Bill Gross: "There Will Be Haircuts"

Tyler Durden's picture

The highlights from Bill Gross' monthly outlook letter: "The past decade has proved that houses were merely homes and not ATM machines. They were not “good as money.” Likewise, the Fed’s modern day liquid wealth creations such as bonds and stocks may suffer a similar fate at a future bubbled price whether it be 1.50% for a 10-year Treasury or Dow 16,000.... if there are no spending cuts or asset price write-offs, then it’s hard to see how deficits and outstanding debt as a percentage of GDP can ever be reduced....  Current policies come with a cost even as they act to magically float asset prices higher, making many of them to appear “good as money”.

And the take away: "PIMCO’s advice is to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond. While this Outlook has indeed claimed that Treasuries are money good but not “good money,” they are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate....a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing."

Said otherwise: continue to frontrun the Fed, but one finger on the sell button. The problem with at strategy is that everyone is doing it. And for a glaring example of what happens when everyone hits the sell button at the same time, see what happened to stocks last week following the hacked AP twitter account - that's what a bidless market, if only for a few seconds, looks like. Now extend those "few seconds" indefinitely.


There Will Be Haircuts


“Good as Money,” proclaimed the ad for Twenty Grand Cognac. Being a beer drinker, and never having cashed in a Budweiser to pay for a fill-up at the local gas station, I said to myself “Man, that must be really good stuff!” Even in a financial meltdown I thought, you could use it in place of cash, diamonds, gold or Bitcoins! And if the Mongol hordes descend upon us during a future revolution, who wouldn’t prefer a few belts of Twenty Grand on the way out, instead of some shiny rocks and a slingshot?

Well, not being inebriated at that moment I immediately shifted focus to a more serious topic. What IS money? A medium of exchange and a store of value is a rather succinct definition, but we generally think of it as cash or perhaps checks that reflect some balance of “ready” cash at a friendly bank. Yet as technology and financial innovation have progressed over the past few decades, and as central banks have tenuously validated the liquidity and price of various forms of credit, it seems that the definition of money has been extended; not perhaps to a bottle of Twenty Grand Cognac, but at least to some other rather liquid forms of near currency such as money market funds, institutional “repo” and short-term Treasuries “guaranteed” by the Fed to trade at par over the next few years.

All of the above are close to serving as a “medium of exchange” because they presumably can be converted overnight at the holder’s whim without loss and then transferred to a savings or checking account. It has been the objective of the Fed over the past few years to make even more innovative forms of money by supporting stock and bond prices at cost on an ever ascending scale, thereby assuring holders via a “Bernanke put” that they might just as well own stocks as the cash in their purses. Gosh, a decade or so ago a house almost became a money substitute. MEW – or mortgage equity withdrawal – could be liquefied instantaneously based on a “never go down” housing market. You could equitize your home and go sailing off into the sunset on a new 28-foot skiff on any day but Sunday.

So as long as liquid assets can hold par/cost with an option to increase in price, then these new forms of credit or equity might be considered “money” or something better! They might therefore represent a “store of value” in addition to serving as a convertible medium of exchange. But then, that phrase “Good as Money” on the cognac bottle kept coming back to haunt me. Is all this newfangled money actually “money good?” Technology and Fed liquidity may have allowed them to serve as modern “mediums of exchange,” but are they legitimate “stores of value?” Well, the past decade has proved that houses were merely homes and not ATM machines. They were not “good as money.” Likewise, the Fed’s modern day liquid wealth creations such as bonds and stocks may suffer a similar fate at a future bubbled price whether it be 1.50% for a 10-year Treasury or Dow 16,000.

