This page has been archived and commenting is disabled.

So Much For Pimco Buying Bonds: Duration Weighted Treasury Exposure Hits Whopping -23% Short, Cash Surges To Unprecedented $89 Billion

Tyler Durden's picture


So much for all the conspiracy theories that Bill Gross was capitulating in his short position against US debt even as he continued to bash US fiscal and monetary policy. According to just released April data for the flagship Pimco $240 billion Total Return Fund (which saw a $4.2 billion increase in AUM in the month), Bill Gross actually added to his short position against US government debt, bringing total market value exposure to 4% of AUM or ($10) billion. More amazing is that on a Duration Weighted Exposure basis, the firm's Treasury short is 23%, read that again, 23%! So much for that change in outlook. Additionally, Gross also sold another $8.3 billion in mortgage securities, bringing the April total to a nominal $57.8 billion. Spring cleaning at casa de Bill continued across all fixed corporate income as well, dropping the firm's exposure to IG by $1.6 billion and to HY by $2.1 billion. The only two securities which saw a token increase was in Non-US developed markets and Emerging Markets, to $14.4 billion and $26.5 billion, respectively. Yet the biggest shocker of all, is that Gross has now brought his cash position to an all time unprecedented high of $89.1 billion! That's right, PIMCO is charging a substantial asset management fee when 37% of all assets are in cash. One would think the mattress would cost far less. Either Gross is expecting a huge collapse in the bond market (so contrary to prevailing though), or this could well be the bet that buries the Allianz subsidiary.

Looking at the maturity exposure there are no surprises: in keeping with the firm's move to almost an all cash fund, Effective Duration dropped to the second lowest in history, or 3.42 years. As the chart below shows, Gross' exposure to debt with a maturity under 5 years is a whopping 83%. Which begs the question: just how terrified is Gross of inflation to be cutting virtually any and all 5 year + exposure. And yes, if the firm was expecting a deflationary collapse, the duration exposure would be flipped upside down.


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 05/09/2011 - 18:57 | 1257269 bob_dabolina
bob_dabolina's picture

Party @ Pimco! Bring your Huggies, they are predicting quite the shit storm.

Mon, 05/09/2011 - 19:05 | 1257291 Ahmeexnal
Ahmeexnal's picture

Bill Gross is going to buy up PHYSICAL SILVER AND GOLD!

Mon, 05/09/2011 - 19:12 | 1257310 camaro68ss
camaro68ss's picture

So is this good for Ipad2 and netflix or not????

Mon, 05/09/2011 - 19:28 | 1257352 CPL
CPL's picture

Depends how well ipads stand up as shingles.  Netflix is a tough one, would be like trying to build a house out of unused gym memberships...


I predict a complete shit storm on open across the board of all markets.  It should give the FED the kick it needs to print more money though.

Mon, 05/09/2011 - 19:30 | 1257363 camaro68ss
camaro68ss's picture

your right, you can dig up Ipad2 out of the ground for what, like 5 bucks? hahaha

Mon, 05/09/2011 - 19:41 | 1257411 Manthong
Manthong's picture

WTF do you do with $89B in cash?

I suppose that much in paper notes could keep the furnace at the Pimco Building going for a while.

I've seen pictures of that being done before. 

Mon, 05/09/2011 - 21:17 | 1257635 Harlequin001
Harlequin001's picture

More to the point, who's going to pay up for this short when he tries to collect?

The Fed, of course. The money supply is about to go ballistic with QE3, 4 and 5 in rapid succession.

Congress is going to be very busy raising the debt ceiling again and again and again...

and pm's will go ballistic with it.

Mon, 05/09/2011 - 21:53 | 1257734 Mec-sick-o
Mec-sick-o's picture

That's a nice wrecking ball.

I have some ideas... monopsony of PM perhaps?

Mon, 05/09/2011 - 19:52 | 1257436 CPL
CPL's picture

Depends on the landfill in India, I'm sure a street urchin could do it for $4.  Knock the gut out of them to make a nice picture frame to hang on my BreX wallpaper in den while pulling a mixture of Enron, and Lehman brothers shares out of the Kleenx box.  To make sure their value doesn't blow away I'll put my newton on top of them.


I'll then look out the window at my impressive windmills built with real CLNE stock and straws making me zero money.  Gentlely drawing the stylus from my Palm Pilot, I'll pick my teeth and wonder if it had been any different...

Mon, 05/09/2011 - 20:14 | 1257486 Ahmeexnal
Ahmeexnal's picture

I hear ya. Still have a couple 2100s and one 2000.

Mon, 05/09/2011 - 23:32 | 1257978 Papasmurf
Papasmurf's picture

A geniune Enron or certificate is worth good money on ebay these days.  No so much for the FRN.

Mon, 05/09/2011 - 19:33 | 1257369 SheepDog-One
SheepDog-One's picture

It all depends on how absorbent IPad2's are, maybe better for folks to just put on the adult diapers for the shitstorm thats here.

Mon, 05/09/2011 - 19:24 | 1257345 Goldman Hufs
Goldman Hufs's picture

Can gross hypothetically buy American Silver Eagles while sticking to mandate of the fund or would the premium over what it could be used to purchase items in a store negate this option?

Mon, 05/09/2011 - 19:46 | 1257406 Sisyphus
Sisyphus's picture

JEWELRY BUYERS in India stood in line to Buy Gold on May 6, as shops opened early for the festival of Akshaya Tritiya.

And you thought people stood in line overnight to only buy iMaxiPads and iTrackPhones


Yep, let the price collapse and see how soon Gold disappears. One word - Asia.


Figures from the World Gold Council show India as the world's largest gold market. India accounted for nearly 32% of global demand in 2010, at 963 tonnes of Gold Bullion. The second largest market was China, which bought 579 tonnes.

