Bill Gross Exposes "The New Paranormal" In Which "The Financial Markets And Global Economies Are At Great Risk"

Tyler Durden's picture

In his latest letter, Bill Gross, obviously for his own reasons, essentially channels Zero Hedge, and repeats everything we have been saying over the past 3 years. We'll take that as a compliment. Next thing you know he will convert the TRF into a gold-only physical fund in anticipation of the wrong-end of the "fat tail" hitting reality head on at full speed, and sending the entire house of centrally planned cards crashing down.


Toward The Paranormal

  • The New Normal, previously believed to be bell-shaped and thin-tailed in its depiction of growth probability and financial market outcomes, appears to be morphing into a world of fat-tailed, almost bimodal outcomes.
  • A new duality – credit and zero-bound interest rate risk – characterizes the financial markets of 2012, offering the fat left-tailed possibility of unforeseen policy delevering or the fat right-tailed possibility of central bank inflationary expansion.
  • Until the outcome becomes clear, investors should consider ways to hedge their bets, including: maximizing durations, U.S. Treasury bonds that may potentially offer capital gains, long-term Treasury Inflation Protected Securities (TIPS), high quality corporates and senior bank debt, and select U.S. municipal bonds.
How many ways can you say “it’s different this time?” There’s “abnormal,” “subnormal,” “paranormal” and of course “new normal.” Mohamed El-Erian’s awakening phrase of several years past has virtually been adopted into the lexicon these days, but now it has an almost antiquated vapor to it that reflected calmer seas in 2011 as opposed to the possibility of a perfect storm in 2012. The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012.
The Old/New Normal
But before ringing in the New Year with a rather grim foreboding, let me at least describe what financial markets came to know as the “old normal.” It actually began with early 20th century fractional reserve banking, but came into its adulthood in 1971 when the U.S. and the world departed from gold to a debt-based credit foundation. Some called it a dollar standard but it was really a credit standard based on dollars and unlike gold with its scarcity and hard money character, the new credit-based standard had no anchor – dollar or otherwise. All developed economies from 1971 and beyond learned to use credit and the expansion of debt to drive growth and prosperity. Almost all developed and some emerging economies became hooked on credit as a substitution for investment in tangible real things – plant, equipment and an educated labor force. They made paper, not things, so much of it it seems, that they debased it. Interest rates were lowered and assets securitized to the point where they could go no further and in the aftermath of Lehman 2008 markets substituted sovereign for private credit until it appears that that trend can go no further either. Now we are left with zero-bound yields and creditors that trust no one and very few countries. The financial markets are slowly imploding – delevering – because there’s too much paper and too little trust. Goodbye “Old Normal,” standby to redefine “New Normal,” and welcome to 2012’s “paranormal.”
2012 Paranormal
This process of delevering has consistently been a part of PIMCO’s secular thesis but “implosion” and “bimodal fat tailed” outcomes are New Age and very “2012ish.” Perhaps the first observation to be made is that most developed economies have not, in fact, delevered since 2008. Certain portions of them – yes: U.S. and Euroland households; southern peripheral Euroland countries. But credit as a whole remains resilient or at least static because of a multitude of quantitative easings (QEs) in the U.S., U.K., and Japan. Now it seems a gigantic tidal wave of QE is being generated in Euroland, thinly disguised as an LTRO (three-year long term refinancing operation) which in effect can and will be used by banks to support sovereign bond issuance. Amazingly, Italian banks are now issuing state guaranteed paper to obtain funds from the European Central Bank (ECB) and then reinvesting the proceeds into Italian bonds, which is QE by any definition and near Ponzi by another.
So global economies and their credit markets instead of delevering and contracting, continue to mildly expand. Yet there is bimodal fat-tailed risk in early 2012 that was seemingly invisible in 2008. Granted, the fat right tail of economic expansion and potentially higher inflation has existed for the 3+ year duration. QEs and 500 billion euro LTROs can do that. At the other tail, however, is the potential for “implosion” and actual delevering. To the extent that most sovereign debt is now viewed as “credit” in addition to “interest rate” risk, then its integration into private markets cannot be assured. If only Italian banks buy Italian bonds, then Italian yields are artificially supported – even at 7%. If so, then private bond markets and non-peripheral banks in particular may refuse to play ball the way ball has been played since 1971– purchasing government debt, repoing the paper at their respective central banks and using the proceeds to aid and assist private economic expansion. Instead, fearing default from their sovereign holdings, any overnight or term financing begins to accumulate in the safe haven vaults of the ECB, Bank of England (BOE) and Federal Reserve. Sovereign credit risk reintroduces “liquidity trap” and “pushing on a string” fears that seemed to have been long buried and forgotten since the Great Depression in the 1930s.
