For Bill Gross, This Is The Only Thing That Matters For The Market Right Now

Tyler Durden's picture

While in previous monthly letters and public statements, Bill Gross has expressed a negative view of Donald Trump, warning his tenure would be damaging, and urging investors to move to cash, culminating most recently in a Bloomberg interview in which he compared the president-elect's policies to those of Italy's fascist dictator Benito Mussolini, in his latest monthly investment outlook he takes a more practical view of what Trump's policies would mean for markets, and specifically the one variable he believes is the key for market action going forward. Specifically, he is focusing on what he thinks is the critical resistance level of the 10Y yield, which will set the tone for virtually every other asset class, from stocks, to FX and, of course, to rates.

But before he goes into that, he points out a tangent on the difference betweeen secular stagnation and actual growth, which he notes is the difference between 2% growth and 3% growth and defines it as  “critical” namely that “3% growth rates historically have propelled corporate profits to a somewhat higher clip because of financial and operating leverage dependent on higher growth. 2% or less typically has smothered corporate profits”

How does this fit into markets? "The critical question of interest rates and the future level of the 10-year Treasury is challenging" noting that “It is the key to interest rate levels and perhaps stock price levels in 2017” and then segues into what he dubs his "only forecast for the 10-year in 2017." To wit:

If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the Dollar/Euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.

Which, incidentally reminds us of an article we wrote back in November asking "How Far Can Bond Yields Rise Before Hurting Equities", and the answer, not surprisingly was just around 2.60%

That said he remains skeptical: “Trump’s policies may grant a temporary acceleration over the next few years, but a 2% longer term standard is likely in place that will stunt corporate profit growth and slow down risk asset appreciation.”

* * *

His latest investment outlook is below.

Echoes from Africa

If I sang a song about Africa
Of the spotted giraffe, the hyena's laugh
Of the fiery sun rising to meet the day
With a stillness belying the lion's evening meal;
Would Africa sing a song about me?

If I remembered a time once in Africa,
Bride at my shoulder, chasing a leopard's shadow
With human eyes and Nikon shutters wide apart
Invading the solitude of blackened ancestors;
Would Africa remember a time once with me?

If I knew a story of Africa
Capturing a disappearing continent for a moment in time
Fleeting – far briefer than the earth's reign;
At least until its dusty death,
Would Africa know a story of me?

Bill Gross

- With appreciation for Isak Dinesen

* * *

I traveled once to Africa, as you might have guessed by now, and it's been a part of me ever since. Being perhaps the cradle of civilization, if not life itself, Africa casts an eerie glow over the entire history and, indeed, meaning of existence. There's a strange beauty to it – this eat and be eaten land – brutal, yet fair and loving underneath its violent surface. I think it's how I view my own life. I saw myself in Africa and, of course, through my own eyes I saw you there, too. The question however, that ends every stanza of my poem is whether Africa saw and will remember me. Are we just passing through without a trace following our dusty deaths? Will anyone, or anything, at the end of the line be the better for our time on earth? I,myself, know nothing of a grand scheme of existence, but I wish there to be one – if only to give meaning to our precious moments of happiness and frequent hours of despair.

Happiness has dominated risk markets since early November and despair has characterized global bond markets. Hope for stronger growth via Republican fiscal progress/reduced regulation/and tax reform have encouraged risk. The potential for higher inflation and a more hawkish Federal Reserve lie behind the 100 basis point move in the 10-year Treasury from 1.40% to 2.40% over the same time period. Are risk markets overpriced and Treasuries overyielded? That is a critical question for 2017.

The assessment of future growth and associated risk spreads is still uncertain of course. President-elect Trump tweets and markets listen for now, but ultimately their value is dependent on a jump step move from the 2% real GDP growth rate of the past 10 years to a 3%-plus annual advance. 3% growth rates historically have propelled corporate profits to a somewhat higher clip because of financial and operating leverage dependent on higher growth. 2% or less typically has smothered corporate profits. The 1% difference between 2 and 3 is therefore critical. We shall see whether Republican/Trumpian orthodoxy can stimulate an economy that in some ways is at full capacity already. To do so would require a significant advance in investment spending which up until now has taken a backseat to corporate stock buybacks and merger/acquisition related uses of cash flow.

