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Gross Says Hold Cash, Prepare For "Nightmare Panic Selling"
Ever since bond market liquidty became the topic du jour across Wall Street (just a few short years after it was first raised in these pages), analysts, pundits, and reporters alike have begun to question what might happen should investors who have piled into mutual funds and ETFs (especially fixed income products) suddenly decide to sell into illiquid secondary markets.
Some have suggested, for instance, that if corporate bond fund managers were suddenly inundated with a cascade of redemptions, the absence of dealer liquidity in the secondary market could create the conditions for a firesale.
The problem, as we’ve been keen to point out, is that when fund flows are one-way (i.e. everyone is selling), fund managers must either i) meet redemptions with cash, or ii) trade the underlying securities. Note that the latter option is so undesirable in illiquid markets (indeed, trading large blocks into illiquid markets poses a systemic risk), that some fund managers are now lining up emergency liquidity lines with banks so that they can at least meet an initial wave of selling with cash and avoid, for a time at least, sparring with illiquidity.
In his latest Investment Outlook, Bill Gross addresses the above, describes what events might trigger a retail exodus (thus tipping the first domino), and says investors should hold enough cash to ride out the storm without participating in a firesale caused by rising rates or some manner of exogenous shock.
* * *
From “It Never Rains In California”:
Mutual funds, hedge funds, and ETFs, are part of the “shadow banking system” where these modern “banks” are not required to maintain reserves or even emergency levels of cash. Since they in effect now are the market, a rush for liquidity on the part of the investing public, whether they be individuals in 401Ks or institutional pension funds and insurance companies, would find the “market” selling to itself with the Federal Reserve severely limited in its ability to provide assistance.
While Dodd Frank legislation has made actual banks less risky, their risks have really just been transferred to somewhere else in the system. With trading turnover having declined by 35% in the investment grade bond market as shown in Exhibit 1, and 55% in the High Yield market since 2005, financial regulators have ample cause to wonder if the phrase “run on the bank” could apply to modern day investment structures that are lightly regulated and less liquid than traditional banks. Thus, current discussions involving “SIFI” designation – “Strategically Important Financial Institutions” are being hotly contested by those that may be just that. Not “too big to fail” but “too important to neglect” could be the market’s future mantra.
Aside from the obvious drop in trading volumes shown above, the obvious risk – perhaps better labeled the “liquidity illusion” – is that all investors cannot fit through a narrow exit at the same time. But shadow banking structures – unlike cash securities – require counterparty relationships that require more and more margin if prices should decline. That is why PIMCO’s safe haven claim of their use of derivatives is so counterintuitive. While private equity and hedge funds have built-in “gates” to prevent an overnight exit, mutual funds and ETFs do not. That an ETF can satisfy redemption with underlying bonds or shares, only raises the nightmare possibility of a disillusioned and uninformed public throwing in the towel once again after they receive thousands of individual odd lot pieces under such circumstances. But even in milder “left tail scenarios” it is price that makes the difference to mutual fund and ETF holders alike, and when liquidity is scarce, prices usually go downnot up, given a Minsky moment. Long used to the inevitability of capital gains, investors and markets have not been tested during a stretch of time when prices go down and policymakers’ hands are tied to perform their historical function of buyer of last resort. It’s then that liquidity will be tested.
And what might precipitate such a “run on the shadow banks”?
- A central bank mistake leading to lower bond prices and a stronger dollar.
- Greece, and if so, the inevitable aftermath of default/restructuring leading to additional concerns for Eurozone peripherals.
- China - “a riddle wrapped in a mystery, inside an enigma”. It is the “mystery meat” of economic sandwiches - you never know what’s in there. Credit has expanded more rapidly in recent years than any major economy in history, a sure warning sign.
- Emerging market crisis - dollar denominated debt/overinvestment/commodity orientation - take your pick of potential culprits.
- Geopolitical risks - too numerous to mention and too sensitive to print.
- A butterfly’s wing - chaos theory suggests that a small change in “non-linear systems” could result in large changes elsewhere. Call this kooky, but in a levered financial system, small changes can upset the status quo. Keep that butterfly net handy.