Mon, 05/09/2011 - 20:36 | 1257537 Quaderratic Probing
Quaderratic Probing's picture

He sees rates climbing and will buy US debt with the 89 billion. He will not buy silver or gold or copper or oil as he sees a USD back at 120 from 73 and in that case commodities will be trash. You me him ..... who has the trillion? He did not get there by being wrong............come to think of it the bond market is always right

Mon, 05/09/2011 - 20:56 | 1257574 Atlas Shrieked
Atlas Shrieked's picture

Do you even know what happens to bond prices when rates climb?  I hope you're saying he's waiting for rates to soar, and THEN step in and buy bonds.  The only reason he can't buy tangible assets because it is not mandated.  He's answered this question before.

Tue, 05/10/2011 - 22:46 | 1261527 Quaderratic Probing
Quaderratic Probing's picture

Yes Bond price will collapse and he will not care hes in cash

Mon, 05/09/2011 - 18:59 | 1257273 Quinvarius
Quinvarius's picture

He could buy up all the silver on the COMEX, 71 times over with that scratch.

Mon, 05/09/2011 - 18:59 | 1257279 ReallySparky
ReallySparky's picture

I wish he would.

Mon, 05/09/2011 - 19:15 | 1257331 Don Quixotic
Don Quixotic's picture

Not with the new position limits they're about to institute, he can't... doesn't matter how much money he has. Yay for free market capitalism.

Mon, 05/09/2011 - 20:29 | 1257499 Ahmeexnal
Ahmeexnal's picture

New position limits mean squat when PHYSICAL is being bought at all scales, from ant operation to multi-ton deals.

JPig Mormon is about to suffer one major blow, given by none other than themselves.

Let them pull the trigger on those position limits. A lot of people have been reading about silver's rise/fall these last couple weeks. They've been to many silverbull blogs.  Most of them have been EDUCATED. You'll be surprised at the percentage of them who have been able to connect the dots.  And now they await a good entry point.

JPig Mormon is about to unleash an avalanche that will bury COMEX once and for all.

Tue, 05/10/2011 - 01:39 | 1258204 Arkadaba
Arkadaba's picture

LOL moment

Mon, 05/09/2011 - 19:01 | 1257276 FOC 1183
FOC 1183's picture

vs. their benchmark, that is huge

Mon, 05/09/2011 - 19:02 | 1257283 vast-dom
vast-dom's picture

the only sane position is to short bonds. unfortunately market read Fed manipulation is for me illegal bitch a la COMEX et al. $cam$ abound!

Mon, 05/09/2011 - 19:03 | 1257285 Pepe
Pepe's picture

"Hyperinflations offer monetary economists a natural experiment they can use to study the effects of money on the economy" -we all know that bernanke is a scientist at heart and uses the experimental method

Mon, 05/09/2011 - 19:07 | 1257294 youngman
youngman's picture

He is going to need all that cash to cover his margins as they keep raising the requirements to 100%...

Mon, 05/09/2011 - 19:51 | 1257434 Boston
Boston's picture

Depending on how well Bill Gross was hedged, the last month could have been very painful for him.

I totally faded him.



Mon, 05/09/2011 - 19:05 | 1257295 bob_dabolina
bob_dabolina's picture

It will be so cool watching this debt ceiling drama play out. 

Trillions in cuts vs. Liberals. 

Someone is going to have to capitulate in this game of Texas Fold'em. Will the Dems see eye to eye with the Republicans or will the Republicans chicken out and concede to less than trillions in cuts? 

We got reputations on the line here (for whatever that's worth in Washington) and some junior members looking to make a name for themselves. 

The Right has very valid arguments to back up their positions and the Left has sycophantic megalomaniacs that believe borrowing is the best way to get out of debt. 

Will be fun watching this rope geting tugged.

Mon, 05/09/2011 - 19:10 | 1257312 NotApplicable
NotApplicable's picture

As long as its not around our neck.

Mon, 05/09/2011 - 19:14 | 1257321 bob_dabolina
bob_dabolina's picture

When is it not?

Mon, 05/09/2011 - 19:30 | 1257362 LowProfile
LowProfile's picture

When your assets are outside the system.

Tue, 05/10/2011 - 03:41 | 1258288 Gavrikon
Gavrikon's picture

And when the bastards create some kind of precious metal redemption tax/fee?  Or, what the hell do I know, make you have a digital tattoo to buy or sell anything? 

Sorry, sorry.  Apocalyptic fit is over now.

Mon, 05/09/2011 - 19:31 | 1257364 duncecap rack
duncecap rack's picture

Will it be fun if they get rational and focus on the revenue side of the equation also?

Mon, 05/09/2011 - 20:58 | 1257404 bob_dabolina
bob_dabolina's picture

Can't worry about the revenue aspect until you put a tourniquet on the area hemorrhaging, which is the spending side. 

I think taxes need to be raised across the board, however, it's useless without a prudent plan to stop the bleeding. 

When I was in the Marines we had the 4 life saving steps: 

Stop the bleeding;

Start the breathing;

Protect the wound;

Treat for shock;

The reason you stop the bleeding first is because what's the point of pumping on a casualties chest with CPR if all you're doing is pumping his blood out of a severed artery? It's the same concept here. If you don't stop the spending, the tax increases don't do much. 

Interesting homework assignment: 

If you were to take every CENT from EVERY US billionaire (100% tax on all assets) How much would the deficit (or national debt) be reduced by? Now once that 1 time tax levy is instituted it can never again be touched (because now we don't have anymore billionaires). How do you solve the remaining and ridiculous amounts of debt we would still have? It's the spending side where the real problems are and they require aggressive action a.k.a stop the bleeding.

Mon, 05/09/2011 - 21:17 | 1257643 JFK.4PREZ
JFK.4PREZ's picture

1 dollar = 1 second

1,000,000 dollars = 11.5 days

US Budget Deficit = 457,000 years




Mon, 05/09/2011 - 21:38 | 1257698 LawsofPhysics
LawsofPhysics's picture

The "rich" are already eating each other.  The debt is a fraud, their "wealth" is a fraud.  Crash the fucking system already.  The sooner we do, the sooner compensation will return to people who are actually worth a shit. 

