"The System Itself Is At Risk" Bill Gross Warns, Shorts Credit As "Day Of Reckoning Is Coming"

Tyler Durden's picture

We were surprised to hear none other than legendary bond investor Bill Gross, who made billions going long bonds, admit to Bloomberg's Erik Schatzker last night that he is starting to short credit, "a position that he said runs contrary to his instincts and training as an investor."

The reason why Gross, who called the Bund blow up last year with uncanny precision, is turning bearish on an asset classes that Mario Draghi is directly supporting - and as such Gross is fighting at least on Central Bank - is peculiar: he thinks the time of central bank dominance is almost over. Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said he is moving to sell credit risk and insurance on market volatility rather than buying long-term debt, because he believes a day of reckoning will come when central banks will no longer be able to prop up asset prices and investors will withdraw from markets.

"It’s really hard to change your psychological makeup and to be a hedge manager that is comfortable with being short,” he said in an interview with Bloomberg’s Erik Schatzker. “I’m working on it, because I’m an investor that ultimately does believe in the system, but believes that the system itself is at risk."

The underlying thesis behind Gross' bearish take is simple: stimulus from central banks worldwide has artificially pushed up values of stocks and credit, which has made Gross cautious on such assets, he said.

Eliminating credit as an investment means "not buying stocks, not buying high-yield bonds." Gross said. "It means going the other way, which comes at a price."

Gross' shift in position in odd because Janus' unconstrained fund (up 2.6% YTD) which Gross co-manages with Kumar Palghat, invests in fixed-income and derivative instruments. It already has a rather low effective duration of 1.13 years, a short-term position that aims to reduce exposure to losses if rates rise. If Gross is indeed going net short, the duration will drop even further. 

It’s becoming increasingly difficult for money managers to justify their fees or their jobs, Gross said. "I know that my investors want three, four, or five percent, or else they can keep it in the bank or stuff it in their mattress." he said.

Which perhaps explains Gross' transition to a Michael Burry-style investing mentality: betting on the "fat tail" event.

Gross also had some comments on Japan, and the entire central bank endgame.

He said that the only way for Japan to eventually cut its debt burden is for the central bank to acquire it and forgo repayment, a scenario that may play out in similar ways in other countries.

"I think that’s where they’re headed. I’m not endorsing that. I think at some point, Japan will basically buy up all its debt and the central bank will forgive the treasury and try to move forward with that. I see no other way out for Japan.

“Ultimately, they could own all the market,” he added during his Bloomberg interview. "At that point they could say to the fiscal side, ‘Olly olly oxen free. You don’t have to pay us back. Or we’ll extend your debt to 50 years with a zero percent coupon and at that point we’ll essentially eliminate the entire obligation.’"

Gross said such a move would have dramatic and damaging consequences for Japan’s currency, savings rate and private sector. Japan has unique demographic factors that exacerbate its economic dilemma, but other nations will face similar choices, he said.

He believes it is also the endgame.

"Japan’s a pretty good picture for the rest of the world, maybe five or 10 years ahead. I have a sense that that’s the route central banks will pursue. They’ll keep on buying debt, keep interest rates low and then ultimately the treasury doesn’t owe them anything.

What should central banks do?

Central banks, he said, need to start raising rates to restore the right incentives for investors. Gross said the Federal Reserve needs a leader similar to Paul Volcker, who raised interest rates in the 1980s despite popular opposition.


“We need another Volcker,” Gross said.

Unfortunately that won't happen.

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SWRichmond's picture

It’s really hard to change your psychological makeup

Amen, brother.

hedgeless_horseman's picture



...the only way for Japan to eventually cut its debt burden is for the central bank to acquire it and forgo repayment...

Unless they buy everyone's debt, and forgive it (jubilee), then this course of action is merely moral hazard on a massive scale.

The State is picking itself as the winner, and the people that still must pay their debts are all left as losers.

Free enterprise can neither compete with, nor support, a government that does not have to pay its bills.  

Have these fools not read any world history?

Japan is fucking done.  Just waiting for the splash.

NoDebt's picture

Far be it from me to try to engage in a serious economic conversation on ZH, but this idea of "central banks buying up government debt and then forgiving it" that seems to twist Bill's noodle around so bad doesn't phase me one bit.  I see it as an inevitability and, no, I don't think it would have nearly the consequences he thinks it will (aside from massive Moral Hazzard which absolutely nobody gives a shit about except, apparently, HH, above).