Should that moment occur, a cold rather than a hot shower may be an investor’s reward and the view will be something less that “gorgeous”. So what to do? Hold an appropriate amount of cash so that panic selling for you is off the table.
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Bill is overdue for a sex change. How about Billy-Jean Gross?
Welcome to the fake financial world of central bank perception management via open market operations.
Hold Cash.........................Hmmmmmmmmmmmm
For the gov to snatch?
GOOD LUCK
Snatching your 401k is a lot easier than snatching your cash in the basement.
Easy to steal cash in the basement through inflation.
Pfffttt....sell your inventory to the Fed when you need cash. It'll buy anything.
Fuck cash, hold gold, but yeah there is going to be a lot of selling.
Are you new to ZH? Or maybe you post here a lot but don't know your ass from a hole in the ground when it comes to finance?
Well there is this little thing called rehypothication where someone takes an asset and loans it out, then the next person can take that asset and loan it out and so on forever. When the first person sells the next person sells and it daisy chains until the last at which point said asset has been sold so many times over it has no more value. Why? Because when something is put on the market it's value begins to drop until a buyer steps in. No buyer? Price keeps dropping. This is the equilibrium of supply/demand.
If you have any questions about the definitions of words like "asset" you may see me during office hours.
"Note that the latter option is so undesirable in illiquid markets (indeed, trading large blocks into illiquid markets poses a systemic risk)"
Don't know about that. Someone loves dumping paper gold into an illiquid market. Happens all the time.
Osmium
+10000.................................post of the day...............................made my day!
i knew the pearl was lurking down here somewhere
i did wet my undies laughing
I'm going to disappear to a Caribbean island.. say Puerto Rico. Where I'm insulated from all this nonsense.
err wait.. umm nevermind.
Try a nice Mediterranean Island like Mykonos.
Maderia
Peter's Cafe Sport in Horta at Ilha do Faial
;-D
Here you go, ah yes..
https://www.youtube.com/watch?v=cGO0pyh5tqw
Saint Martin is nice, it's French! Er, ......nevermind.
whats your point. France is lovely.
Because the central banks will stop printing money and buying stuff this time, right?
OT folks, I see severe implications here.
Hamm claims in the lawsuit that he has suffered “damage to his reputation and standing in the community and has suffered severe mental and emotional distress,” as a result of Thompson’s Facebook post.
The mere sight of your avatar with Jesus weilding a gun makes me so emotionally distressed that I am unable to work ever again.
Fear not HH, he'll be the winner in this battle for your immortal soul.
To all those atheists/agnostics...There's room for all beliefs.
Check out the membership of the committee of 300 pointing to the article above.
Bastids!
Why is he holding a gun?
I thought he was supposed to be holding a sword in his second coming?
Cuz I couldn't find an appropriate star wars human liquifying laser device.
I have one I could sell you.
It only costs $390,390,200.
The energy cells come separate.
If you are not interested, do you know anyone in government who might be?
And why was he pictured as a tall white guy with long hair when he was a 5'1" short haired palestinian dude who weighed about 110 pounds?
Hedgeless - remember that I comes before E, except after C ...
well, yeah, could have been a typo.
Carry On, wield that keyboard well.
I before E, except after C - that's weird.
or when sounding like "a", as in neighbor or weigh.
The article says nothing about Thomas's assertion that Hamm tried to 'squelch' a seismicity report.
Proof or pay up.
Might as well said he puts cute puppies in his blender for a breakfast drink.
GET INTO GOLD GUYS .... physical gold ownership on a long term deal.. speculate on comex paper if its short term gratification your after. . Physical ownership is a savings plan.. why save in dollar/euro thats depreciating faster than a ford mondeo being used as a taxi... fuck me zerohedge readers are all intelligent professionals... this is basic stuff... save in bullion spend in fiat !!!
if people dont have the £$€ to save a bit of bullion each month then use the marketing system to earn commissions and acquire your bullion with that.. we are giving people both the bullion and the means to acquire it... we spout enough about gold and economics on ZH why not profit a bit from that knowledge by referring people to acquire bullion... but perhaps ZHer's are to aloof for network marketing ...sarc
www.teamramgold.com
This is a totalitarian state now; so it will not matter what you own and a loaf of bread and a drink of clean water will be a luxury, but do not touch the elite's goodies. There are already Executive Orders taht would allow the President to confiscate any and all financial instruments.
https://www.youtube.com/watch?v=O6ayb02bwp0 America: Freedom to Facism & Revelation 13
Can't confiscate PM if they are physically held and secured by a wall of lead.