But delevering now has a new spectre to deal with. Not just credit default but “zero-bound” interest rates may be eating away like invisible termites at our 40-year global credit expansion. Historically, central banks have comfortably relied on a model which dictates that lower and lower yields will stimulate aggregate demand and, in the case of financial markets, drive asset purchases outward on the risk spectrum as investors seek to maintain higher returns. Near zero policy rates and a series of “quantitative easings” have temporarily succeeded in keeping asset markets and real economies afloat in the U.S., Europe and even Japan. Now, with policy rates at or approaching zero yields and QE facing political limits in almost all developed economies, it is appropriate to question not only the effectiveness of historical conceptual models but entertain the possibility that they may, counterintuitively, be hazardous to an economy’s health.
Importantly, this is not another name for “pushing on a string” or a “liquidity trap.” Both of these concepts depend significantly on perception of increasing risk in credit markets which in turn reduces the incentive of lenders to expand credit. Rates at the zero bound do something more. Zero-bound money – credit quality aside – creates no incentive to expand it. Will Rogers once fondly said in the Depression that he was more concerned about the return of his money than the return on his money. But from a system-wide perspective, when the return on money becomes close to zero in nominal terms and substantially negative in real terms, then normal functionality may breakdown. We all start to resemble Will Rogers.
A good example would be the reversal of the money market fund business model where operating expenses make it perpetually unprofitable at current yields. As money market assets then decline, system-wide leverage is reduced even if clients transfer holdings to banks, which themselves reinvest proceeds in Fed reserves as opposed to private market commercial paper. Additionally, at the zero bound, banks no longer aggressively pursue deposits because of the difficulty in profiting from their deployment. It is one thing to pursue deposits that can be reinvested risk-free at a term premium spread – two/three/even five-year Treasuries being good examples. But when those front end Treasuries yield only 20 to 90 basis points, a bank’s expensive infrastructure reduces profit potential. It is no coincidence that tens of thousands of layoffs are occurring in the banking industry, and that branch expansion is reversing industry-wide.
In the case of low borrowing rates, this paradox at first blush seems illogical. If a bank can borrow at near 0% then theoretically it should have no problem making a profit. What is important, however, is the flatness of the yield curve and its effect on lending across all credit markets. Capitalism would not work well if fed funds and 30-year Treasuries perpetually co-existed at the same yield, nor if commercial paper and 30-year corporates did as well. It is not only excessive debt levels, insolvency and liquidity trap considerations that delever both financial and real economic growth; it is the zero-bound nominal yield, the assumption that it will stay there for an “extended period of time” and the resultant flatness of yield curves which are the culprits. That front ends of yield curves are relatively flat at near zero percent interest rates is critical as well. If they were flat at 5% as in 2007, then banks and investors could extend maturities with the possibility of capital gains. Now at 1% or lower, they cannot. Leverage is constrained.
Conceptually, when the financial system can no longer find outlets for the credit it creates, then it de-levers. The point should be understood from a yield as well as a credit risk point of view. When both yield and credit are at risk the mix can be toxic. The recent example of MF Global emphasizes the concept, as does the behavior of depositors in some struggling European economies. If an investor has money on deposit with an investment bank/broker that not only appears to be at risk but returns nothing, then why maintain the deposit? Perhaps an investor would be more comfortable with a $100 bill at home in a mattress than a $100 bill on deposit with a broker – Securities Investor Protection Corporation notwithstanding. If so, system wide delevering takes place as opposed to the credit extension historically necessary for an expanding economy.
This new duality – credit and zero-bound interest rate risk – is what characterizes our financial markets of 2012. It offers the fat-left-tailed possibility of unforeseen – delevering - or the fat-right-tailed possibility of central bank inflationary expansion. I expect the January Fed meeting to mirror in some ways what we have first witnessed from the ECB. It won’t take the form of three-year financing by a central bank – but will give assurances via language that the cost of money will remain constant at 25 basis points for three years or more – until inflation or unemployment reach specific targeted levels. QE by another name I suggest. If and when that doesn’t work then a specific QE3 may be announced – probably by mid-year – and the race to reflate will shift into high gear. But the outcome of left-tailed delevering or right-tailed inflation is not certain. Both tails are fat.