Mon, 05/09/2011 - 22:52 | 1257869 LaLiLuLeLo
LaLiLuLeLo's picture


Tue, 05/10/2011 - 00:55 | 1258148 Augustus
Augustus's picture

Taking 100% of the assets of all US billionaires would not clost the deficit gap for 2011.  Once that is pissed away by the congress craps, they can move on down the line to all assets for anyone over $750 million.  that will help with the 2012 gap.

When they try to move down to the $500 milllion they will find that the money has vanished to money heaven in some other country.  Never to return.

Mon, 05/09/2011 - 20:32 | 1257522 sabra1
sabra1's picture

it's all just political theatre to give the illusion of haggling back and forth. they all have the same puppet masters!

Mon, 05/09/2011 - 21:23 | 1257654 riley martini
riley martini's picture

 You nailed it they will collect bribes, bonuses and votes all along the way as the brain-washed party minions cheer " we're winning " when they think their party masters have won a point.  They will need large gathings with the finest trimming money can buy and guess who gets the bill.

Mon, 05/09/2011 - 19:06 | 1257300 Gubbmint Cheese
Gubbmint Cheese's picture

Given the severity of this situation I think its best to assume Pimco is llying...

Mon, 05/09/2011 - 21:24 | 1257656 Sockeye
Sockeye's picture

Comment of the day!

Mon, 05/09/2011 - 19:10 | 1257302 NotApplicable
NotApplicable's picture

Isn't China's effective duration also around 3.5 years?

Mon, 05/09/2011 - 19:08 | 1257304 augie
augie's picture

that is an absurd amount of money.

Mon, 05/09/2011 - 19:09 | 1257307 astartes09
astartes09's picture

So if the Fed stops buying the debt at the end of June, and then no other country wants our debt, what happens?

Mon, 05/09/2011 - 20:09 | 1257316 bob_dabolina
bob_dabolina's picture

Interest rates go down /sarc

bbbb but why would no other country want our debt?

We're AAA+ according to the rating agencies. 

Mon, 05/09/2011 - 19:22 | 1257339 camaro68ss
camaro68ss's picture

Rate hit the moon, the government collapse under its debts, then the rabies virus mutates and turns people into zombies starting a zombie apocalypse.

ok maybe the 2nd might not happen but it might as well happen. People will be roming the streets like zombies after there 401k's takes a shit and all aspects of the economy come to a hult.

Mon, 05/09/2011 - 21:37 | 1257693 quasimodo
quasimodo's picture

I really do hope the 401k takes a huge fucking dump. Can't convince the old lady to take the hit and cash the fuckers out; methinks I will have one big case of "told you so"

All she can say is "stuff goes in cycles"


Tue, 05/10/2011 - 03:42 | 1258291 Gavrikon
Gavrikon's picture

While mine wants to cash out and buy more physical metals.  I agree, except that she wants to wait until the end of the year to pay the tax and 10% penalties.  Last week proves it's better to bite the bullet earlier.

Tue, 05/10/2011 - 03:47 | 1258296 Gavrikon
Gavrikon's picture

While mine wants to cash out and buy more physical metals.  I agree, except that she wants to wait until the end of the year to pay the tax and 10% penalties.  Last week proves it's better to bite the bullet earlier.

Mon, 05/09/2011 - 19:59 | 1257446 famousamos
famousamos's picture

Someone please correct me... Bond market collapse = bond prices fall due to fewer buyers, interest rates have to go up, = austerity = depression = deflation across all asset classes including pm's. Cash is king. wankin' bankers win. Central bankers asset strip first by inflation (in progress), then deflation.

OR... Bond market collapse = bond prices fall due to fewer buyers = threat of austerity/depression = QE infinite = zimbabwefication (recovery illusion) continues until at least September 2012

Mon, 05/09/2011 - 20:13 | 1257478 traderjoe
traderjoe's picture

I always fail to see how a depression would lead to increased faith in paper money - especially under your hypothetical bond market collapse.

Mon, 05/09/2011 - 20:29 | 1257519 Korrath
Korrath's picture

Me too.  It may have been the case that during the last great depression cash was king, but wasn't that due to the fact the dollar was backed by gold?  


And since it's nothing but paper now...why would it be worth anything during a bond collapse?

Mon, 05/09/2011 - 22:09 | 1257785 Slim
Slim's picture

US revalued on the gold standard in 1933 to help stop spiraling deflation (about a 40% haircut and we saw no real inflation for years until we took part in WWII).  At the end of the day all money is by writ, it's only worth what someone says it is or what someone will trade for it at a point in time (if you have your own army, you can play this game too).  This includes all fiat, all fiat backed by anything (until they decide it isn't or change the rules), and all tradable physical goods including gold/silver (can never be certain of price or value based on sentiment).  Life is easier once one accepts the uncerainty of it.

Mon, 05/09/2011 - 20:41 | 1257548 unununium
unununium's picture

Bingo.  Late 70's USA and Argentina 00's are much better proxies to the current situation than the Great Depression I.

Tue, 05/10/2011 - 04:40 | 1258324 Urban Redneck
Urban Redneck's picture

Timing is everything.  Gross is playing the go big or go home card, with that much cash earning a substantially negative real rate of return, he has to see (or hope) for a sizeable outlet for all that dry powder the near future.   

Mon, 05/09/2011 - 19:11 | 1257308 camaro68ss
camaro68ss's picture

I need to know, so is this good for netflix and ipad2 or not?

Mon, 05/09/2011 - 19:12 | 1257309 slewie the pi-rat
slewie the pi-rat's picture

give us your tired, your poor, your cash...

Mon, 05/09/2011 - 19:12 | 1257311 Salah
Salah's picture

It's amazing: Gross & PIMCO's actions exactly correlate to Charles Hugh Smith's prediction (see "the con of the decade").  Now I know for certain these guys ain't best-buds, but they do seem to connect on a deeper metaphysical level.  Go figure.

