Bill Gross' March Investment Outlook - Spread Convergence

Tyler Durden's picture

The bond king's trade recommendation: the yield convergence trade between the guarantor nations and the guarantee nations. Additionlly, expect a convergence between government spreads and agency/corporate yields. Is this a sea change in the way credit is approached? Somewhat yes; then again, even though he is ostensibly absolutely right, haven't many (ahem LTCM) already tried this and failed?

Full PIMCO March letter:

Don't Care

I haven’t gone to a cocktail
party in over 10 years. Granted, perpetually watching Seinfeld reruns
on Friday and Saturday nights makes for a dull boy, but the alternative
is excruciating. Uh, which would I prefer – solitary confinement or
water boarding? I lean strongly in the direction of a warm bed and
peace as opposed to a glass full of tinkling ice cubes and a room
resonating with high-decibel blather. I suppose the parties wouldn’t be
so bad if there was something original to be said, or if “you” had a
genuine interest in “me” as opposed to “you,” but let’s face it folks,
no one does. The only reason any of us really cares about cocktail
conversations is to quickly redirect someone else’s stories into
autobiographies that we assume to be instant bestsellers if only in
print. If not, if the doe-eyed listener seems simply fascinated
by what you’re saying, you can bet there’s a requested personal favor
coming when you finally shut up. “Say Bill, I was wondering if you knew
somebody at…that could…” Yeah right! But, as my chart shows, 90 seconds
into a typical conversation, no one gives a damn about you and your
problems – maybe those shoes and that dreadful eye shadow you’re
wearing, but not anything audible coming out of your mouth.

During that unbearable minute-and-a-half, however, you’re likely to have covered some of the following topics:

  1. Where are you from? (If it’s not a place where I’ve been or have a distant second cousin – don’t care.)
  2. How’s the family? (If Johnnie is in advanced placement courses
    and my kids aren’t – don’t care. Don’t care about your kids’ soccer
    games either or that upcoming wedding.)
  3. Medical problems. (Unless you’re dying from cancer – don’t
    care. Your artificial hip and kidney stone stories are important only
    to let me tell you about mine.)
  4. How’s work? (Forgot where you work, but it’s a good lead in.
    Don’t really care though unless you can direct some business my way.)
  5. Can you believe Tiger? (Now there’s something I care about, but the wife is only five feet away.)

Actually, the “afterparty” is the best party of all – driving home
with your partner and dissing all of the guests. Still, give me a home
where Seinfeld roams, I suppose. Boring is better – cocktail parties
are so 1990s.

In contrast to those cocktail parties, I‘ve got so much to say in this Investment Outlook
that I don’t know where to start. Don’t be lookin’ around for something
more important though, like you do at a cocktail party; I need your
undivided attention for the full 90 seconds allotted me.

To begin with, let’s get reacquainted with the fundamental
economic problem of our age – lack of global aggregate demand – and how
we got to where we are today
: (1) Twenty years of accelerated
globalization incrementally undermined the real incomes of most
developed countries’ workers/citizens, forcing governments to promote
leverage and asset price appreciation in order to fill in what is known
as an “aggregate demand” gap – making sure that consumers keep buying things.
When the private sector assumed too much debt and asset prices bubbled
(think subprimes and houses, or dotcoms/NASDAQ 5000), American-style
capitalism with its leverage, deregulation, and religious belief in
lower and lower taxes reached a dead end. There was a willingness to keep on consuming, there just wasn’t the wallet.
Vigilantes – bond market or otherwise – took away the credit card like
parents do with a mall-crazed teenager. (2) The cancellation of credit
cards led to the Great Recession and private sector deleveraging, the beginning of government policy reregulation, and gradual deglobalization
– a reversal of over 20 years of trade policies and free market
orthodoxy. In order to get us out of the sinkhole and avoid another
Great Depression, the visible fist of government stepped in to replace
the invisible hand of Adam Smith. Short-term interest rates headed to
0% and monetary policies of central banks incorporated new measures
labeled “quantitative easing,” which essentially involved the
writing of trillions of dollars of checks to replace the trillions of
dollars of credit that disappeared after Lehman Brothers. In addition,
government fiscal policies, in combination with declining revenues, led
to double-digit deficits as a percentage of GDP in many countries, a
condition unheard of since the Great Depression. (3) For awhile it
seemed that all was well, that the government’s checkbook could replace
the private market’s wallet and credit cards. Risk markets returned to
normal P/Es as did interest rate spreads, and GDP growth resumed; it
was only a matter of time before job growth would assure the world that
we could believe in the tooth fairy again. Capitalism based on asset
price appreciation was back. It would only be a matter of time before
home prices followed stock prices higher and those refis and second
mortgages would stuff our wallets once again. (4) Ah, but Dubai,
Iceland, Ireland and recently Greece pointed to a potential flaw in the
model. 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, as Carmen Reinhart and Kenneth
Rogoff have pointed out in their book, “This Time is Different,” 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?