But let’s not go there and speak of a bubble popping. Let’s perhaps more immediately speak about current and future haircuts when we question the “goodness of money.” Carmen Reinhart has said with historical observation that we are in an environment where politicians and central bankers are reluctant to allow write-offs: limited entitlement cuts fiscally, no asset price sink holes monetarily. Yet if there are no spending cuts or asset price write-offs, then it’s hard to see how deficits and outstanding debt as a percentage of GDP can ever be reduced. Granted, the ability of central banks to avoid a debt deflation in recent years has been critical to stabilizing global economies. And too, there have been write-offs, in home mortgages in the U.S., for example, and sovereign debt in Greece. But the cost of these strategies, which avoid what I simplistically call “haircuts,” has been high, and their ability to reduce overall debt/GDP ratios is questionable. Chairman Bernanke has admitted that the cost of zero-bound interest rates, for instance, extracts a toll on pension funds and individual savers. Some of his Fed colleagues have spoken out about the negative aspects of QE and future difficulties of exit strategies should they ever take place. (They won’t!) So current policies come with a cost even as they act to magically float asset prices higher, making many of them to appear “good as money” – shots of cognac notwithstanding.

But the point of this Outlook is that even IF… even IF QEs and near zero-bound yields are able to refloat global economies and generate a semblance of old normal real growth, they will do so utilizing historically tried and true “haircuts” that rather surreptitiously “trim” an asset holder’s money without them really knowing they had entered a barbershop. These haircuts are hidden forms of taxes that reduce an investor’s purchasing power as manipulated interest rates lag inflation. In the process, governments and their central banks theoretically reduce real debt levels as well as the excessive liabilities of levered corporations and households. But they represent a hidden wealth transfer that belies the vaunted phrase “good as money.”

Before drinking up, let’s examine these haircuts to see why they do not represent an authentic store of value even if their bubbly prices never pop. I will give each haircut a symbolic name – I welcome your suggestions as well via e-mail reply:

(1) Negative Real Interest Rates – “Trimming the Bangs”

During and after World War II most countries with high debt overloads resorted to artificially capping interest rates below the rate of inflation. They forced savers to accept negative real interest rates which lowered the cost of government debt but prevented savers from keeping up with the cost of living. Long Treasuries, for instance, were capped at 2½% while inflation was soaring towards double-digits. The resulting negative real rates together with an accelerating economy allowed the U.S. economy to lower its Depression-era debt/GDP from 250% to a number almost half as much years later, but at a cost of capital market distortions.


Today, central banks are doing the same thing with near zero-bound yields and effective caps on higher rates via quantitative easing. The Treasury’s average cost of money is steadily grinding lower than 2%. If current policies continue to be enforced in future years it will eventually be less than 1% because of the inclusion of T-bill and short maturity financing. The government’s gain, however, is the saver’s loss. Investors are being haircutted by at least 200 basis points judged by historical standards, which in the past offered no QE and priced Fed Funds close to the level of inflation. Large holders of U.S. government bonds, including China and Japan, will be repaid, but in the interim they will be implicitly defaulted on or haircutted via negative real interest rates.

Are Treasuries money good? Yes. But are they good money? Most assuredly not, when current and future haircuts are considered. These rather innocuous seeming (-1%) and
(-2%) real rate haircuts are not a bob or a mullet in hairstyle parlance. More like a “trimming of the bangs.” But at the cut’s conclusion, there’s a lot of hair left on the floor.

(2) Inflation / Currency Devaluation – “the “Don Draper”

Inflation’s sort of like your everyday “Mad Men – Don Draper” type of haircut. It’s been around for a long time and we don’t really give it a second thought except when it’s on top of a handsome head like Jon Hamm’s. 2% ± a year – some say more – but what the heck, inflation’s just like breathing air … you just gotta have it for a modern-day levered economy to survive. Sometimes, though, it gets out of control, and when it is unexpected, a decent size hit to your bond and stock portfolio is a possibility. If our TV idol Don Draper lives another decade or so on the airwaves, he’ll find out in the inflationary 70s. Such was the example as well in the Weimar Republic in the 1920s and in modern day Zimbabwe with its One Hundred Trillion Dollar bill shown below. As central banks surreptitiously inflate, they also devalue their currency and purchasing power relative to other “hard money” countries. Either way – historical bouts of inflation or currency devaluation suggest that your investment portfolio may not be “good as the money” you might be banking on.