Investment Implications
The critical question of course is whether efforts by the ECB, BOE, and Fed will work. Can they reinvigorate animal spirits in the face of “credit” and “zero bound money” risk? We shall see. An investor however should hedge his/her bets until the outcome becomes more obvious.
Bond Markets:
  1. Durations and average maturities should be at their maximum permissible limits. Even if reflation is successful it will only be because the Fed and other central banks keep policy rates low for an “extended period of time.” Financial repression depends on negative real yields and until inflation moves higher for a period of at least several years, central banks will hibernate at the zero bound
  2. The bulk of sovereign bond holdings should be in the U.S. as long as Euroland credit implosion is possible investors should gravitate to the “cleanest dirty shirt” sovereigns with the least encumbered balance sheets. Anything short of a 5-year maturity however yields relatively nothing and provides minimal rolldown. Focus on 5–9 year Treasury maturities to guard against inflation which create opportunities to take advantage of rolldown capital gains.
  3. Long Treasury maturities should be held in TIPS form.  If inflation really is coming, then an investor will want assets that offer inflation-protection.
  4. Corporate credit purchases should be in higher-rated   A and AA paper. Senior as opposed to subordinated holdings in finance/bank debt should be considered as well. Haircuts ahead?
  5. U.S. municipals represent an opportunity from the stand point of valuation. Their yields of 5–6% are near historically high ratios to Treasuries. They do, however, entail risk – not only volatility but occasional default risk. This is not a Meredith Whitney echo but simply a recognition that you usually get what you pay for in this world and nothing comes for free. Be selective and avoid states/municipalities with pension and funding problems.
  6. Continue to avoid Venus fly trap peripheral Euroland paper. Italian bonds at 7% for instance are enticing but have trap door possibilities that could see further “price” defaults in 2012.

Stocks and Commodities:

  1. Stocks yield more than bonds and will tend to do better in anything but a delevering fat left tail. That, however, is what worries us. Equity allocations, therefore should favor higher yielding companies in sectors with relatively stable cash flows: Electric utilities (yes they appear overbought), big pharma and multinationals should head your shopping list.
  2. Commodities could go either way depending on the tails but scarcity and geopolitical considerations (Iran) favor a positive tilt. Gold at $1550 seems pricey but it has upward legs if QEs continue.


  1. The dollar is king with a left-tailed delevering scenario – pauper in a right-tailed global reflationary expansion.
For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations. 2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable. Adjust your expectations, prepare for bimodal outcomes. It is different this time and will continue to be for a number of years. The New Normal is “Sub,” “Ab,” “Para” and then some. The financial markets and global economies are at great risk.

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Oh regional Indian's picture

I think post-normal fits this coming time well. In post normal, there is no normal.

This is the year when the tail will wag the belle, curvey or other-wise.

I call it the year of anomaly. 



Momauguin Joe's picture

Underground survival shelters are all the rage in the Hamptons, Bronxville and Greenwich.


I think I need to buy a gun's picture

devaluation/revaluation or reset has to happen by march or its a 2013 after election event

MillionDollarBonus_'s picture

Key events to watch in 2012: 

The economy: Will 2012 be the year of recovery?

US energy policy: Will Obama successfully reduce America’s dependence on foreign oil?

GOP primary: Can Rick Santorum challenge Mitt Romney’s lead in the polls?

Europe: Will President Herman Van Rompuy resonate with the European people and achieve fiscal and monetary union?

Iran: Will Obama outline clear policy initiatives to protect Israel from potential threats?

Climate Change: Will G20 leaders finally devise global legislation for taxing excessive carbon emissions and achieve climatic equilibrium?

The US Deficit: Will congress outline a responsible plan for reducing the deficit, while at the same time ring-fencing key government functions such as social security, Medicare and National Defense? 

Momauguin Joe's picture

Fat, drunk and stupid is no way to go through life, son.

blindfaith's picture

he was kidding you, son.  It was a joke.

Tyler, where is that sarcasum and or 'it is a joke' ICON on the comment bar?  You promissed.

Calmyourself's picture

"achieve climate equilibrium" you bet, right after they glue fault lines ensuring no more Fukushimas, outlaw hurricanes and stick corks in volcanoes..

Fred Singers take on Global warming and its flawed methodologies.

LawsofPhysics's picture

Does not matter, he is being sarcastic and he knows full well that the answer to all his questions is NO.

francis_sawyer's picture

Re: underground shelters


I've always been fascinated by those cave dwellings (like in Cappadocia, Turkey), & really... all over the globe...

I used to think it was cultures who decided to live that way, but more & more I'm styrting to think that the people probably lived just like we did, and that there were also a bunch of rich Goldman Sachs type fucks (of the day), that knew they were fucking with things so bad that some day they'd need to BUG OUT & employed slaves to build them for them...




Cast Iron Skillet's picture

If I ever have to spend time in an underground shelter like that, I think I'll draw a horse or buffalo or some animal on the wall.

jc125d's picture

Or put your hand on the wall and shoot it with orange spray paint.

DeltaDawn's picture

Protect them from the urban hoardes coming to loot the 1%?

Momauguin Joe's picture

So it seems. A hedge for when the "private security" goons can no longer be depended on to defend the ramparts of old money gated communities.