What would happen if the Fed or the BOJ just "poofed" the government debt it held?  Would there suddenly be a massive spike in inflation-stoking liquidity?  No, that money was already injected into the system long before- at the time the CB bought the bond on the open market.  It's only a swap between the CB and the Feral Government at that point.  A shift of balance sheet from one to the other in a 1:1 ratio.  It would have ZERO impact on the "real" economy.

The only effect would be that the CB's capital would be wiped out by taking such a huge write-off.  Again, so what?  Does capitalization even matter when you're talking about a CB?  Of course not.  They could either self-recapitalize via their own printing press or (more likely) they could just declare that the normal rules of insolvency simply don't apply to a CB.


hedgeless_horseman's picture



I don't think it would have nearly the consequences he thinks it will (aside from massive Moral Hazzard, of course...

And just like that, we will all be working for the government, comrade.


MillionDollarBonus_'s picture

If Bill Gross expects a systemic collapse, the last thing he should be doing is shorting US credit. US treasuries are going to be the number one safe haven asset in the event of any economic turmoil. The flight to safety will push interest rates to new historic lows, helping to finance our economic recovery. This makes us truly invincible as a nation. If things go badly, credit gets cheaper, and we do well anyway. 

hedgeless_horseman's picture



When the state is allowed to operate under a different set of rules than the people, the result is always tyranny.

Dr. Spin's picture

An attack upon a servant of the king is an attack upon the king himself.

                                                                  -- Braveheart


Antifaschistische's picture

If I were a Japanese citizen, I would be living out of the back of my car (preferably a van) and putting 90% of my income into gold before they go Full Financial Fukashima

Wookie's picture

Perfect, a gold safe on wheels with cheap Japanese locks. Point out the parking space for me....

Antifaschistische's picture

weekly trip to the safety deposit box...problem solved. 

ps..Japanese locks aren't cheap and like most of the rest of things coming out of Japan, they're about the best in the world.

bamawatson's picture

certainly you are not implying a bank safe deposit box gives you comfort. i suggest you look at greece and cyprus

Mountainview's picture

The can can still be kicked a little bit further down the road, start to worry later...

Antifaschistische's picture

Greece had the warning lights flashing years in advance, Cyprus had the clear warning lights flashing months in advance.  Those same warning lights are currently not flashing in the US.  Although, I do believe they one day will be.

However, in Greece and Cyprus, were Safe Deposit Box contents confiscated?

I don't think so...there will be a time to go to DEFCON2 on the Financial War preparadness scale.  Neither the Japanese or the Americans are at that point......yet.

LawsofPhysics's picture

Weak.  The U.S., especially in it's currently divided state is not "invincible".  Weak MDB, come on, put some thought into your next post.

JRobby's picture

Bill is responsible for inverstor's money (Laugh Track Deafening)

It is all semantics now. It will be a long, painful process as the oligarchs must squeeze every last penny out of the collapse. This means moving out of monetary assets. It is their nature, a habitual way of living. Of course everyone will sit by and watch them do it instead of violenly murdering them, burning and then piking their remains. Hindsight being 20/20 etc.........

Perimetr's picture

Sheeit, I thought he was talking about the Second Coming.

Winston Churchill's picture

In theory you are correct.

Theory has no way of dealing with the law of unintended consequences, which is why we're already

in the clusterfuck we are.The only way this might work is if the CBs own everything.

Not a world I wish to live in.

NoDebt's picture

We've already unleased so many unintended consequences nobody is going to care about a few more.  And by the time they actually get around to doing this the INTERNDED consequences will be so desperately needed nobody will even flinch when they pull the trigger.

CNONC's picture

I am trying to imagine the cosequences.  Beyond a potential change in the expected future tax rates, I don't see a transmission mechanism to the economy at large.  But that just doesn't seem possible.  Can it really be cosequence free?  I rebel instinctively at the idea.  The sudden change in future tax rate expectations, and the governments suddenly increased ability to spend could be inflationary, I suppose.  Would the lower availability of high quality collateral have an influence?  Understanding the consequences .gov debt cancellation is critical to understanding the future, because debt cancellation is coming.  I no longer pretend to have any clue as to what will happen or when, and have concluded that dropping out of the cash economy is my wisest option.  What happens to an advanced economy when people like me bcome common as opposed to ti foil hat nit jobs.

NoDebt's picture

As long as you don't count moral hazard (i.e. that they'll do it over again and again with increasing frequency) as a "consequence", then no, there are no consequences.


CNONC's picture

Amazingly, I hadn't considered that.  Just shows I don't belong in this world anymore.