You are now up-to-date and I’ve used up all of my 90 seconds, but
bear with me, patient reader. I may not be able to get your kid a job
at PIMCO, but maybe I could give you an idea or two as to what lies
ahead. Let’s explore the last line in the previous paragraph first – can you get out of a debt crisis by piling on another layer of debt?
The answer, of course, is that “it depends.” Replacing corporate and
mortgage debt with a government checkbook is initially beneficial
because the sovereign is assumed to be more creditworthy than its
private market serfs. It taxes, it prints, it confiscates wealth if
need be and so this substitution is medicinal in the early stages of a
financial crisis aftermath – especially if debt/GDP levels are low to
begin with. That is the case currently at most G7 countries, with the
exception of Japan, although the balance sheets of Germany/France are
obviously contaminated by its weaker EU members, and that of the U.S.
by its Agencies and other off-balance-sheet liabilities. But based on
existing deficit trends and the expectation that not much progress will
be made in reducing them, markets are raising interest rates on
sovereign debt issuance either in anticipation of higher future
inflation, increased levels of credit risk, or both. This places a
potential “cap” on the “debt” that supposedly can be created to get out
of the “debt crisis.”

The threat of credit deterioration is clearly evidenced in the CDS
or credit default market for sovereign countries. Greece has taken the
headlines with its 350–400 basis point cost of “protection,” but even
Japan and the U.K. approach 100 and the U.S. is nearly half of that.
Markets, in fact, are demanding 20–30 basis points of higher insurance
premiums for the best of credits relative to levels prior to Dubai and
Greece. The inflation component of sovereign issuance is obvious as
well. Potential serial reflators such as the U.K. and U.S. both show an
increase of 50 basis points in their 10-year notes since the Dubai
crisis in late November. While a portion of that 50 may in fact be
credit related as pointed out above, the combination of credit and
inflationary protection demanded by the market suggests, as Reinhart
and Rogoff point out in their book, that government securities
following a financial crisis are subject to huge increases in supply
and accordingly, significant increases in risk and real yield levels.

It is interesting to observe that over the past few months when
investors have begun to question the ability of governments to exit the
debt crisis by “creating more debt,” that increases in bond market
yields have been confined almost exclusively to Treasury/Gilt-type
securities, and long maturities at that. There has even been a
developing debate in the press (and here at PIMCO) as to whether a
highly-rated corporation could ever consistently trade at lower
yields compared to its home country’s debt. I suspect not, but the
narrowing in spreads since late November solicits an interesting
proposition: Government bailouts and guarantees such as those
evidenced and envisioned in Dubai and Greece, as well as those for the
last 18 months with banks and large industrial corporations across the
globe, suggest a more homogeneous “unicredit” type of bond market. If
core sovereigns such as the U.S., Germany, U.K., and Japan “absorb”
more and more credit risk, then the credit spreads and yields of these
sovereigns should look more and more like the markets that they
The Kings, in other words, in the process of
increasingly shedding their clothes, begin to look more and more like
their subjects. Kings and serfs begin to share the same castle.

This metaphor doesn’t really answer the critical question of whether
a debt crisis can be cured by issuing more debt. The answer remains: It
depends – on initial debt levels and whether or not private economies
can be reinvigorated. But it does suggest the likely direction
of sovereign yields IF global policymakers are successful with their
rescue efforts: Sovereign yields will narrow in spreads compared to
other high-quality alternatives. In other words, sovereign yields will
become more credit like
. When sovereign issues become more
credit-like, as evidenced in Greece, Spain, Portugal, and a host of
others, they move closer in yield to the corporate and Agency debt that
supposedly rank lower in the hierarchy. That process of course can be
accomplished in two ways: high-quality non-sovereigns move down to
lower levels or governments move up. The answer to which one depends
significantly on future inflation, the aftermath of quantitative easing
programs, and the vigor of the private economy going forward. But the
contamination of sovereign credit space with past and future bailouts
is a leveler, a homogenizer, a negative for those sovereigns that fail
to exert necessary discipline. Only if global economies
stumble and revisit the recessionary depths of a year ago should the
process reverse direction and place Treasuries, Gilts, et al. back in
the driver’s seat.