(3) Capital Controls – the “Uncle Sam Cut”

Uncle Sam with his rather dapper white hair and trimmed beard serves as a good example for this type of haircut, if only to show that even the U.S. can latch on to your money or capital. Back in the 1930s, FDR instituted a rather blatant form of expropriation shown above. All private ownership of gold was forbidden (and subject to a $10,000 fine and 10 years in prison!) if it wasn’t turned into the government. Today we have less obvious but similar forms of capital controls – currency pegging (China and many others), taxes on incoming capital (Brazil) and outright taxation/embargos of bank deposits (Cyprus). Governments use these methods to keep money out or to keep money in, the net result of which is a haircut on your capital or your potential return on capital. Future haircuts might even include a wealth tax. Are gold and/or AA+ sovereign bonds good as money? Usually, but capital controls can clip you if you’re not careful.


(4) Outright Default – the “Dobbins”

Ah, here’s my favorite haircut, and I’ve named it the “Dobbins” in honor of this 5-year bond issued in the 1920s with a beautiful gold seal and payable, in dollars or machine guns! Bond holders got neither and so it represents the historical example of the ultimate haircut – the buzz, the shaved head, the “Dobbins.” As suggested earlier, the objective of central banks is to prevent your portfolio from resembling a “Dobbins.” I have tweeted in the past that the Fed is where all bad bonds go to die. That is half figurative and half literal, because central banks are typically limited from purchasing bonds payable in machine guns or subprime mortgages (there have been exceptions and Bloomberg reported that nearly 25% of global central banks are now buying stocks believe it or not)! But by purchasing Treasuries and Agency mortgages they have rather successfully incented the private sector to do their bidding. This behavior reflects the admission that modern-day developed economies are asset-priced supported. Unless prices can continuously be floated upward, defaults and debt deflation may emerge. Don’t buy a Dobbins bond or a Dobbins-like asset or a bond from a country whose central bank is buying stocks. They probably aren’t “good as money!”




Investment Strategy  

So it seems as if the barber has you cornered, doesn’t it? Sort of like Sweeney Todd! Let’s acknowledge that possibility, along with the observation that all of these haircuts imply lower-than-average future returns for bonds, stocks, and other financial assets. If so, the rather mixed metaphor of “money’s goodness” and “avoiding haircuts” is still the question of our modern investment age. The easiest answer to the question of what to buy is to simply take your ball and go home. If the rules aren’t fair, don’t play. That endgame however, results in a Treasury bill rate of 10 basis points or a negative yield in Germany, France and Northern EU markets. So a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing. PIMCO’s advice is to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond. While this Outlook has indeed claimed that Treasuries are money good but not “good money,” they are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate.

The same conclusion applies to credit risk alternatives such as corporate bonds and stocks. Granted, this sounds a little like Chuck Prince and his dance floor metaphor does it not? His example proved that dancing, and full heads of hair are not forever. So give your own portfolio a trim as the year goes on. In doing so, you will give up some higher returns upfront in order to avoid the swift hand of Sweeney Todd. There will be haircuts. Make sure your head doesn’t go with it.

Quick Read

1) Central banks and policymakers are acting like barbers. They haircut your investments.

2) Negative real interest rates, inflation, currency devaluation, capital controls and outright default are the barber’s scissors.

3) Gradually reduce duration, risk positions and “carry” as the year proceeds.

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GetZeeGold's picture



Seem's a just a tax for people that can't do math.


Contact your local politician for a refund.

Ghordius's picture

or, in other words: "What can't be repaid, won't be repaid"

Hard1's picture

Excellent piece by Mr. Gross.  Unbelievable that the manager of the world's largest fixed income funds warns readers that they will not get their money back (at least in purchasing power terms).   I think good news for Zerohedge as well. Gross's letter even includes images of Zimbabwe's 100 Tln dollar note and the presidential confiscation of gold, both items, regular images for ZH readers. Pity that the news are terrible and denial is rampant!

fonzannoon's picture

But when it comes to Europe....