Antifaschistische's picture

I scratch moral hazard...if the CB shift/delete's a liability when we are running Trillion dollar a year deficits...I don't have to think about morality.  What we have admitted is that the US Government has no spending constraint and will just print more money (electronically albeit) to keep Parasite Nation rolling.  This, to me, is math not morality. 

I think the consequences would be significant...but only common sense tells me that.  The mechanisms of how that moves through the economy are beyond my pay grade

tarsubil's picture

When the CB buys up all the government debt, that would be inflationary (the debts aren't paid by money in the system collected by taxation but by printed money). When they write it off, that is inflationary as the government no long has to pay interest/service the debt and can suddenly spend more.

Essentially, this is already happening and will just accelerate. They never were going to pay off the debt or cut spending. They'll print as humans tend to do through out history. Sooner or later, confidence in the dollar will be lost as the printing gets out of hand. 

hedgeless_horseman's picture




When all those USD come rushing back to the USA it is going to be...interesting.

Arnold's picture

It will rush to the financial institutions, who would lend to corporations seeking to automate production to streamline and contain excessive (employee) annual operation increases, and enhance shareholder value.

Net benefit to employed wage slaves, unless personal debt is forgiven?


okay, I'm done..

Jstanley011's picture

Looking at history in concert with the technical targets I've got on the DX at 50 and on GC at 3000, well. There's no such thing as a sure thing, but at face value, the situation appears far enough beyond random for me to keep stacking physical.

Jstanley011's picture

@NoDebt: "It's only a swap between the CB and the Feral Government at that point."

Yeah, but BOJ is presently only 1/3rd of the way to that point with a national debt at 200% of GDP. Which means they've got close to 140% of GDP to inject yet to get all of it.

My questions are, would the central bank have to own 100% to forgive what it owns? And what would it do to outstanding bonds that they don't own if they forgave without owning it all?


NoDebt's picture

They could just forgive what they already own.  Doesn't need to be 100%.  They could do it piecemeal.  But they'll probably be a lot closer to owning 100% by the time they actually do it.

Remaining outstanding bonds (held elsewhere) would keep going just the same as always.  In fact, they might even go up in value (down in yield) because the government's balance sheet would instantly look better (at the expense of the BOJs balance sheet looking worse) and, of course, you then know for certain they'll do this shit FOREVER.


Jstanley011's picture

Then why not cut out the middle man altogether? The need for a central bank at that point would be zero. The original rationale for the Fed's existence -- to take the money supply out of the realm of politics and into the realm of "the science of economics" -- would be moot. Congress has all the authority it needs to issue money directly when it spends beyond tax receipts, without the cash making a meaningless circuit into "bonds."

If "economists" have proven one thing, they've proven that they are little more than lackeys for the politicos.

NoDebt's picture

Interesting that you would ask that.  Up until about 1952 it was entirely legal and common for the Fed to purchase USTs directly from the Treasury Department.  They did it all through WWII.  How do you think we financed that war?

Remember:  just when you think you're mapping uncharted territory, you're not.  ALL this shit has been done before.  It was just too long ago for you to have direct experience with it.

Jstanley011's picture

Yeah, it's well charted territory from way before the Federal Reserve, back to the Civil War...


Dragon HAwk's picture

A lot of investors not being able to make a living or turn a profit is certainly going to piss a lot of people and trophy wives off, not that that is a bad thing, unless of course  you own one of those investments

bustdrs's picture

No Debt, there is no doubt Japanese leaders agree, and with them, all G7 leaders. A line through soveriegn debt with no repercussion.

An alternative is not seriously considered as they truly believe they're in total control.

To listen/watch Abe and Aso treat their own Diet with such content is a site to behold.

Its that constant half eye closed, pretending to be relaxed, you dont know what we know kind of attitude, and the rhetoric matches.

And what they know may very well be as you describe ND, a non event write down with no repercussions. 

Still, we look a fair way away from finding out, until we're not.

Jstanley011's picture

IOW, they're all MMT now. Good lord...

NoDebt's picture

"An alternative is not seriously considered as they truly believe they're in total control."

I think you're absolutely right about that.  It's why the issue of moral hazard isn't worried about at all, either.  

BettingTheFarm's picture

The effect of forgiving public det is that tax rates can be decreased across the board, as the portion of taxes currently used to service debt will no longer be needed. Lower taxes is an immediate economic stimulus.


Without public debt, interest rates could be increased Volker style, which would force corporations to seek returns competitive with the risk-free rate of return. So companies that lose money year after year, and those with weak business plans will be washed away, leaving us with only the strongest companies.