PS: USA out of the Outer Space Treaty of 1967, let's go back to the Moon with full sovereignty over our ability to create wealth there.


Mon, 05/09/2011 - 19:11 | 1257315 buzzsaw99
buzzsaw99's picture

It would be funny if he was right.

Mon, 05/09/2011 - 19:12 | 1257319 DK Delta
DK Delta's picture

"And yes, if the firm was expecting a deflationary collapse, the duration exposure would be flipped upside down."


Sorry, but doesn't the duration weighted exposure mean that they are heavy short the long end?

Mon, 05/09/2011 - 19:15 | 1257330 Muir
Muir's picture

Don't quibble with logic.

Just learn the mantra that "this is surely good for silver" no matter what the news.

Mon, 05/09/2011 - 19:32 | 1257379 Logans_Run
Logans_Run's picture

Actually I vigorously, what.....oh man I find myself distracted with something bouncing around in my head

Mon, 05/09/2011 - 19:15 | 1257324 NOTW777
NOTW777's picture

what happens if he gets one or two other big players to join him

Mon, 05/09/2011 - 19:15 | 1257325 Muir
Muir's picture


Well, of course, according to the brilliant ZH posters here this could not possibly be deflationary.

It could not be that the Fed fails, Tres yields are forced to go up, money goes risk off and PMs plunge.


Mon, 05/09/2011 - 19:23 | 1257343 Tyler Durden
Tyler Durden's picture

Well, according to the "brilliant" Bill Gross if it was deflationary you would see 100% allocation to the 10-30 year Treasury space, and the firm would be buying bonds on margin.

Mon, 05/09/2011 - 19:40 | 1257396 DK Delta
DK Delta's picture

I know it's conventional wisdom for yields to move in conjunction with inflation, but if the fed pulls the plug on QE and yields start to rise, you can get that with a concurrent move into very short-term paper and a liquidation in assets - i.e. deflation


Also, why would Gross be 37% in short-term paper if he was not expecting deflation?

Mon, 05/09/2011 - 19:59 | 1257448 XPolemic
XPolemic's picture

Also, why would Gross be 37% in short-term paper if he was not expecting deflation?

I must, reluctantly, agree. The only reason you would be long cash is if you are expecting asset prices to collapse, and want to pick up bargains at the bottom.


However, at this juncture, deflation would be political and (short term) economic suicide, and the USG cannot decrease it's debt burden without massive spending cuts OR devaluation of the dollar. Given the political will in Washington, we can be sure it will be the later, hence you would expect PIMCO to be short cash and long assets.

So one has to wonder if Bill Gross will eventually blink first, and flip his position to an inflationary one. It could be that both Washington and New York are prepared to go all the way to the brink of Zimbabweism, which would be very weird for the world's financial markets, eventually forcing a reset, OR, if Bill Gross is correct, we are about to see the mother of all economic collapses in history.

Mon, 05/09/2011 - 20:14 | 1257487 Tyler Durden
Tyler Durden's picture

TRF does not have a stock mandate. And if he is waiting to buy fixed income securities on the cheap, do bond prices, all else equal, fall in an inflationary or deflationary (especially assuming risk aversion from equities into bonds) scenario?

Oh, and lastly, please check and let us know what the yield on the 3 and 6 month Bill is?

Mon, 05/09/2011 - 20:40 | 1257543 Muir
Muir's picture


from DK Delta who posted after me

"I know it's conventional wisdom for yields to move in conjunction with inflation, but if the fed pulls the plug on QE and yields start to rise, you can get that with a concurrent move into very short-term paper and a liquidation in assets - i.e. deflation"

or my "yields rise, risk off, PMs liquidated"

But I gave his reply first, since he seems more presentable.


or from Xpolemic (again posted after me)

"So one has to wonder if Bill Gross will eventually blink first, and flip his position to an inflationary one."


Mon, 05/09/2011 - 21:51 | 1257724 Tyler Durden
Tyler Durden's picture

Appreciate answering a question with a question.

So here it is again:

TRF does not have a stock mandate. And if he is waiting to buy fixed
income securities on the cheap, do bond prices, all else equal, fall in
an inflationary or deflationary (especially assuming risk aversion from
equities into bonds) scenario?

Mon, 05/09/2011 - 22:02 | 1257757 DK Delta
DK Delta's picture

But all else is not equal. If there were no one keeping the beach ball under water, then as the tide rose, so would the yield on treasuries.


However, the Fed has been pushing yields down and prices up in the face of INCREASES in money and credit. Therefore, the conventional wisdom that bond prices decline during inflation is wrong in this scenario due to fed intervention. What do you think will happen if the Fed stops buying? Well, we all know what is going to happen to bond prices. They will undoubtedly fall and yields will rise, but that doesn't mean that we get inflation, just like all the inflation we have been getting now did not translate into lower bond prices.

The very actions of the Fed to keep yields artificially low is inflationary. If it lets yields rise, this will be deflationary. Does this not make sense to anyone here?

Mon, 05/09/2011 - 23:10 | 1257903 hedgeless_horseman
hedgeless_horseman's picture

Sure you make sense to most readers, but don't forget that our current situation where the flight to safety of the world's reserve currency is now somewhat obviated by the fact that the dollar is probably coming to the end of this role.

Mon, 05/09/2011 - 23:35 | 1257993 DK Delta
DK Delta's picture

Sure, the dollar is a disaster, but what other major currency out there is better? Would you rush into the Yen or the Euro? No. You would probably diversify as much as possible into precious metals, other commodities and other currencies. Still, the world is leveraged, and settlements are made in cash, which means that even if you are in gold and silver (two assets that i'm a huge bull on), you still have to sell these in order to raise the cash you need to meet collateral or margin calls or to settle payments.


A contraction in money and credit leads to an increased demand for cash balances as institutions attempt to stay liquid and meet capital requirements. This cash has got to come from somewhere, so it drives down prices in other assets as people look to get ahead of the curve. This is deflationary, and can lead to major price declines, regardless of how disgusting and impaired the dollar is.