"Bill Gross, manager of the world's largest bond fund for Pimco, has launched a stinging attack on efforts by Britain and much of the euro zone to cut debt rapidly with severe austerity measures, warning that such action risks stifling recovery.

"The U.K. and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not," Mr Gross told the Financial Times. "You've got to spend money."

Ghordius's picture

when it comes to Bill Gross and PIMCO don't forget that Gross co-founded it 1971 - after Uncle Sam defaulted on the gold-backing of the Dollar, and sold it to the Allianz insurance giant based in Munich, Germany in 2000

imho what he says now has a different motivation from what he said between 1971 and 2000

disabledvet's picture

"good luck proving that in court." (that's suppose to make you laugh.) listen a man isn't just out to make money...he's also also out "to get the word out." does one do this by yelling SHIT ON A STICK COME AND GET IT! of course there's an "optimism bias" in the media...of course we talk our book...but can we REASON with the numbers? hmmmm. "this is a conundrum indeed Chairman Greenspan." WE'RE TALKING TRILLION YOU FEDERAL RESERVE PHUCKTARD! (obviously you can't "reason" with math..the numbers are the numbers so that's another thing to make you laugh, or cry..or be engraged etc). point being IN THEORY these deficits "WERE to be repaid" but it was only upon "successful bubble reinflation"' that "suddenly hope emerged!" i would argue "conditional reality"...subject to change without further notice as they say. RISK RISK RISK RISK RISK. that thing NEVER shows up in "the price." you know..."yeah, man...Amazon's only 400 bucks so i bought it dude" is what i mean. in other words you have to look at valuation relative to the economy and interest rates...THE MARKET will move the Fed...NEVER the other way around. (hopefully it is for...good and peaceful purposes this time. VERY rarely is it ever however and indeed in 2008..."the economy may have just gotten lucky there...." but by no means are we out of the woods yet.

tip e. canoe's picture

did not know that.   all his sockpuppet shouts make perfect sense now.   

Ghordius's picture

Austerity never produced growth

Austerity is the equivalent of cutting cancerous cells from the body so that they don't consume precious resources, and eventually you

Austerity is the equivalent of taking the credit cards of your daughters away and explaining them that you won't finance a new bag, dress and pair of shoes every day forever. And that they might have to contemplate work or finding a husband or both

Austerity is about giving breathing space to those parts of the economy that really produce, even if consumption in total goes down

Austerity is about conservation of resources on what is essential, because times are though

Good Austerity would be paired with some help to the truly poor, and cuts in the help to those who won't suffer by that

If I really had any trust in governments spending wisely, then I'd be all in favour of gov spending during recessions/depressions

If those spendings on borrowed funds would go in things that might be truly useful for the real, producing economy, like bridges, harbours, roads and all kind of useful infrastructure, than I'd be all about taking the Keynesian medicine

but we all took the Keynesian medicine since 1971, even though Lord Keynes advocated for paying back debt during good times, the way the US Congress was doing in the 50's and the UK did after the Napoleonic Wars

fact is, peacetimes are good times, wartimes are bad times. The old way was to pay back in the first and spend to win in the second

The new times are all about having peace and war together, declaring it as good times and borrow and spend as if they were bad times

balanced budgets, dammit. in the european case, we already tax as if we were having a war. plenty of tax money that begs to be spent efficiently, instead of having... moar

Sandmann's picture

in the european case, we already tax as if we were having a war.

So very true ! We have never gotten rid of the Wartime State which has simply grown inexorably and pre-empted claims on all forms of income

Dangertime's picture


Austerity does not create growth.  It clears away the rubble so one can begin anew.

tip e. canoe's picture

excellent summation, G.   however, the problem with "Austerity" will be the same problem as with "Keynesianism", it will be warped & twisted & mangled from its original intent to serve only those in power (and those who pull their strings).

as long as there is a centralized monopoly on "money" and "power", the beatings will continue, no matter whether it's a force feeding (K) or an enema (A).