I, for one, am skeptical of the 3 and more confident of the 2. The longer term negatives of my "New Normal" and Larry Summer's "Secular Stagnation" may have disappeared from the business front pages of the FT and the NYT, but they have never really gone away – Trump or no Trump. Demographic negatives associated with an aging population, high debt/GDP now more at risk due to rising interest rates, technology displacement of human labor, and finally the deceleration/retreat of globalization pose negative ongoing threats to productivity and therefore GDP growth. Trump's policies may grant a temporary acceleration over the next few years, but a 2% longer term standard is likely in place that will stunt corporate profit growth and slow down risk asset appreciation.

The critical question of interest rates and the future level of the 10-year Treasury is equally challenging. While the Fed has begun to tighten policy after abandoning Quantitative Easing several years ago, other major central banks continue to stoke the fire with as much as $150 billion of monthly buybacks. With the pinning of Japanese JGB 10-year yields at near 0% and the ongoing dovishness of Draghi's ECB, global arbitrage effectively caps the 10-year at 2.4% to 2.6% levels. Currency adjusted yield pickups of 70 basis points by selling 10-year JGB's or German Bunds and buying U.S. Treasuries, outline the artificial pricing of our 10-year, even as inflation moves higher and short term yields are raised by the Fed once, twice, or three times in the next 12 months.

So for 10-year Treasuries, a multiple of influences obscure a rational conclusion that yields must inevitably move higher during Trump's first year in office. When the fundamentals are confusing, however, technical indicators may come to the rescue and it's there where a super three decade downward sloping trend line for 10-year yields could be critical. Shown in the chart below, it's obvious to most observers that 10-year yields have been moving downward since their secular peak in the early 1980s, and at a rather linear rate. 30 basis point declines on average for the past 30 years have lowered the 10-year from 10% in 1987 to the current 2.40%.

Source: Bloomberg.

Now, however this super strong, frequently tested downward trend line is at risk of being broken. 2.55% to 2.60% is the current "top" of this trend line, and over the past few weeks it has held and reversed lower by 15 basis points or so. BUT----------. And this is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside – if yields move higher than 2.60% – a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the Dollar/Euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.

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BabaLooey's picture

It's going to be a big scorecard of the asshats, douchebags, and outright fuckheads that "come around" if Trump delivers.

I for one, will love verbally beating the shit out of them.

This cat's one of 'em.

gatorengineer's picture

The only thing that trump can deliver on is what Trump directly controls.  The Senate, House and Judiciary are stacked against him.

His first real test is the Supreme Court Nominee.

two hoots's picture

Gross pretty much spells out the mess Obama left Trump and the nation.  Trump will face higher interest on our debt which must be subtracted  from any good gains he may devise.  It's a tough road ahead unwinding the Obama and his handlers, mess.  But, onward we must go.

xythras's picture
xythras (not verified) two hoots Jan 10, 2017 9:29 AM

Hope that Trump will throw the monkey in Guantanamo. Reasons? TOO DAMN MANY. 

Just off the top of my hat: paying billions to Iran and allowing them to receive uranium in exchange for heavy water:

JRobby's picture

Did Bill run out of kool aide?

Or have the bankster masters determined that there been enough bond selling (for now)?

See the sharp rise in rates for what it is. More central planning/market manipulation. 

MillionDollarBonus_'s picture

At least Bill Gross now recognizes that Trump is the single biggest threat to the markets in American history. His tax plan is completely irresponsible and has been criticized by countless top economists! Every top economist recommends high taxes and fiscal stimulus programs to stimulate the economy and jobs! This is what has worked timeand time again! Why is Trump persuing this failed neoliberal model of low taxes and deregulation?? That’s exactly what caused the crisis of 2007-08!

Obama Saves Thousands Of Auto Jobs As He Wraps Up His Term

Doña K's picture

MDB, Bill Gross is revealing his inner thoughts and existential issues and in short, admits that he, as most of us has no idea which direction this market is going.

The long term of course is down, but do we live long enough and have enough money to endure the capricious movements?

At least, Bill has the courage to put it on paper. Kudos Bill.

Oracle of Kypseli's picture

Oh! Africa, having been amongst the wild looking for leopards in the middle of the night with spot lights and having seen cheetahs decending on wilderbeast and heard their teeth scraping its bones, yes indeed Mr. Gross, Africa is intoxicating and in a way, it resembles the markets. "run fast enough for your life or run fast enough to catch your meal."

Cheers mates 

Bay of Pigs's picture

Bill Gross is a pimp and an asshole.