Psst, hey buddy, you got change for a million in treasuries? Sure but the best I can do in physical is an ounce of silver, a gram of gold or a real 10.00 bill and a roll of nickels. Take it or leave it, up to you.
Hold that Tiger!
https://www.youtube.com/watch?v=nWSnT62X8uA
Bankster fucks and sitting ducks, it's muppet season
Article starts with a premise..'what might cause a bond run' then goes on to describe what circumstances would cause such an event as if those circumstances were actually happening. The conclusions drawn in that hypothetical scenario might be correct, but we are still no closer to it actually happening.
Issue the arrest warrants for Dimon and Blankfein.
Amen, Bro!
Cash?
Which cash?
The kind that is a number in your account, just waiting for an official of a bank or government to declare it to be theirs?
Or the kind you stuff in your mattress in the hope that you'll be able to spend it before it becomes kindling?
The kind that sinks in boating accidents.
GROSS HAS BEEN SO WRONG FOR SO LONG. I THINK HE MEASN PREPARE FOR A FEW YEARS FROM NOW.
Gross speaks to me. I have people. I'll have one of my people hold my cash for me.
Bill, You don't mean physical cash? If not physical, then no thanks for the recommendation, too much counter party risk. A little cash (instant maturity note) as diversification is fine. BTW - GFYourself.
It must be serious, look how far down they hammered Au!
I'm sorry.
I can't understand your post.
I can't get past the 'get hammered' part.
I'll raise a glass to that!
I can't believe people are still playing around in the NYC casino hurricane. Crazy. If your wealth isn't in your hands, it doesn't exist.
I guess for serious holy shit money it's different, but here on Earth where most people are lucky to hold 30-100 grand it's stash your shit and keep your antenna on the signal.
Thank Christ the house is paid for and all the guns are sequestered in Lake Kiss My Ass. I guess things are going to get weird.
quit worrying. the fed has already established their position as provider of liquidity in a market crisis since 1987. they're not going to change, policy never changes, it is replaced by new policy. once the fed has gorged itself on bond funds and etfs they will be shuttered, just like Fannie Mae. the bubble will reflate through a combination of direct intervention, and off balance sheet accounting. responsibilities will shift, in housing it became HUD and FHA. it all gets more political, and the crisis turns not on this chart, or that country, rather it turns on the election. its probably too soon to speculate on obamas successor. so relax, next year however is the year of living dangerously, and by then a lot of investors will be complacent once more. remember all the speeches W Bush made about economic recovery, they were probably true, but the people who own this country get nervous when we change horses.
"... but the people who own this country get nervous when we change horses."
Except that given the probability that the next presidunce will be named either Bush or Clinton, there won't be any changes to the two most important policies: 1. Perpetual War, and 2. Upward Wealth Transfer.
The people who own this country can rest easy, because the country will not be changing horses, it will only be changing one jackass for another.
the challenges are immense, the structural changes in employment need to be addressed. its soon going to be a jobless society, should we hold them to the old rules and let them starve while the 1% get theirs. or do we continue to keep them alive, or do we give them enough money to generate some economic activity? bens helicopter may be coming to a neighborhood near your via direct payments of a living wage. the next potus will have to make some decisions.
Hold garbage that can be printed into oblivion it'll save them the time it would take to liquidate your securities when the bail ins and forced treasury purchases begin
DEAR BILL:
THIS IS TANTAMOUNT TO ***ILLEGAL*** SUPPRESSION OF NATURAL MARKET FORCES.
YES.
AT A "FIRESALE" NOT MANY PEOPLE FIT THROUGH THE "DOORWAY".
OTHERWISE IT WOULDN'T BE A FIRE.