For what it's worth, I posted my own analysis of this matter on my blog:

Mon, 05/09/2011 - 22:52 | 1257816 Muir
Muir's picture

@Tyler "Appreciate answering a question with a question.

So here it is again...."


If this was directed at me: 

I did not respond to those question because you had asked them of another poster and it had nothing to do with my point (the same one that others also made.)

However this was posted further down by me 

"TNX April 11: 3.60 inflation on / risk on

       today      3.14 

"Bonds are going up because there are no expectations of immediate qe3." 



I happened to have added in the same post the following:

"Now, if memory serves, Bill Gross expected QE(n +1) and went on strike.  [see Idiot below at 21:08]

and as robo has pointed out, so far, he's not doing well...."


1. My original post (to which you had a straw man argument)was as follows: "Fed fails, Tres yields are forced to go up, money goes risk off and PMs plunge." which DK Delta said much better as:"I know it's conventional wisdom for yields to move in conjunction with inflation, but if the fed pulls the plug on QE and yields start to rise, you can get that with a concurrent move into very short-term paper and a liquidation in assets - i.e. deflation"

2. Bill Gross' posturing to the FED/ or bad bets that QE (n + 1) is unavoidable have nothing to do with my point.

Tue, 05/10/2011 - 02:00 | 1258172 XPolemic
XPolemic's picture

edit: Sorry, going to read the rest of the comments before I post.

edit2: Sorry for the double edit, but wanted to be clear before posting.


If Bill Gross was betting on an inflation outcome, divesting MBS and going long on cash would be a strange thing to do, given that in a reflationary environment your MBS will at least hold their value, and may even yield a return, and cash has a negative return in an inflationary one.

So I still believe that Bill Gross is betting on deflation, but the great thing about cash is that until the issuer defaults, it is highly liquid and 100% convertible, so if reflation turned out to be on the cards he could always go back into MBS chasing a nominal yield (while the currency deflates).

I should say that I personally believe that reflation is coming, but I thought the OP was opinining on Bill Gross's position.

Changing the topic slightly:

One thing that I find .... odd ... about USians thoughts on a currency collapse is this idea that it cause the 4 horsemen to make a personal visit to the economy. There are other currencies that have collapsed before, and no horsemen appeared. Take Mexico for example, when it's currency went from ~40 to ~1800 to the USD. There was a long warning period before it occurred, and rich mexicans expatriated their wealth (to the US primarily, but also to EUR), which caused the currency to collapse even further than had been expected. But eventually, capital returned in the form of investment into manufacturing, and it could be argued that the rising tide of capital investment and employment 'rose all boats' in Mexico (it could also be argued that only the boats of the rich and upper middle class have risen, but there you go, the poor don't get much richer anywhere at anytime). 

It should also be said that the collapse of the Peso gave a huge boost to the drug trade, as the drugs could be produced with Mexican labour in Pesos and sold over the border in dollars, resulting in a massive FX arbitrage. Perhaps when the USD collapses, USA can be become BRIC's drug dealer?

So while I think the great Bernanke Put will result in eventual collapse of the USD, I do NOT subscribe to the armageddon scenarios put forth by many demagogues

Tue, 05/10/2011 - 03:38 | 1258287 bigwavedave
bigwavedave's picture

its a deflation bet. actually not a bet but a preservation exercise. there isnt enough em paper in the markets he would like and he cant buy anything else that can get him the delta he needs. perhaps other than buying yuan which i am sure he is trying to do. yuan cash that is.

Mon, 05/09/2011 - 21:25 | 1257672 I am a Man I am...
I am a Man I am Forty's picture

ZH thinks QE3 is a given, BG does not, he's waiting to see what happens

Tue, 05/10/2011 - 07:03 | 1258440 BigDuke6
BigDuke6's picture


The consensus is QE3 will not happen, at least not officially.


Mon, 05/09/2011 - 19:42 | 1257402 camaro68ss
camaro68ss's picture


Mon, 05/09/2011 - 20:34 | 1257533 Muir
Muir's picture


"Well, according to the "brilliant" Bill Gross if it was deflationary you would see 100% allocation to the 10-30 year Treasury space, and the firm would be buying bonds on margin. "


actually DK Delta anwered for me:

"I know it's conventional wisdom for yields to move in conjunction with inflation, but if the fed pulls the plug on QE and yields start to rise, you can get that with a concurrent move into very short-term paper and a liquidation in assets - i.e. deflation"


Of course, since he is respectful, and didn't insult anyone, he doesn't get junked.


Mon, 05/09/2011 - 19:33 | 1257381 SheepDog-One
SheepDog-One's picture

LOL nice on, dream on Muir.

Mon, 05/09/2011 - 20:50 | 1257561 Muir
Muir's picture

Sheep - the dog to guide

I posted two replies, and by the by, two posters made similar arguments, arguably, with a better tone and diction.


sheeple and more shepple at ZH

p.s. Of course inflation is a possibility. One poster at ZH who knew his shit on CDOs quantified it: above 3.40 the market bet is on inflation.


 Close: 3.16 Open: 3.18


Mon, 05/09/2011 - 19:13 | 1257326 beastie
beastie's picture

He is not planning on sitting on the cash.

Sometimes the answer is right in front of you and you don't have to go digging through financial statements or interviews.

Mon, 05/09/2011 - 19:16 | 1257332 DK Delta
DK Delta's picture

Ok, but if he is sitting on so much cash, doesn't that mean that he expects major price declines in fixed income at least? And considering what a HUGE part of bank assets fixed income are, doesn't this mean liquidations across all asset classes??

Mon, 05/09/2011 - 19:37 | 1257393 Dejean Splicer
Dejean Splicer's picture

It means he's short the dollar. A bona fide hedge.

Mon, 05/09/2011 - 19:39 | 1257400 DK Delta
DK Delta's picture


Mon, 05/09/2011 - 21:16 | 1257627 earlthepearl
earlthepearl's picture

Short the dollar??
He is holding $23 billion of them....
I think he is betting that in the coming collapse the usd will regain it's safety?