A high rate of interest on public debt would encourage small business, as it becomes more enticing to entreprenours to generate a reasonable rate of return (though maybe less than govt debt) with the expectation of growing their business. Compared to now where small business have to compete with companies that lose money but are kept afloat by a stock market that expects little or no return, and is awash is free money.


Exports might not suffer if the other nations follow this example and forgive their public debt as well. Yes, all currencies will be masivelly devalued, but the economy might be revived, jobs might return, etc. If the USD were to be massively devalued thus, it may once more be profitable for manufacturing to be done in the US instead of China.

BettingTheFarm's picture

I should add that in this scenario, it would be smart to hold PMs or high quality stocks instead of cash/bonds/speculative stocks the day before the debt forgiveness is announced. Sell za gold when everyone and their brother is desperate with the huge inflation (it may be years until this happens), and buy more of the high quality stock, or start a business yourself.

NoDebt's picture

Do you really think they're going to lower taxes if they pull something like this?  They'd still be running yearly deficits, they'd just have the historical debt pile reduced some.

BettingTheFarm's picture

Why would there still be yearly deficits if the bulk of the budget is no longer going to interest payments? That would be a surplus. Besides, the CB would instruct the govt to lower taxes, as being part of the overall plan to improving the economy.

buttmint's picture

NoDebt..."faze" not "phase."

hedgiex's picture

Yes. Whatever the financial gimmickry to park the debts/paper assets in one or two balance sheets i.e. Fed & Try, the paper prices are to be dictated by the Oligarchs with already increasing forces to maintain deformed prices (not market determined). the list is long from exchange control to in-bails, etc imposed to maintain their dictated prices at all costs. By now, you should revert to the real economy of goods and prices that will increasingly find their prices through the private unregulated exchanges. More of these turbo-charged ebays will be on the horizon. Any real assets that can be stolen through the disguises of regulations should be left to the hopeless muppets. Property rights in debt peaked deformed markets are lies told by Predators. As for moral hazard, it is long gone that this matters when markets are in captive to the Predatory Class. 

Currencies (vanities) of EM countries who are sucked into these CB games but with no share in the global liquidity like the US$ are low-lying fruits. Besides, unlike their bonds and equities, there are no underlying real things that these pygmy CBs can confiscate. That is if you want to play with papers rather than casino cards.

Radical Marijuana's picture

It is another Gross Understatement to point out merely "moral hazard on a massive scale." Similarly, the entire article above does not directly address the deeper reasons regarding how and why "The System Itself Is At Risk."

"Moral hazard" is a euphemistic reference to fundamentally fraudulent financial accounting systems. "The System" of civilization has been built on the foundation of being able to back up lies with violence for thousands of years, while those doing that have become professional hypocrites. The leading edge of the human species, in the short to medium term, is getting away with attitudes based upon deliberate ignorance and self-delusions, because society is controlled by its murder systems, which were most successful by becoming most deceitful and treacherous. The ruling classes are becoming increasingly psychotic psychopaths, while those they rule over are matching that by becoming increasingly impotent political idiots.

Instead of only the biggest primates tearing up the jungle, the leading edge of the human species now has technologies like electronics and atomic energy with which to advance its abilities to enforce frauds. Instead of merely monkeys and apes beating up each other, and tearing up the foliage, there are now electronic monkey money frauds, backed by the threat of force from apes with atomic bombs, tearing up the planet.

"The System" is primarily based upon public governments enforcing frauds by private banks, and the most important corollaries to those systems based upon enforcing frauds are that they are operated by the best available professional hypocrites, while the vast majority of people do not understand that, as well have been conditioned to not want to understand that. Thousands of years of civilization based upon being able to back up huge lies with lots of violence was the backbone of "The System."

The existence of central banks, which can engage in central planning, are merely symptoms of the overall situation that human beings and civilization necessarily operate according to the principles and methods of organized crime, in ways which have the necessary corollaries that "The System" is able to indulge in the maximum dishonesty about itself, since its short to medium term successfulness was based on being able to enforce frauds, despite that becoming exponentially more fraudulent.

To point out the "moral hazards" from developing civilization on the basis of integrated legalized lies, backed by legalized violence, tends to Grossly Underestimate the degree to which that civilization has developed attitudes of the maximum possible dishonesty towards what it is really doing. While human beings and civilization necessarily live as entropic pumps of environmental energy flows, that has necessarily driven civilization to become manifestations of the methods of organized crime on greater and greater scales.