Investors should obviously focus on
those sovereigns where fundamentals promise lower credit or
inflationary risk. Germany and Canada are amongst those at the top of
our list while a rogues’ gallery of the obvious, including Greece,
Euroland lookalikes, and the U.K. gather near the bottom. PIMCO’s “Ring
of Fire” remains white hot and action, as opposed to cocktail blather,
is required to maintain or regain trust in sovereign credits
approaching the rocks. Just last week Bank of England Governor Mervyn
King said that it would be difficult to cut government spending
quickly, but that there needs to be a clear plan for doing so. Not good
enough, Mr. King. Don’t care. Show investors the money, not
vice-versa. An investor’s motto should be, “Don’t trust any government
and verify before you invest.” The careful discrimination between
sovereign credits is becoming more than casual cocktail conversation. A
deficiency of global aggregate demand and the potential impotency of
policymakers to close the gap are evolving into a life or death outcome
for the weakest sovereigns, with consequences for credit and asset
markets worldwide.

William H. Gross
Managing Director

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Cognitive Dissonance's picture

Earth to Bill - "We don't care!"

Anonymous's picture

I care. Mr. Gross' commentary has gotten increasingly more interesting over the last few months. I think he understands that governments are close to a point of choosing. They must either accede to the economic pain, or cross the rubicon into a world of greatly diminished individual liberties. Either choice is risky. The former raises fears of violence born of poverty and desperation. The latter runs the risk of violence born of poverty and rebellion against overweening authority.

Bill seems to believe that the former is a better course. I hope other powerful people around the world come to the same conclusion.

Cognitive Dissonance's picture

Philosphopical musings uttered by the King have a distinctly different taste than those uttered by the plebs. In fact, the King's thoughts might be considered somewhat less than authentic, thought I grant you they may be just as sincere. Charitable offerings, be they financial or philosophical, are much more powerful when they come from those that have the least.

Gross can afford to be gracious and generous, both in deed and in word. He still plays the system with at best an amoral belief system and (it does appear) with all the gusto of the best dirt diggers. After the pile of chips is safely stashed in the nest, he bemoans his unfortunate involvement and the state of affairs. Hypocrisy by any other name is still hypocrisy.

Anonymous's picture

There is a level of cynicism beyond which the only action is to take up arms in the name of anarchy. No one can be trusted, so tear it all down and start from scratch. I'm not there yet.

Everyone has to live in the future we create starting now. Maybe, possibly, Bill Gross believes that his incentives are now aligned with those who have grave doubts about our current fiscal and monetary course. If that's true, for whatever reason, I welcome him to our small, but rapidly growing club.

Gromit's picture

At least he's a transparent hypocrite!

Cognitive Dissonance's picture

You make a good point. However, any person who allows the ever changing wind to determine his or her priorities, who must rely on "incentives" to take any position, is not one to be trusted. Once the wind changes along with that person's incentives, you will find yourself swinging from the same rope you used to pull him or her into your small group.

Bill Gross is a Chameleon. I've been following him for over 25 years. He's an opportunist and he will sell his soul if the money is right and there are enough people around him whispering in his ear to convince him he's on the right track. Whether we describe this as immoral and amoral matters little. He is not to be trusted.

At best, he sells himself to the highest bidder and will accept payment in the future if need be. He lies with the best, switches games with the best, he is the best. He will not help you unless he sees the percentage in it and he can just as quickly see the percentage in leaving you in the road side ditch.

Cynicism is a blanket view of everything, something that if you read my postings you will see I try to avoid. I always attempt to pull back and see the big picture. While I can understand the calculation that might make sense to accept Gross with open arms, I suspect you will need to replace that arm sometime in the future if you deal with Gross and his ilk.

Don't listen to what he says, watch what he does. He's been extremely consistent during the 25 years I've watched him. He says whatever the collective needs to hear in order to be acceptable. He recognizes the changing mood. He takes care of himself and his own.

Anonymous's picture

Not sure i see your point. Who does anything without proper incentives? Noone is here for the greater good of mankind. I wouldn't trust anyone who is not taking care of himself or his own.

E pluribus unum's picture

Bill Gross may be the most aptly named man on Wall Street

Hephasteus's picture

How to get out of a debt crisis. Default. Send the bill. We don't care either. Next time Bernanke tells congress how they plan to deal with budgets that include 850 billion a year in interest payments while banks are payng 0.25 percent a year in interest. Congress just simply needs to tell him. We'll simply stop paying interest stupid.

Mako's picture

"it depends"

Is the best answer I have seen in this blog yet.


