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"How Does It All Play Out?" - Bill Gross Explains How The Central Casino Banks' Martingale Strategy Ends
From Bill Gross' latest monthly investment outlook
Breaking News!
Tired of reading about the Kardashians? Sick of egocentric politicians? Disgusted with endless war in the Middle East? Getting bored reading these monthly Outlooks? (not that bored or you wouldn’t be reading this). Here’s some “breaking news” that I find really interesting and I hope you will too. It’s a recent summary of some things that scientists have discovered over the last few decades. Prepare to be amazed.
- Velocity and gravity can make time stand still – relatively, that is. Einstein’s concept of “spacetime” proposes that the gravitational pull at the center of a black hole freezes the stopwatch of time. If you could live there, billions of years in the universe could pass, and you would not have aged one second. Similarly, time stops if an object travels at the speed of light. Even by traveling at 450 miles an hour in an airplane, your “time” relative to a stationary friend on Earth would pass more slowly than hers. To be “relatively” immortal, forget about cryogenics – just go fast, or live in a dark hole.
- The universe has trillions of identical but separate twins. Two different “particles” separated by light years in space – one at one end of the universe, the other at the opposite, can influence each other. If one turns “right”, the other one will turn “left” and at exactly the same time. Quantumly spooky!
- Scientists have shown that “particles” can suddenly appear out of nothing – even a vacuum – and then disappear again into nothingness. It seems strange that you could get something from nothing, but that there once was nothing 15 billion years ago, and now there is a universe, is evident proof that you can. One theory behind the creation of our universe is that a small “particle” showed up completely from a “void” and then “expanded” exponentially into the universe we know today. Big Bang? Yes – most know this – but the “singularity” from nothing? Mind blowing.
- Something can either be here or not here, depending on whether you’re looking. Remember the old twister about “if a tree falls in the forest and no one hears it, does it make a sound?” Science says “no”. Observation matters. This is the puzzle of “Schrödinger’s Cat”. Hidden in a box, this quantum “cat” can be alive or dead depending on whether you look inside. Be careful then, about how you treat your own Tabby. Check on it often to make sure it’ll be there tomorrow.
- Carbon and all the heavier elements of which we are composed (a little gold by the way) were manufactured or cooked by Supernova stars at tremendous heat. Those stars eventually exploded and the elements somehow coalesced into other stars and planets, eventually to make us. So we are “golden – we are stardust” – Crosby, Stills and Nash were right. And by the way, you and I are composed of some of the identical atoms as Genghis Khan and Columbus were. Not Elvis though. Nature hasn’t had enough time yet to spread him around.
- Dark Matter – So 2/3 of the universe is made up of dark matter – matter that supposedly doesn’t emit or reflect light. This one’s mysterious to me but I’m going with it because scientists seem certain the universe couldn’t stay together unless it was there. And God said, “Let there be dark matter!” Have to change a few verses in the Bible, I guess.
- Global warming is a fact. Nah, I won’t go there – they haven’t really proved it, now have they? After all, if a cat can either be here or not here depending on whether you’re looking, then global warming deniers just need to avoid looking for the signs, and it won’t exist. See – science is on their side after all.
Some of this isn’t actually breaking news, but then for Fox and CNN, everything is. So I’m just following their example. If you’re incredulous or just mad by now, go back to the Kardashians. Caitlyn has a new wardrobe she is just dying to show off, and the war in the Middle East will still be going on.
More breaking news – this time on the investment side: central banks are casinos. They print money as if they were manufacturing endless numbers of chips that they’ll never have to redeem. Actually a casino is an apt description for today’s global monetary policy. There is a well-known “foolproof” system in gambling circles that is sophisticatedly called the “Martingale”. I used to call it “double up to catch up” at my fraternity’s poker table where I was consistently frustrated (loser) – not because I used Martingale but because I wasn’t a good bluffer. Today’s central bankers use both tactics to their success – at least for now. They bluff or at least convince investors that they will keep interest rates low for extended periods of time and if that fails, they use Quantitative Easing with a Martingale flavor. Martingale theorizes that if you lose one bet, you just double the next one to get back to even, but if you lose that one you do it again and again until you win. Given an endless pool of “chips”, the theory is nearly mathematically certain to succeed, and in today’s global monetary system, central bankers are doing just that. Japan for years has doubled down on its QE and Mario Draghi’s statement of several years past, “Whatever it takes” – is a Martingale promise in disguise. It vows to get the Euroland economy back to “even” and inflation up to 2% by increasing QE and the collateral it buys until the Euro currency declines, the EZ economy improves, and inflation approaches target. Currently the ECB buys nearly 55 billion Euros a month, and this Thursday they will up the ante – Martingale or bust!