Ckierst1's picture

Austerity may never promote growth (although it may redirect assets to productive endeavors), but stimulation diminishes in efficacy (pushing on a string).  Better to let truly free (laissez faire) markets allocate than permitting political elites to choose winners and losers.  We ought to try laissez faire capitalism sometime.  Mercantilism is a travesty in the "Land of the free and home of the brave."

Sandmann's picture

They are spending water...but not in a productive way.

GetZeeGold's picture



Let the real wealth transfer commence. Grab anything precious that is not nailed down.


I'd get some oil but I've only got 5 empty jugs and if you don't seal them up really well that crap gets all over everything.

Ghordius's picture

since it flows I'll continue


central banking based on fiat currency is a war instrument. it's perfect for doing what Germany did 1914: get off the gold backing and print to win. of course because after the war the loser pays for the expenses, every child 1914 knew that

during peacetimes, it's hard for sovereigns to forego the wonderful potentiality of CBs, their flexibility, their might. that's the reason why there are 110 of them in the world. they are something like giant, sovereign-sized credit cards

nevertheless, as with all war instruments, the instrument as such is not evil - it's how you wield it and for what

a credit card is a credit card, in the case you max it out as well as in the case you use it wisely

in this, ZH still does not understand what the EUR is about. it's a response to the eventualities of the fiat USD, that is still the global reserve currency, and so the main protagonist on the monetary plane. it's a damage control instrument

it's also the path of having options, or, better, not painting everybody in the same corner

including the option of having all member countries jumping off the EUR at the same time into their old ones, for example, or floating a new currency that has a chance because of size, and many, many others

but it's also a way not to get ripped apart by the tidal forces of the USD/Yuan fight

and - something probably only continental europeans feel this way - it's a sign of peace between previously constantly at-war-sovereigns because CBs are central to modern wars in the first place

yes, I know, the banks, particularly the megabanks. but they aren't what the EUR is about, they are only clients/customers of the system, not it's "reason of being". corrupt, sick ones, yes, but this is an illness of the parts, not of the system

Sandmann's picture

Again nice comment !  Bank of England 1694 set up to fund wars by Dutch king on English throne. Bank of France 1800 to fund war.  Canada and New Zealand did not get one until 1934.

So it is fair to say Central Banks are there to fund Government. That is exactly what they have done in funding wars and debasing currency and engaging in financial repression.


Tsunami Wave's picture

Aaaaaahhhhhhhhhhhhhhh. And now I see. And when the Fed goes kaput.. As the bad bank amongst other banks of course, a 'good' and new central bank must come into existence. A global bank producing one single currency. 'One bank to rule them all.' Now I understand.

i-dog's picture


"understand what the EUR is about. it's a response to the eventualities of the fiat USD, that is still the global reserve currency"

A response ... or a challenge for the throne, Ghordius?

There are two things we do know about the "European Experiment":

1. It was intended to encompass MANY more than the current 27 states (and paltry 11 EZ takers); and,

2. It has used every underhanded means possible to achieve that end - including, but not limited to, secret organisations (Bilderberg, etc) of politicians and bureaucrats working in the background, repeated ballots until the correct answer is given by voters (or the ballot is simply ignored!), and a European Central Bank to swallow, errrr, control it all.

Your continual platitudes of "there's nothing to see here, move along" ring very hollow, to me.

new game's picture

any contact will be anger driven; best to mind my own affairs for now.

mayhem_korner's picture

it's a just a tax for people that can't do math.


I saw that on a Lottery Commission bumper sticker.

disabledvet's picture

"the market is a tax." interesting. "gold standard takes that away." we must always feed this beast? i would argue "there is a growth limit." 2008 was a "obvious" one. there will be more. "find yourself at the intersection of the up and the down and you will find history." will yours be told? will it be about you?

kridkrid's picture

The lottery is such a wonderful little example of: 1) how fucked up the government is and 2) how fucking dumb people are to not realize it.