Mon, 05/09/2011 - 21:51 | 1257736 DK Delta
DK Delta's picture

that's my take as well

Tue, 05/10/2011 - 07:42 | 1258459 Dejean Splicer
Dejean Splicer's picture

Long the physical, short the paper. Neutral.

Sometimes the greatest returns are found by being cautious and reserved.

~D'jean Splicer

Mon, 05/09/2011 - 22:02 | 1257759 IWanaBRich
IWanaBRich's picture

Finally, someone mentions the obvious.  Such a flight to dollar-safety would slaughter commodities and commodity-related stocks.  We would switch to risk-off and equities would follow comods.

Mon, 05/09/2011 - 22:14 | 1257794 DK Delta
DK Delta's picture

ZeroHedge is the best blog on the net, but everyone is so gungho on the inflation story here. I recognize that what the Federal Reserve is doing is inflationary, but that doesn't mean that you can't get a massive liquidation as people panic into cash ahead of what they think is going to be a renewed credit crisis. Credit still dwarfs the increase in the adjusted monetary base.

Mon, 05/09/2011 - 23:29 | 1257923 hedgeless_horseman
hedgeless_horseman's picture

Maybe the traditionally safe investment (Federal Reserve Notes) is so much a part of the problem that some who understand this relationship might choose a lower return or greater risk merely for the sake of disintermediation.  What is the cost of freedom?

Tue, 05/10/2011 - 07:40 | 1258488 rufusbird
rufusbird's picture

You hit it. The 'disintermediation' process will/is provide a distortion of perspective. I have advised friends to go into cash equalivalents which pay tiny interest while waiting for opportunities. (We just had one one the metals.) It is not a act of confidence...

Mon, 05/09/2011 - 23:25 | 1257959 Tyler Durden
Tyler Durden's picture

Incidentally you answer your own (rhetorical) question: as long as the shadow banking system (a topic discussed almost exclusively only on Zero Hedge) continues declining, and it probably will for some time, the Fed will have to continue printing. And sooner or later the paper dilution will overtake the flight to safety response. As a reminder the woefully named hyperinflation is never an inflationary phenomenon. It is, and always has been, a confidence phenomenon.

Mon, 05/09/2011 - 23:46 | 1258016 DK Delta
DK Delta's picture

You are right, hyperinflation is a loss of faith in currency and credit, and you should know full-well that markets are irrational and that such a loss of faith can occur at any time and for any reason. 

Equally, for all the reasons that the dollar is a horrible currency, there are reasons (namely my argument that credit still dwarfs anything the Fed has managed to print) to expect a rally in the dollar as people try and front run what they think may be a rush for liquidity. Thus, the perception that a flight to safety will occur makes it occur. 

And let me point out one other thing: "sooner or later the paper dilution will overtake the flight to saftey response."

You are totally right, but are we sooner or are we later? I have been consistently amazed at how long it takes bubbles to burst, and I have been burned many times overestimating the market's ability to recognize a bubble, and subsequently its willingness to act on its convictions. I can see this dollar bubble lasting much longer than many of the readers on ZeroHedge seem to believe.

Tue, 05/10/2011 - 00:14 | 1258072 tickhound
tickhound's picture

if i may...

appreciate both arguments immensely.

They almost had me convinced that metals were trading on penis size alone.

Now back to our regularly scheduled program.

Tue, 05/10/2011 - 08:00 | 1258538 Dejean Splicer
Dejean Splicer's picture

"consistently amazed at how long it takes bubbles to burst".

Yes, but do not think that just because the FED stops QE that no entity will step in and fill the void.

Where do you think all this $100/bbl crude oil money is going to park itself? The JPY?

Tue, 05/10/2011 - 01:44 | 1258208 bob_dabolina
bob_dabolina's picture

As a reminder the woefully named hyperinflation is never an inflationary phenomenon. It is, and always has been, a confidence phenomenon.

Oh, really? And what leads to a loss in confidence but a reckless monetary paradigm.....


Tue, 05/10/2011 - 04:23 | 1258318 XPolemic
XPolemic's picture

Oh, really? And what leads to a loss in confidence but a reckless monetary paradigm.....

Civil War, for one. Coup'de'tat/government overthrow, imminent invasion. At least with reckless monetary policy you a forewarned a long way in advance, and it follow a predictable course.

Mon, 05/09/2011 - 19:17 | 1257334 Raymond_K_Hessel
Raymond_K_Hessel's picture

Time for Fed-induced equities crash to drive yields down and crush those fighting the Fed.

Mon, 05/09/2011 - 19:37 | 1257387 SheepDog-One
SheepDog-One's picture

They better watch the silly games, you tank stocks hard and the 401K bathrobe brigades will stack up the sell orders, resulting in catastrophic non recoverable total failure.

Mon, 05/09/2011 - 19:36 | 1257392 Ahmeexnal
Ahmeexnal's picture

That would mean civil war.

Mon, 05/09/2011 - 19:58 | 1257441 buzzsaw99
buzzsaw99's picture

the fed wants people in equities, why would they want to crash equities? they can buy bonds until the cows come home. QE99 bitchez!

Mon, 05/09/2011 - 19:25 | 1257358 Mercury
Mercury's picture

Run Bill run!

Mon, 05/09/2011 - 19:30 | 1257370 Billy Shears
Billy Shears's picture

"...first by inflation and then by deflation..."

Mon, 05/09/2011 - 19:31 | 1257372 pitz
pitz's picture

What if the bonds remain relatively flat, while the dollar collapses?  Bill Gross will have destroyed a massive amount of value by sitting in cash.

Mon, 05/09/2011 - 19:34 | 1257386 Tyler Durden
Tyler Durden's picture

The 64k question. The trick is that Gross, arguably, is one of the bigger Treasury put buyers: the market in which the Fed is allegedly the biggest seller of LT curve vol. All that needs to happen is for the Treasury vol market to expire. Alas, with $9 trillion in agency paper out there that needs curve delta hedging at every secondary transaction, this will be a tough nut to crack.

