.  That is progress...

Wed, 01/12/2011 - 16:15 | Link to Comment AccreditedEYE
AccreditedEYE's picture

Austerity you can believe in. lol

Wed, 01/12/2011 - 16:17 | Link to Comment cossack55
cossack55's picture

May 6 my ass.  Cinquo de Mayo Bitchezzzz.

 

QE? QE? We don need no stinkin' QE, Senor.

Wed, 01/12/2011 - 16:21 | Link to Comment Logans_Run
Logans_Run's picture

Get it right TD! It is Newporsche Beachian.

Wed, 01/12/2011 - 16:29 | Link to Comment buzzsaw99
buzzsaw99's picture

The JPMorgan CEO said he expects to see more U.S. municipalities declare bankruptcy, Bloomberg News reports. His concerns echo those of Meredith Whitney, the analyst who has said the next major financial crisis will come from a wave of local government defaults, and those of famed investor Warren Buffett, who has called the municipal debt situation a “terrible problem.”

“If you are an investor in municipals you should be very, very careful,” Dimon said, according to Bloomberg…

Why is Jamie Dimon trying to cause a panic in the muni market?

1) Steal underwear.

2) ???????????????

3) Profit!

Wed, 01/12/2011 - 16:52 | Link to Comment Bahamas
Bahamas's picture

They're just creating so much confusion. So many different alarm bells going off at the same time in all kinds of different situations.

They just want us scared and meek. Shock and awe technique. So that when a solution is prospected we would just accept it.  "Anything will do, just stop tormenting us with these catastrophic forecasts".  "Give us some soma for Goodness sake".

When SDRs will be on the plate. people will be glad to get them, the same way European southern countries were scared of default if they didn't accept the Euro back then.

History repeats its self and memory is very short term.

Wed, 01/12/2011 - 17:04 | Link to Comment johnnynaps
johnnynaps's picture

Cutting municipalities' police and fire fighters makes sense? Sure, but don't touch that low-balled 600-800 billion dollar defense budget to chase camel-riding terrorists who dwell in caves 4000 miles away. I'm so happy and proud to be a leach on the system these days!

Wed, 01/12/2011 - 17:46 | Link to Comment Motorhead
Motorhead's picture

Margaret Brennan is hot.

Thu, 01/13/2011 - 00:44 | Link to Comment Rick Blaine
Rick Blaine's picture

+1

Wed, 01/12/2011 - 17:58 | Link to Comment kita27
kita27's picture

That Bloomberg reporter is so hot its amazing Gross was paying enough attention to her words to respond appropriately.

Wed, 01/12/2011 - 18:57 | Link to Comment The Rock
The Rock's picture

I've got a magnet he can pull right here...

Wed, 01/12/2011 - 19:01 | Link to Comment The Rock
The Rock's picture

blah blah blah in terms of blah blah blah in terms of blah blah blah in terms of blah blah blah...

Wed, 01/12/2011 - 19:35 | Link to Comment medicalstudent
medicalstudent's picture

thanks for posting the text

 

more entertaining than this squirrellfully tepid mug.

Thu, 01/13/2011 - 02:50 | Link to Comment SmittyinLA
SmittyinLA's picture

Well, I think the Portagee bonds were purchased by Uncle Ben to help round out the old portfolio.

I'm dragging out my supply of Confederate, Bonds, King Zog Bonds, Weimar Bonds and packaging them up in stunning Triple A garb with a little help from my friends at S&P and Mooody's. Wouldn't you like to have some these? They are really pretty.

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