If consumers are still able and/or willing to take on more than the system rights it's self in quick order but when you have negative numbers in total credit for more than a quarter or two than the likelyhood goes down drastically.  See federal reserve Z1 report for all figures.

Humans have a system that uses exponential equation as it's base... one problem with this... humans can't produce nor consume at an exponential rate long term.  Humans have it down to about a generation or 60-80 years.

Within time the unfunded liabilities will have to be liquidated, what are the unfunded liabilities?  Europe and parts of Africa and Asia were liquidated last time, many of those were involuntarily liquidated.  

Once you get negative numbers for more than a handful of quarters the fight against the equation becomes that much tougher.  

Humans would have to have unlimited power to beat this equation.

The real smoking gun is that humans think they can out wit the equation and are shocked when it collapses.   It's one big ass gaint ponzi scheme which 99.9% of the world's population is a part of. 

The liquidation process will be long, dark and windy road this time... not nearly as easy as last time.

Gromit's picture

Help me here.

Are you saying that Germany's improving economy after the disaster of Weimar could not have been sustained without war?


Mr Shush's picture

I believe he is pretty much saying that, yes. The theory, as I understand it, is that German economic growth in the 30s was built on unsustainable borrowing, with the full long term intention of armed default. My knowledge of economic history does not begin to equip me to say with any confidence whether that is accurate, but if that is his claim he is certainly not the only one to have made it.

Gromit's picture


I can't figure out which nation today corresponds to Germany then.


miker's picture

Gross's summary of why/how we arrived at where we are:  

Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things.  

is the most succinct (and correct) description of why we are where we are now. 

Those of you that think Greenspan, Rubin and others were ignorant of their actions......think again.  All of this started in the Clinton administration and was a defined plan to counter the effects of globalization.  Really it was a plan to kick the can down the road a bit longer, they knew it, but didn't care because the effects wouldn't show up on their "watch". 

Anonymous's picture

I enjoy cocktail parties - free booze!

Anonymous's picture

Hah, wtf is up with Bill's extended rip on cocktail parties. I mean really. Saying the parties you go to are full of douchebags and boring people is more a statement and reflection of what Bill is like to chit chat with rather then what's it like to go to a good party and socialize.

I lived in France for a few months to escape the US and the big lesson I learned is that if you ask the other person "what they do" at any point when you're getting to know someone, then you need to up your social game BIG TIME.

andy55's picture

Hah, wtf is up with Bill's extended rip on cocktail parties?  I mean really.  Saying that the parties you go to are full of boring people is more a statement and reflection of what you're like to chat with rather then what it's like to go to a good party and socialize.   In other words, if all the people at the parties you go to are douchebags, then take a look in the mirror.

I lived in Paris for a few months to take a break from the U.S. last year and the biggest lesson I learned is that if you ask the other person "what you do" at any point when you're getting to know someone, then your social skills need major work and people will generally find you boring.  I'd stand in awe as a roomful of europeans would meet each other for the first time and not once would I hear that dreaded question--boy, did I feel American.  As time went on, I was amazed to forge new friendships with europeans where even after knowing them for months, "what we did" simply never came up nor came into the equation of having fun or talking about interesting things.  And as the hallmark question "what do you do" fades into your rearview mirror as you become actually fun to talk to, you'll especially notice it when someone asks you that question 60 seconds within meeting them.

So, if you're reading this, challenge yourself and never ask that question again.  Only good things will happen, from meeting chicks, to making new friends, and learning about the real you: we are more than how we make money.


Cognitive Dissonance's picture


".... the hallmark question "what do you do"........has everything to do with your perceived social status (aka penis and/or power "size") and nothing to do with anything else other than "me, me, me". The "higher" the social circle sees itself in relationship to those below, the more important this question is to each other. 

"What do you do" is the politically correct way of socially asking "How much money do you make, what is your social status, who do you know and who knows you". In an era when nearly everyone "up scale" wears the (male or female) business power suit, the costume we wear is much less telling than it was during the time of Kings and plebs.

The games (these) people play is more than just games. It's the difference between (social) life and death in their minds.

Anonymous's picture

What do you do?

Anonymous's picture

As little as possible.

Anonymous's picture

"I may not be able to get your kid a job at PIMCO"

(takes envelope) On second thought, Mr. Kashkari...

williambanzai7's picture

I hear they have cocktail readings of these letters in Newport Beach.

“Don’t trust any government and verify before you invest.”

Wise words.

Anonymous's picture

[quote]So, if you're reading this, challenge yourself and never ask that question again. Only good things will happen, from meeting chicks, to making new friends, and learning about the real you: we are more than how we make money.[/quote]

F8ck off.