Mon, 05/09/2011 - 19:56 | 1257439 Reese Bobby
Reese Bobby's picture

I wonder what you mean in plain English.  Gross is betting against UST by buying lots of puts.  The Fed is allegedly sellng long-term insurance against Treasury curve volatility?  Then you lost me... Little help?

Mon, 05/09/2011 - 20:04 | 1257452 buzzsaw99
buzzsaw99's picture

Let me sum up. Buttercup is marrying Humperdinck in a little less than half an hour, so all we have to do is get in, break up the wedding, steal the Princess, and make our escape after I kill Count Rugen.

Mon, 05/09/2011 - 20:38 | 1257546 Reese Bobby
Reese Bobby's picture

It seems your sense of humor rivals your intelligence.

Mon, 05/09/2011 - 20:56 | 1257575 buzzsaw99
buzzsaw99's picture

Gross is betting against UST by buying lots of puts.



I have trouble believing that Gross is buying more protection than he needs. The miniscule amount he is short he doubtless has covered on his book. He would like cheaper prices sure, but imo it isn't going to happen. Selling puts = easy money for the fed because other = shtf.



Mon, 05/09/2011 - 21:43 | 1257713 Reese Bobby
Reese Bobby's picture

That makes a lot of sense.  Except Gross isn't buying protection.  This Tyler suggests he is buying puts, aka the right to sell, aka a short.  And his short is not "minuscule" in the TRF.  And "covered on his book" makes no sense in this discussion.  If you ever handled real money I'm guessing you would shit your pants...

Mon, 05/09/2011 - 21:56 | 1257729 buzzsaw99
buzzsaw99's picture

$10B is chump change for the TRF. As for all the insults, please continue, I thrive on abuse. bitchez.


ps: I doubt you even know what "real money" is. Also, it is impossible for me to shit my pants as I don't wear them.

And "covered on his book" makes no sense in this discussion...


So your theory is that he intends to keep paying the coupon on $10B to someone else until hell freezes over? Right.

Mon, 05/09/2011 - 21:12 | 1257620 Rick64
Rick64's picture


Mon, 05/09/2011 - 20:33 | 1257536 Reese Bobby
Reese Bobby's picture

See Catullus post and link at 19:56 below.  Very helpful...thanks.

It seems the theory is the Fed is selling massive amounts of UST puts to hold down the long end of the curve, and may be, or will sell massive amounts of UST vol to dampen/replace the effect of QE ending in June.  The Fed is hiding this crap in the undefined Other Assets.  I guess this Tyler highlights the MBS holdings because that is a multi-Trillion dollar beast that may prove difficult to control?


So while the fancy terms confuse laymen, the use of derivatives by the Fed would be an interesting, albeit scary strategy.  In effect it is the Big Banks that own and control the Fed going all-in so they can keep the Ponzi going.  But there will be no margin hike on the Fed akin to Goldman's on AIG...for now.

Tue, 05/10/2011 - 04:50 | 1258339 Franken_Stein
Franken_Stein's picture


Thanks. Your post was very enlightening.

Explaining difficult matters in simple language is a sign of intelligence and absence of  arrogance.


Tue, 05/10/2011 - 01:48 | 1258219 Arkadaba
Arkadaba's picture

Not knowing anything about bonds - Is there a place Gross can stick his money and still say it is in cash but still be redistributed? (I'm guessing maybe...)

Mon, 05/09/2011 - 19:49 | 1257426 duncecap rack
duncecap rack's picture

Wouldn't a large amount of value be destroyed if you were sitting in flat bonds with a declining dollar also?

Mon, 05/09/2011 - 19:51 | 1257433 gkm
gkm's picture

Hence the problem with QEx.  If the Fed embarks once again, they can effectively "corner the market" in treasuries and hold the bond market up.  However, the effective discount rates embeded in other instruments should reflect a divergence.

In the end, Gross may be completely right and not have a dime left.  Interesting gamble.  Remember though, it is okay for the Fed (a private institution) to manipulate the market.

Mon, 05/09/2011 - 20:39 | 1257545 gkm
gkm's picture

Or - I should note - since these guys don't gamble, another alternative is that Gross is building a short AT the behest of the Fed to smooth the transition out of the current round of QE.  

Actually this is probably a much more likely scenario.

Mon, 05/09/2011 - 22:10 | 1257787 IWanaBRich
IWanaBRich's picture

don't agree with you ... with $89B in cash and so much in less than 5 year maturity, and a short position to top it off ... this looks more like a bet than a hedge.

Tue, 05/10/2011 - 11:42 | 1258508 rufusbird
rufusbird's picture

Gross has a history of making this bet/hedge in the past. A few years ago, at the request of a friend, I did an analysis of some of the Munibond funds. One of the significant positions that was affecting the performance was a short position in Treasury Bond Futures. This was at least two years ago. I think it is just one of the tools in his kit.

Mon, 05/09/2011 - 21:10 | 1257615 I am a Man I am...
I am a Man I am Forty's picture

well his bet is that the dollar is going to bounce, interest rates will rise, and if that doesn't happen he will continue to look for a better return in foreign countries

Mon, 05/09/2011 - 19:32 | 1257377 gimli
gimli's picture

Maybe Bill's gonna give Sprott all the cash and destroy Blythe

Mon, 05/09/2011 - 19:40 | 1257403 AUD
AUD's picture

This cash you speak of is the obligation of the Federal Reserve Bank. It only the more monetised form of whatever junk the Fed holds as 'assets'. Gross is not short Treasuries at all.

Mon, 05/09/2011 - 19:43 | 1257415 Jovil
Jovil's picture

No one can argue with this relationship of PMs and other assets classes.

Mon, 05/09/2011 - 19:45 | 1257422 Buck Johnson
Buck Johnson's picture

He's not dumb, he sees this bubble in bonds about to burst.