Perimetr's picture

Why is this ridiculous article posted at the top of ZH???

divingengineer's picture

Bill Gross : Buy bonds, don't think, just do it.

The Saint's picture

Ha ha ha ha ha ha! Oh, MDB.  This is the first of your posts that I've actually read in the last several months and I can't stop laughing.  I'm curious though, how does one get himself in a place in his mind where he has everything all twisted and wrong?  Certainly you weren't born this stupid.


Stuck on Zero's picture

He's completely wrong about thatr 2.6% number. The correct number is 2.7%.

NoDecaf's picture

Slightly off topic:


check out the censorship on backpage, adult sections.

MANvsMACHINE's picture

Agreed. Gross must not have factored in the increase in purchases of lube. My own analysis shows this having a 0.8% impact so I'm getting 2.68% which is essentially in line with your figure.

CNONC's picture

Your Econ degrees are showing.  I keep mine hidden, like I keep my zipper zipped, for fear of giving offense.

NoDecaf's picture

I was reading an old reuters link about "i can't eat an ipad" and saw the link below. A quick check on backpage and I posted the comment.

I said "slightly off topic" because It is connected to everything. Interest rates, the running fake news narrative, the power grab of the election process etc etc

The noose is tightening fast, not just in the financial markets but out in the street.

What happens when joe six pack, who is already pissed about his pay check (or lack thereof) can't get some nookie?

That pressure has to blow in one direction or another.

fx's picture

First, everyone sees that chart and the trendline. It likely WILL get broken over the next couple of weeks/months.
Second: everyone will think that this means a new secular bond bear market. They will all be wrong. After a violent surge due to panicing people and momentum players, the yields will reverse. I do not think they will get much above 3.30 for the 10year bond.
There will be new lows in 10year yields before we see 4 or 5 %. Another, final thrust down that nobody expects. well, after all, everybody right now seems either scared of Trump or super-euphoric. both emotions cloud judgement and are total nonsense.

t0mmyBerg's picture

I dont know.  On my chart the top of the very long term trend channel is more like 3%.  Not sure why he says 2.6  Maybe he thinks if we hit 2.6 we hit 3?  I would guess the end of the bond bull is still several years off.  May stop trending down but i doubt it turns a new channel to the upside until the deflationary forces of the world ease off or the world wakes up to the fact that all developed and for that matter developing markets are fucking bankrupt in all but name.

Kayman's picture

So Russia is useful to O'bumbler after all.  Part of the "no, you can't see it, it is a secret" Iran deal, was the delivery of the Uranium.  So O'bumbler got the Russians to deliver it; not good optics to have American uranium going to Iran.

Yog Soggoth's picture

What made Hong Kong and Singapore so attractive to businesses? I hope that was part of the conversation with Jack Ma. Less regulation. On the other hand Singapore has some pretty strict policies on keeping it clean, which I do not neccesarily disapprove of. What good does a billion unemployed people do for the midwest? Is that environmental or just mental? I know that I would be cutting down every tree in the nieghborhood just to feed my kids no matter what the price of lumber was. They need those trees for water retention/other. Why not manufacture something? Jobs = sustaining infrastructure, and can help to save the environment that the so called environmentalists are destroying by killing jobs.

markpower49's picture

Bill Gross is a proven leftist moron. And Africa never developed a civilization worth a damn.

HRH Feant's picture
HRH Feant (not verified) markpower49 Jan 10, 2017 3:46 PM

After reading his crappy poetry that is obvious! Why bother reading anything else? This guy needs to retire and take some happy pills or get checked out for Syphlis.

two hoots's picture

Finally something I can agree with on from this noise maker.  I would put it closer to $2.70.

gatorengineer's picture

Housing is probably already dead at current levels.........  just will take a few months to fall over.

JRobby's picture

How many new apps and new loans funded are ARM's would be some good knowledge. 

gatorengineer's picture

I think a fair number of them are also gimmicks interest only balloons etc.....

tarsubil's picture

Italy, Spain, Japan are all much lower. US 10 year has a long way to fall in terms of rates. The debt level means it does not have a lot of room to go up. Considering that the powers that be can simply print and buy (and they do this all over the world), why would they let US 10 year rise to apocalyptic levels?

Kayman's picture

In a no-growth, falling wages, no jobs economy rising interest rates (still at historic lows) would certainly slow housing. But let's see if Trump can get the pot boiling. More jobs, more after-tax income, will stimulate the economy, interest rates notwithstanding.