The underlying "moral hazards" from "The System" based upon organized crime, which also lies about itself doing that as much as humanly possible, have become trillions of times greater than ever before in human history. While the leading edges of humanity are understanding physical science and technology better and better, the rest of humanity continues to deliberately not understand itself, but rather, to deliberately misunderstand itself, as much as humanly possible, due to the history of social successfulness based on being able to enforce frauds.

Money is measurement backed by murder. The debt controls depend on the death controls. That is necessarily the real situation, while that has also been necessarily driven to be lied about as much as possible, due to the intense paradoxes, or sets of consistent contradictions, which were driven to develop by successful warfare based on backing up deceits with destruction, becoming successful finance based upon enforcing frauds. Along the way, totally bullshit-based languages were developed by professional hypocrites, in order to misrepresent the ways that the political economy really operates as much as possible.

Everyone making "money" was doing so within fundamentally fraudulent financial accounting systems. They are actually and necessarily participating "The System" based upon more or less organized lies operating robberies, where those have primarily become the enforced frauds which are symbolic robberies. The greatest of "moral hazards" are the degree to which the excessive successfulness of controlling civilization through the methods of organized crime has driven that civilization to manifest runaway criminal insanities, while the ways that works are through there being almost nothing but controlled opposition groups surrounding the central core of organized crime, the bankster dominated governments.

Human beings and civilization necessarily live through enforcing frauds. However, "The System" that does that has also necessarily developed to become as dishonest about itself actually doing that as possible. Therefore, it is politically impossible for "The System" to better balance the rates of robberies, because all of the dominate systems of enforced frauds operating as symbolic robberies are both deliberately ignored and/or misunderstood, to the maximum degree humanly possible, by everyone living inside "The System" based on ENFORCING FRAUDS, becoming exponentially more FRAUDULENT.

While there is a leading edge of some human beings that have advanced physical science and technology, by better understanding general energy systems, pretty well everyone continues to deliberately ignore and/or misunderstand how human beings and civilization actually operate as general energy systems. Those attitudes are the worst threats of "moral hazards" within "The System!" Theoretically, we should develop better integrated and balanced human, industrial and natural ecologies. However, the ways that the dominate civilization deliberately ignores and/or misunderstands itself as an energy system makes that politically impossible.

GUS100CORRINA's picture

Japan is an example of what happens in a democratic, pagan, oligarchy that killed (murdered) its babies. Paybacks are a bitch and this is where America is headed unless it humbles itself and strightens up. 

What a mess.

Kissy Ass's picture

So the retard aMerikans want to elect the most humble unselfish man alive.

Go figure.

CPL's picture

Considering they programmed it into the population over 120 years, they completely deserve the bed they made for themselves.  Never before has an entire civilzation been based on debt instead of assets.  The acedemic study from their failure is incredibly valuable to many students that want to learn how to never run a world, a civilzation or even an economic system.  Their horrible, dumb, sloppy failures are a fantastic teaching tool for people that want to succeed and strive for more for their people.

Best thing about it is they are all far too stupid to let go of their lousy ideas and perform the service for free (well, for rocks and bits of paper) for the benefit of students that come from all over the universe.  It's a fantastic setup, runs itself in a ever repeating loop.

Kissy Ass's picture

Lesson 1 for new country.
If jew comes within 1000 yards of your border, shoot it.

CPL's picture

It was the common practice up until the mid 1800's to hack off their right hand and nail it to the town square message board as a 'notice' to go elsewhere for their business.

eishund's picture

"It's a fantastic setup, runs itself in a ever repeating loop."

was the matrix trying to show us this?

CPL's picture

Slippery slope towards Gnosticism once that idea sets in.  The macro level recorded history of earth is a showcase of how failure occurs.  All that it requires is a group of asswipes or a single asswipe to ruin it for everyone. They don't do it for much more than shiny hats, rocks and paper IOU's.  Best thing about it, don't even have to lift a finger to watch it fall a part.  They do it to themselves.  It's hilarious.

In the case of the movie matrix, there were no 'good' guys just good story telling.  The fact is they were all worthless assholes that fought to make the world their own.  The result of the fiction presented; human's and a bunch of machines squabbling over a self created nuclear wasteland, cave dwelling and eating protein slurry.  You have to imagine for a moment that you are a visiting third party observing these two factions, the only possible position to be in at the moment in time is cautious observation of both parties since they are both obviously completely retarded and crazy.

ZH Snob's picture

all is debt, but debt is dead. yet, it appears alive to those who worship paper.

hence, the zombie economy.