Mon, 05/09/2011 - 19:56 | 1257428 Catullus
Catullus's picture

Just to remind people of the best article written by ZeroHedge this year:

Perhaps Pimco owns the puts that the Fed opened. Of course, Pimco would be absolutely screwed if the Fed continued to open new put positions to manage the yield curve. 

Mon, 05/09/2011 - 20:57 | 1257581 Muir
Muir's picture


Just to remind people of the best article written by ZeroHedge this year:


yes, that was the best written article this year (that had nothing to do with Japan)


said so before

Mon, 05/09/2011 - 21:14 | 1257634 famousamos
famousamos's picture

Thanks for the link Catullus! That helped.  I saw that come through in April but didn't have time to absorb it.

Mon, 05/09/2011 - 21:34 | 1257687 Dejean Splicer
Dejean Splicer's picture

Many thanks for the link.

Tue, 05/10/2011 - 07:19 | 1258462 BigDuke6
BigDuke6's picture

Indeed , it was a great article with total bullshit comments which is tragic.

The comments this article are better and enhancing the experience, as it should be.

My own feeling is that BG is preparing for the end of QE... for now.

It will no doubt create buying opportunities - i will be ready.


Mon, 05/09/2011 - 19:58 | 1257444 onarga74
onarga74's picture

Mortgages will be around 3-3 1/2%  next year...there is no industry here for jobs and there are no houses you can buy with a 261 credit score.  Everyone on the planet expects inflation which means...




Mon, 05/09/2011 - 19:56 | 1257445 Yancey Ward
Yancey Ward's picture

Looking at that first curve, it looks like he sold the MBS to the Fed when Bernanke started buying.  Then Gross bought government bonds and then sold them to Bernanke again on QEI.  He then bought new ones and sold those to the Fed on QEII.  The Fed has been paying top dollar all along.  What will the Fed be "buying" next?

Mon, 05/09/2011 - 20:02 | 1257455 michigan independant
michigan independant's picture

Tough nut indeed to crack. Do we wish value added growth or Monte Carlo filtering bullshit or the like as the world moves on. Since Mr. Obama is no Hadrian as such, why at this point  should paper jockeys not be shot wholesale?

Mon, 05/09/2011 - 20:15 | 1257488 RobotTrader
RobotTrader's picture


This is by far, the most bullish news for financial markets in recent history.

'1)  Treasuries have been bonering non-stop off the lows, now up 8 days in a row and 13 out of the last 16 days since Gross made his "I'm short Treasuries" announcement.  So far, his bet has gone horrifically wrong.

'2) With that world record amount of cash on hand, no doubt Gross has set himself up for huge performance anxiety.  With his short Treasuries already going against him, he's digging himself further into a hole vs. competitor firms.

'3) Only a matter of time before Gross panics and has to buy something.  If EEM or NYA break out to new highs after this lengthy consolidation that everyone believes is a "topping pattern", guys like Gross sitting on cash will have no choice but to start buying blue chip stocks and/or corporate bonds.

Heh, if he even allocates a tiny silver of his percentage to gold and silver, those markets could also get hockey-sticked.


Mon, 05/09/2011 - 21:18 | 1257644 topcallingtroll
topcallingtroll's picture

Hockey stick should be banned as both a noun and a verb, bitchez.

But i like seeing the delivery failure king taking that hockey stick up his outflow channel. Does it feel good Bill?

Mon, 05/09/2011 - 20:16 | 1257489 TheSto
TheSto's picture

Did anyone think to call and ask him yourselves?

Mon, 05/09/2011 - 20:32 | 1257534 Kina
Kina's picture

I did, and he said go ask Robotrader because it knows everything and he knows nothing.

Mon, 05/09/2011 - 20:21 | 1257496 babylon15
babylon15's picture

Looks like the last time Bill Gross was this short in US treasuries was April 2008, right after Bear Stearns collapsed. We all know what happened next.

Mon, 05/09/2011 - 21:09 | 1257619 topcallingtroll
topcallingtroll's picture

The man is stubborn thats for sure.
And history is about to rhyme.

Thu, 08/18/2011 - 04:51 | 1571777 mediahuset
mediahuset's picture

electronic cigarette

I am hoping the same best work from you in the future as well. In fact your creative writing abilities has inspired me to start my own Blog

Mon, 05/09/2011 - 20:34 | 1257529 IdioTsincracY
IdioTsincracY's picture

I guess bonds will go up as people expect a new round of QE ... obviously Bill Gross does not ... we'll see how this plays out.

Mon, 05/09/2011 - 21:09 | 1257608 topcallingtroll
topcallingtroll's picture

Bonds are going up because there are no expectations of immediate qe3.

Bonds went down at the beginning of qe2.

(Remember zeroheds if you want to argue price and yield go in different directions)

Mon, 05/09/2011 - 21:14 | 1257632 IdioTsincracY
IdioTsincracY's picture

Thank you for you insight!

Ayway, i was just pointing out a possible repeat of the march-august 2010 trend. Only this time the trend has started before the end of QE2

Mon, 05/09/2011 - 21:28 | 1257651 Muir
Muir's picture

"Remember zeroheds if you want to argue price and yield go in different directions"

Well troll, I wan't to argue.

TNX April 11: 3.60 inflation on / risk on

       today      3.14


"Bonds are going up because there are no expectations of immediate qe3." 



Now, if memory serves, Bill Gross expected QE(n +1) and went on strike.  [see Idiot below at 21:08]

and as robo has pointed out, so far, he's not doing well.


but of course for the silver hawks, this is all trivial and only margin hikes and manipulation played a part.


Mon, 05/09/2011 - 21:00 | 1257591 chump666
chump666's picture

All bond markets are bubbled up, Asia is alarming -  has a CDS bubble too

Mon, 05/09/2011 - 21:02 | 1257598 topcallingtroll
topcallingtroll's picture

This reminds me of how Peter Lynch ended his career with Magellan.

Do NOT follow this link or you will be banned from the site!