How long can this keep going on? Well, theoretically as long as there are financial assets (including stocks) to buy. Practically the limit is really the value of the central bank’s base currency. If investors lose faith in a reasonable range for a country’s currency, then inflation will quickly hit targets and then some. Venezuela, Argentina, and Zimbabwe are modern day examples. Germany’s Weimar Republic is a great historical one. Theoretically, if the whole developed global economy did this at the same relative pace and stopped at the right time, they could successfully reflate and produce a little bit of inflation and a little bit of growth and save the globe from the dreaded throes of deflation. That is what they are trying to do – Quantitative Easing, Martingale style – and so far, so good, I guess – although no rational observer would call these post Lehman efforts a success.
That they haven’t really succeeded is a testament to what I and others have theorized for some time. Martingale QE’s and resultant artificially low interest rates carry distinctive white blood cells, not oxygenated red ones, as they wind their way through the economy’s corpus: they keep alive zombie corporations that are unproductive; they destroy business models such as insurance companies and pension funds because yields are too low to pay promised benefits; they turn savers into financial eunuchs, unable to reproduce and grow their retirement funds to maintain expected future lifestyles. More sophisticated economists such as Kenneth Rogoff and Carmen Reinhart label this “financial repression”. Euthanasia of the saver is the result if it continues too long.
But this is theorizing much like Schrödinger’s cat. How many people care about the existence of a quantum feline? (A few, thankfully, but not many.) Market observers say “show me the money” and when they look inside the box, they want to see some, so let’s get down to business.
How does all this play out?
Timing is the key because as gamblers know there isn’t an endless stream of Martingale chips – even for central bankers acting in unison. One day the negative feedback loop on the real economy will halt the ascent of stock and bond prices and investors will look around like Wile E. Coyote wondering how far is down. But when? When does Martingale meet its inevitable fate? I really don’t know; I’m just certain it will. Doesn’t help you much, does it. Except to argue that much like time is relative to the speed of light, the faster and faster central bankers press the monetary button, the greater and greater the relative risk of owning financial assets. I would gradually de-risk portfolios as we move into 2016. Less credit risk, reduced equity exposure, placing more emphasis on the return of your money than a double digit return on your money. Even Martingale casinos eventually fail. They may not run out of chips but like Atlantic City, the gamblers eventually go home, and their doors close.
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Gross, This is fucking news for me. Glad you see the big picture.
In all his “letters” Bill Gross sounds like a bat-swingin’ badass.
However, in the follow-up interviews, he looks and sounds like a chewed-up whistling Woopee Cushion. ;-)
Looney
LOL Looney, makes you wonder, what the fuck is he sittin' on?
Wile E Coyote, how far is the bottom? Far.
https://www.youtube.com/watch?v=Gq_bjaI0NTo
Roadrunner is just a "startling event" that has been staring him in the face for years.
Gross, if you ate better and exercised you could live for more years......isn't that worth investing in? Really, time is what you should view as the most valuable growable asset. But, no.
Only ass clowns believe in glo-bull warming.
Did not realize we live in a real economy /society
This is certainly news to me..........
There is an economy out there. It is being hidden by the fat ass-ed lady who is trying to squeeze passed you in your theater row. Huge rump, crushing you.
Biggest hidden economy group besides n.s.a. Is the paid liars. There are legions of them.
Gross definitely should take a long vacation and while at it - lay off the LSD - what a trip.
help help I'm being repressed!
regressed, actually
Bloody peasant.
so this guy rode on a 30-years wave going always in one direction and now he thinks he is an expert on how the market could go in the opposite direction?
look at what he is writing:
"central banks are casinos"
ok, now you have me reading, avidly
"They print money as if they were manufacturing endless numbers of chips that they’ll never have to redeem"
not quite. they buy something for those chips
"How long can this keep going on? Well, theoretically as long as there are financial assets (including stocks) to buy. Practically the limit is really the value of the central bank’s base currency. If investors lose faith in a reasonable range for a country’s currency, then inflation will quickly hit targets and then some."
ok, and expressed in... what? dollars? or imported oil? the currency in which you might find you over-leveraged, and with margin calls?
less then mediocre. not one mention of FX reserves
It lasts until they succesfully implement the ban on cash and widespread negative interest rates. Faced with the prospect of losing money at the bank and no way to withdraw, people will spend. Monetary velocity will increase, as will inflation. Central banks will not be able to stop it because their reaction times are too slow.
Watching Bill Gross slowly degenerate into madness is surprisingly less fun than it used to be.
We have property near Bill in Corona Del Mar. If that is a "degeneration", sign me up!
Bill is in "the club" and he has always been part of the Fed's "opposition"...
yes, his acting has never been that great.
I'm pretty sure he is adept at diverting enough of the frustrated 'club members' money his direction, to afford the lifestyle to which he has become accustomed.
egad worthless drivel
Sorry Bill, a number of errors, including: "And God said, “Let there be dark matter!” Have to change a few verses in the Bible, I guess"
I guess not. "I form light and create darkness, I make well-being and create calamity, I am the Lord, who does all these things." Isaiah 45:7
Stick to bonds ...