Gambling is illegal, unless it is HUGE... and run by the state.  Gambling is illegal because... well, I'm not sure, but I assume it's because the "juice" earned by the bookie is.. what... immoral or something?  But the bookie is only raking 10%, the state is raking 50%+.  But the lottery is for education, right?  Fucking dumb fucking people who don't understand that money is fungible.  Money the state can now collect from idiots who can't do math to pay for something that the state is already on the hook to pay for.

The lottery really pisses me off.

barroter's picture

Play Megamillions Today!  The Payout is $100 Million! (Less what the lottery takes, about 40% and less what the gov't takes, another 40%)

player333's picture

"Gambling is illegal because... well, I'm not sure, but I assume "


Its illegal because the state does not get their part.


+1 for a great post and to the point.

Cone of Silence's picture

Lotto,  A tax on Stupidity

akak's picture

Kind of like the price of cigarettes, too --- slowly killing yourself while paying through the nose for the privilege.

SheepDog-One's picture

Exactly, just a more elaborate way of extracting yo interest payment that all central banksters deserve! The 'old way' is no longer working, that being Avg Joe getting a loan and paying it back gradually with interest. The new way is blow a bubble, and haircut the entire enchilada. One thing is for sure, banksters deserve their free living at the expense of you.

Dollar Bill Hiccup's picture

This is one of the best pieces out by Mr. Gross. Succint.

What to actually do with it? If the responsible thing for the "public" is to start fading this rally,

then the truly irresponsible thing is to lever up into the parabolic madness we are in the midst of.

AS LONG AS INFLATION IS FALLING, THE CBs are pedal to the metal.

Europe is cooked.

China has severe over capacity and is cooked.

US is living on virtual money.

The economic divergences from mkt price allow for no change of game plan by the CBs.

Scotty, warp factor 10.


mayhem_korner's picture



CBs will be pedal to the metal irrespective of inflation.  They have NO CHOICE (unless they want to be viewed as personally responsible for total and near-instantaneous crash of the bond, stock, and real estate "markets", which they don't).

[Front running insider-informed algos] ain't my idea of's more like suicide.  (channeling Han Solo)

disabledvet's picture

"speculations allow for the unwind." is that what you said Hank Paulson? something..."in the future" will allow for deficit reduction? couldn't tell ya...i'm just an average guy. clearly we now have the speculation however...will it pay down the debt...the deficit..or will it be used for...

NoWayJose's picture

If the Vulcans came by today the would view what is happening and conclude that we are a primitive race with no intelligence - then they would keep going. Maybe that is why we haven't seen them yet...

NoWayJose's picture

If the Vulcans came by today the would view what is happening and conclude that we are a primitive race with no intelligence - then they would keep going. Maybe that is why we haven't seen them yet...

Dollar Bill Hiccup's picture

I thought the headline was a bit hyperbolic, until I saw the number.


I don't think the headline captures that abysmal print.

new game's picture


Yellowhoard's picture

Bill finally gets it.

Ghordius's picture

you mean after 30 years and one billion he made out of trading bonds? perhaps he "got it" much earlier

buzzsaw99's picture

Bill is good at haircuts. He takes a little off the top from every one of his infestors.

disabledvet's picture

"when you're talking trillions a little can be a lot." market still has to move "your way."

babylon15's picture

All the cuts will be on the bonds Ben Bernanke bought.

W T F II's picture

I agree....Same w/ BOJ..."national duty" and all that...that is why Merkel ain't lettin' Mario 'bail her in'....

mayhem_korner's picture



...with your great-grandchildren's credit card.

disabledvet's picture

again "speculations can pay for many things." we know this from the 90's...of course "that was a prelude to the greatest financial collapse in world history." hmmm. "this sounds political to me." STILL.

JustObserving's picture

how deficits and outstanding debt as a percentage of GDP can ever be reduced

We keep adding intangibles of $500 billion to the GDP every few months?

The US economy will officially become 3 per cent bigger in July as part of a shake-up that will see government statistics take into account 21st century components such as film royalties and spending on research and development.


HD's picture

Fiat Russian roulette.  All or nothing.