INVESTORS WHO ARE SMART ENOUGH TO BE PREPARED FOR SUCH AN EVENTUALITY SHOULD BE ALLOWED TO PROFIT FROM IT.
NOT THE DUMBASSES THAT CAUSED THE PROBLEM IN THE FIRST PLACE.
(note: deliberately mixed metaphors)
tell that to Jesse Livermore, who during WWI bought up all the coffee.
he was called to the white house, and told how americans needed to be able to afford their morning Joe. at a reasonable price.
thus, he was not allowed to profit from normal market forces.
Reminiscences of a Stock Operator.
As much as Gross is wise in what he says now, I recall oh so many times he was on CNBC going "full Keynesian" and cheering on money-printing and creation of near-infinite debt. Is he telling the truth now or was he telling the truth then?
Or does Gross suffer from the same moral disorder that Alan Greenspan does. That is Greenspan who wrote a famous essay on Gold that ended with telling the raw truth, that the only way for a private citizen to protect his wealth from government embezzlement was to hold his wealth in the form of physical gold. Then, after being the Fed Head, he was so hostile to gold, that wretched metal. Now that he is "retired", he is back saying that gold is great.
These people are not liars so much as the truth at any moment is plastic and malleable. What is true in the morning is not true later that afternoon. Such people are dangerous to listen to and as government officials very dangerous to our prosperity and safety. How many trillions of wealth have the recent Fed Heads destroyed or seized and given to others?
And the panic selling has begun at 12:30 EST!
bitchz!
I am going to enjoy watching the so-called "safe" bond funds implode. The amount of 401k money in bond funds is staggering.
I agree with you but for one small point.
TPTB will NEVER allow it. If you watched the articles here, they are PREPARED. Credit lines to meet redemptions WITHOUT having to sell the underlying.
If that fails, they will close the markets. no way in hell they allow a bear market, it would collapse everything.
Still, I am in 100%% cash and perfectly content, if lacking income.
Not that I care but is that about the size of it Bill?
How Gross is he?
Y'know, this little market dip is getting in the way of The Janet's plans to bump US rates. I guess she saw it coming and that's the real reason she didn't do the bump in June. But if this keeps up she is not going to have time to fix the pothole before September, either.
http://stockcharts.com/charts/indices/McSumNYSE.html
I can just smell the processors in max overdrive on her laptop, trying to recompute models for the future that still include a bump this year.
Hey BG waddaya say to that?
Did I just hear a canary fall over?
I
I must have missed the point...I have enough cash...and do not need to sell...but if the market is tanking...I might sell to avoid further losses...so why not sell now..take my profits..and sit this crash out...
There'll be a nasty bottle-neck at the exit door when panic begins.
))==D
Ain't it amazing how just a picture of Yellen posted on cnbc can turn markets around. One day business news will be about business not a FED put.
What? That S&P WAS FLAT today!
Bill Gross' giant, mishapen forehead gives me nightmares every time I see his ugly picture.
I guess one should note that this guy has been so wrong for so long now that 70% of the assets he use to manage have gone elsewhere.
$xeu has barely moved, is anybody really taking any of this seriously?
I thought MDB was serious and then I substituted the word "gold" for "cash". The clue was "tradtion".
"Hold an appropriate amount of cash so that panic selling for you is off the table."
I think I could do that if I was investing with someone else's money.
Hard not to panic if you are not wealthy.
Would someone - anyone here -define what is "cash?" If restrictions are enforced, would my debt card be made inoperable?
Please take just a moment of your time and respond.
Thank you.
My guess is cash is what you would possess physically in a form that others would
take from you in exchange for labor or items of intrinsic value without electricity or third
parties being involved.
Thank you for the response. If correct, then the money in the bank should be safe using my debt card.
The words "bank" and "safe" are not synonymous anymore.
In a financial melt down situation, the laws now consider that your deposit in a bank, makes you a shareholder of the bank.
Poopy pants mutual funds and shit-stained 401k's are backed by puffed air, Chicago-style municipal bonds, Eurotrash timebombs, and other assorted nasties.
Sure they could go up in flames quick with an old school match.