NugginFuts's picture

Seems legit. 

Looking pre-market, I'm starting to wonder if others are waking up to this reality as well. Things are about to get choppy in these here waters.

DeeZ_nutZ's picture

beg fecken dehl, the trumpon tweets stability like it was steak and eggs!

Stanley Lord's picture

Drawing lines is hocus pocus.


fx's picture

and voodoo. that's why barry was good at drawing lines here and there, too.

orangegeek's picture

Here's the other whisper number...ready???


January 20th.

Big Brother's picture

The Costanza trade is to go long the 10-year. 

I hereby take the opposite side of Bill Gross' trade.

Boston's picture

Back in the summer of 2007 when the US 10yr yield rose above 5%, Bill Gross confidently---and I mean very confidently---declared to all who listened (and back then, a lot more people listened to him then they do now) that the bond market rally was over. Dead. Kaput.


That was almost 10 years ago....after which the yield on the US 10yr proceeded to grind down, falling all the way to 1.34% in mid-2016.


Bill Gross could not have been more wrong back then....but it's different this time?


PS. There's another scenario---instead of UST yields stopping and reversing back up, they can enter into a long-term range, just like they did in the mid-20th century. 

PiccarDoffed's picture

Other than performing cunnilingus on himself, Bill Gross offers no value to the investing community!

janus's picture

we've issued lots of predictions round here as well.  It's sorta hard to make predictions in financial markets when they're placed in suspended animation.  Could you, I or Bill have predicted INTERNATIONAL central bank coordination to accomodate US fed hopium policy for the last 9 years?  hardly.

He was doing the math according to established formulas.  You cannot adapt math to equations with unknown variables, especially when weighing that evah-so tricky tick-tock-ticky element of time.

but now that the unknown-unknowns are better known, a clearer and more immediate inevitability is increasingly present.

And he's right, if/when the 30y UST starts to go, it's ovah.


Big Brother's picture

I owed one of his PIMCO bond funds at my last job.  Pretty reliable, low risk, low fee.


The whole house of cards comes down when rates rise.  Our ivory-tower FED can't let that happen.

YHC-FTSE's picture

Bill Gross looks like my old headmistress when I was in kindergarten.

As for this article going on about a "secular" (WTF?) bear bond market should yields go over 2.6%, I'm sure a lot of work went into the analysis, but all I see is a graph with a linear regression line. So, good luck with working the casino markets.

PiccarDoffed's picture

I am sorry you had a Headmistress with such ugly hair!  Beyond the brilliance and depth Bill offered in this article, do you believe he goes through 2 or 3 Depends each day?

markpower49's picture

Bill Gross should obviously start hormone therapy. He thinks like a girl. No wonder he supported Hillary. What an idiot.

rent slave's picture

The bond market isn't bad enough now?Vanguard's High Yield Tax Exempt price has dropped from 11.47 to 11.01 from Nov.1 until today.

fx's picture

Tax exempt is becoming useless. The Donald will cut taxes big time. and later even abolish them. He is the messias, after all. sort of.

allamerican's picture

mrkts turning into chopfest.  was lunar, now solar if you can manage the arbituary week w/ all the holiday breaks.  messin with ya..

things getting messy for sure.

motorollin's picture

We haven't seen over 2.60 since September 2012.

Ajax4Hire's picture

When Bill Gross talks or writes, I may or may not want to hear.

But I always want to hear what Mohamed el Erian has to say (or write).  This made me realize that Bill Gross is not the great Pimco prognosticator; it was Mohamed el Erian.  He is the true genius.  Of what he says, I cannot get enough of.


Yes, it is true that Bill Gross can tell some interesting stories and relate them back to current investment climate.  But Mohamed el Erian is the wizard behind the curtain.  Once Mohamed el Erian left Pimco, I realized I didn't care for what Mr. Gross had to say.

explosivo's picture

Nice try, Mohamed el Erian.

fx's picture

El-erian may be a decent risk manager. But he is no real asset manager. His track record has been mediocre wherever he was. A way overrated talking head.

Sid Davis's picture

If Bill Gross is correct about the effect of the 10 year treasury rate on profits, the economy is in for an ass whipping because potentially this rate could go to 9% by 2018, based on cyclical forces and reaction to the abnormally long time the rate was supressed.