I want my 7 minutes back.......
Drivel
Not sure it's entirely drivel. People behave in patterns, even people 'at the top'. His reference to Martingale may simply be for illustration or as a metaphor, though I'm not sure how deeply he goes with this kind of thinking.
His point being that there is always an end to this crap. I agree. He used to try to guess when, now not so much. Lessons in humility are often painful.
What was that he said about Caitlyns new wardrobe?....
Look when you live in a mansion in Corona del Mar overlooking the Pacific Ocean you gain some amazing insights. Cut him some slack please. Besides he needs to recoup his strength for the next battle with El Erian.
Einstein relativity theory is wrong! http://etheric.com/black-hole-hypothesis-stands-disproven-mainstream-physics/
Even Stephen Hawking rejects the idea of a black hole http://etheric.com/stephen-hawking-rejects-idea-black-hole/The more Gross talks, the more I am convinced all of his success was in spite of himself.
Hmmm, let me see if I've got this straight....
1) The markets are rigged casinos filled with fake chips that are manufactured by some guy in the back room who has no intention of honoring them when they are finally presented for payment.
2) The date at which the chips will cease to be honored is uncertain but nevertheless rapidly approaching.
3) Therefore, you should gradually transfer at least a portion of your holdings away from chips and back into money over a period of about 12 months time.
That way, when your own personal Wile E. Coyote moment arrives, you will only fall off a 500' cliff rather than a 1000' one.
No doubt, 50 million dollars is enough compensation for the rigorous job of dispensing such supreme enlightenment to the sweaty masses.
Beep-beep, your ass.
1) Inflation does that.
2) Inflation is ongoing, sometimes quite quickly in a short period.
3) 'Money' is nothing but a belief system. IMO, convert 'assets' into 'money' and then into 'wealth' which you can hold in your hand.
Have at least something outside the 'system'. Increase those holdings over time. Learn to remove the fiat denominator and begin to compare real things with real things. Find the arbitrage, and grow your 'wealth' by shifting between tangible asset classes when fat arbitrage opportunities arise.
If I wanted to know what a skeleton thought about anything,
I would dig one up and ask it.
Splattered my keyboard at that!
Gross should have written this article 5 years ago.... if he was being honest.
Thirty some-odd-years ago, as bright-eyed, but somewhat math challenged, college junior, I was smacked across the face by the reality of the Martingale system. On the way to ski trip in Utah, a couple of friends and I decided to stop in Vegas for a little gambling action. My friend Will (who should have known better, and turns out he did, since he was an engineering major at UCLA) introduced me to that seductive, but highly flawed system. It made perfect sense to me, so with a couple of hundred dollars burning a hole in my pocket I headed for the nearest roulette table to put my new foolproof system to work. It worked to perfection for the couple of hours we were in town, so well in fact that I didn't want to leave. I had made over three hundred bucks in a couple of hours. Who the hell needed college! I could move to Vegas, make $400-$500 a night for a few hours work; man, I had found my Holy Grail.
I loved skiing, but I don't think I even enjoyed my trip that weekend, so seduced was I by my newfound "talent". As soon as we hit Vegas on the way back home, I hit the roulette table, firmly convinced I was about to double the newfound $500 in my pocket; and then reality set in. I placed a red $5 chip on black and red promptly came up. Undeterred, I placed $10 on black again, and again red. $20; red. $40; dbl00. $80, red. A black, 2 green and 2 red chips ($160) went on black. There was a knot in my stomach as the bouncing white ball jumped from one slot to another before finally settling on 11red. I realized I no longer had enough money left to double up again. I was contemplating placing my remaining chips on black, to at least get back some of my lost winnings (after all, there was no way that red could possibly come up again, right?), when I looked up at the croupier's face. He gave me an almost imperceptible shake of the head. I interpreted that as a sign from him that the wheel was rigged, but more than likely he had seen the story unfold before and was trying to save me from my stupidity. I reluctantly grabbed my few remaining chips and walked to the cashier’s cage.
As I walked away, I heard the croupier call out: "zero, single zero."
Had to be rigged, I grumbled to myself as I stuffed the $175 in my pocket. Will walks up to me and asks me how I did. I told him what he could do with his Martingale system. He seemed surprised that I had tried it again and proceeded to lecture me on the fallacy of the system. Thanks pal!
Next semester I enrolled in a statistics class. A real eye opener. Perhaps it should be mandatory for all elected officials, and certainly for Fed officials. Either that or force them to go to Vegas and use the Martingale system, with their own money, and see how it works out for them. Wouldn’t take long.
We are stardust, we are golden -- Joni Mitchell wrote it, CSN had the hit. I know, trivial, but credit where credit is due.
Mathews Southern Comfort had the hit, no? They transformed a vary basic song into something wnderful.
The guy thinks he's refined.