Anonymous's picture

Those hair plugs are obviously too deep

jmc8888's picture

Well the human desire demand is there, just not the actual aggregate demand that comes from having money to realize what humans desire.


This isn't about people suddenly desiring far less and not's that a far greater percentage of people are broke and can't spend, they're desires to spend, going unfulfilled.  There's pent up demand, but no money to realize it.  The trickle down damn got plugged up, and credit (the thing that actually trickled down to us...gee wonder why...getting us on the hook???) is getting pulled or defaulted on.  The debt blew asset and commodity prices up so much the last 40 years that supply and demand simply can't meet anymore. Period.


I too would really like to see how the two will meet considering all the supposed (if you believe) stimulus pull backs and debt rollovers happening over the next few weeks and months.


Woo hoo, all the broke banks and lenders who used to be the mortgage market now seem to be carry trade artists. Makes me wonder if the brazil carry trade will get crushed when this happens.  Someone is going to have to take money out of the free 27 percent currency appreciation + 8.75 percent interest carry trade and put that into the housing market.  Of course it can never meet the demand the fed is currently providing (at depressed levels).  But could even an uptick from 90/10 fed/private to a 0/30-40 be enough to do this?  There will be home loans, just scarce and at 'who knows' interest rates.  But the money will have to come from SOMEWHERE.  My guess, the Brazillian carry trade.  See ya later Santander. 

Also credit cards just got cancelled or pulled a week ago from our college students. (you know the ones who more than 1/3 use to pay their tuition and where more than half have four cards with 3k in debt on each card...this is the AVERAGE)

They also got their rates spiked as they can't live off mommy and daddy's credit rating anymore.  (unless they co-sign). 

Of course say you live in Arizona...where they are trying to lower the minimum wage for college age students (18-22), your credit card lines just got cancelled, lowered, and/or interest rate spiked (thanks to REFORM...isn't that supposed to be PRO PEOPLE word, not anti-people word?)....and on top of all this the in state colleges raised tuition rates 20-40 percent for next year, depending on the university. Of course what used to cost 59 dollars, five years ago for the privlege of walking 2 miles to your nearest class in 100-120 degree heat (ASU lot 59), that privlege is now going to cost you about triple.  The closer parking structures, up from 200-250 dollars five years ago, to 600-700 and still rising...among many other nickel and dime procedures.  Like you have to buy healthcare through them, even if you have your own.  If you're a freshman you have to buy meal plans, even if you never intend to eat there.  100-200 text books, yikes, used ones???? still run you 80 percent of new prices.  You can literally spend almost 1k on books, soft cover supplementals, etc for a single semester.

Did I mention also the low cost food options like Burger King where it's prices are going up?  Not much, only 20 percent on the cheaper stuff you probably buy. 

But as you can see that increase has already been taken by everything else.  Something's got to give, and it's going to be the college students giving hell to anyone that will listen.  Will it be this spring we see the 60's marches again? Probably not, as it may take a few months before they really see what's going on.  Next school year....yeah I think that's when it'll start.

Something's got to give.  We're just extending, pretending, gouging, and nickel and diming each other trying to fix the broken system.  I'm saying what's going to give is the fantasy currently playing out in the markets, we're about to come back to reality, at least until Big Ben throws the printing press into overdrive.  Could be any day, week, or month.  But it sure seems like it's ramping up.  Good luck.


When the absurdity shines so bright in front of your face, look around, it also lights up the ugly truth hidden in the dark corner.

the grateful unemployed's picture

I'm a gross supporter, (i think he will be fed/treasury cabinet someday) but the bottom line in this long circuituous (brief) cocktail chatter is that the bond market is in a race to the bottom. The way it plays out assumes one of the two definitions of interest rates might apply, rates as credit, and rates as risk premium.

On one matter Gross might be mistaken, consumers simply have too much of everything, (see Bob Prechters special report on two Jaguar -automobiles-, the question is who needs more than one?) and GM made a lot of money by selling the average consumer as many as three different cars, when he only needed one. 1) the car he owns, which is usually older, and which serves a secondary purpose, like a van or a truck 2) the lease car which is his primary vehicle, and 3) the rental car he needs when he flies somewhere, and when his lease car has too many miles on it...

Now that everyone has just about everything they need, a second psychological factor arrives, the reaction to several decades of mass market consumer materialism. Never in my six decades have I seen money more coveted than it is now. That simply won't continue, people have other values, really.

That said we note that Newport Beach is ground zero in the wealth disparity map. Omaha not so much.


Anonymous's picture

fewer will live in the future that ww3 creates.