LowProfile's picture

The problem with private security is they expect to get paid...

Cpl Hicks's picture

Addendum to 2012 resolutions: Protect the hoard from the horde.

Pegasus Muse's picture

"When both yield and credit are at risk the mix can be toxic. The recent example of MF Global emphasizes the concept, as does the behavior of depositors in some struggling European economies. If an investor has money on deposit with an investment bank/broker that not only appears to be at risk but returns nothing, then why maintain the deposit? Perhaps an investor would be more comfortable with a $100 bill at home in a mattress than a $100 bill on deposit with a broker ...."

And even more comfortable with ounces of silver and gold tucked safely away from the clutches of thieving gangster banksters who would "MF Global" client funds.

MF Global Sold Assets to Goldman While It Was Looting Their Customer Accounts

It turns out that MF Global sold hundreds of millions in assets to Goldman in the last two business days before its bankruptcy.It is not clear that MF Global actually received the payment for the sale, or if the funds were held by their clearing agent and banker, JP Morgan, who knew that they were going to be bankrupt.

BalanceOrBust's picture

Wouldn't the rich be better buying some real estate in Wyoming, or the British Columbia interior?  There they could build new mansions far from the prying eyes of everyone (don't worry, the marauding hordes will no longer have access to satellites or to private planes come doomsday).  The mansions could be surrounded by huge estates, stocked with game and fish and berry bushes.  Build a windmill (or better yet, a small hydroelectric facility), and live out your life in splendour while the rest of the world goes to the dogs (er, marauding hordes).


Godd thing I know the back-country.  I will find them, poach their fish and game, and squat in the east wing of their hideaway mansions.

Green Leader's picture

Very well said, Vivek.

My post-normal has become working with my body into learning how to flush chemtrails out. Bring it on!

Bansters-in-my- feces's picture

Hey Green Leader,.

They are really laying out the Chemtrails where I am from in Canada,and 99% of the sheeple don't even know it.

And when you point it out,they say.....Huh...!

Fucking idiots.

FreeNewEnergy's picture

My quick take on chemtrails and global warming: They are related. The Chemtrails always come out on sunny days, blocking the sun's rays through the depleted ozone layer. This ties in with global warming. Whatever the "leaders" point out or deny, they know it is a problem, and just like deficits and imploding financial systems, they lack the political will to do anything about it.

Case in fact: I live in Rochester, NY, on the North shore of Lake Ontario. Normal snowfall for December is 19.7 inches. ( year we had 4.8. It has been much warmer than usual. Only two days thus far have remained below freezing for an entire 24-hour period. It is expected to remain close to or above freezing for the next 7-10 days, which puts us near the middle of the month and with only 1-2 inches of measurable snow. This is highly unusual. The normal snowfall is 23.5 inches, and we'll be half way through the month and about 80% below normal.

While I am not a full-fledged proponent of global warming via man-made inputs, I cannot dismiss its possibility. Whatever the case, it's much warmer here than usual this winter, the chemtrails are fairly constant on sunny days, which also have been more plentiful this year, though I believe the real culprit is ozone depletion, not CO2, but I'm not a scientist.

In the short run, snow shovels and blowers are getting a big rest. Snow plowing around here is normally a good seasonal business, but this year, these mostly-self-employed types are getting killed. People were playing golf the day after Thanksgiving. Unheard of around here. There was so little snow, you could have played golf on our three public courses for free on about 15 days through December.

I've heard also that the snow cover is way off for the nation, about 28% compared to the normal 57%.

The weather will change, and we will likely have a number of 6-18 inch snowfalls yet, but our November-April total will be well below the average of 92 inches.

One cannot dismiss the possibility of this winter being an anomaly, but generally, winters have been milder than normal for the better part of the last 12 years.

Whatever the case, my fuel bills are way down (Applause!) and Spring planting may be earlier than normal. Last freeze has been moving steadily backwards - earlier and earlier - every year for the last 20-25 years.

Junk or comment at will.

Big Slick's picture

My quick take on chemtrails and global warming: they are related... Both are simplistic hoaxes perpetrated to confuse tinfoil hat-wearing conspiracy theorists :)

Green Leader's picture

If you know some Spanish this is a great website on how drying up the land is done:

It's worth at least a look at the pictures.

Green Leader's picture

Chemtrails destroy and/or atrophy a lot of crops.

Here in the US Caribbean plantains & bananas, citrus, taro, papaya, mangoes, breadfruit--all messed up.

Seems like 'somebody' doesn't want people taking their vitamins.

Hunger is coming for the 99%.

Bindar Dundat's picture

I like the new Panorama turbo better then the paranormal with the fat tail.  It is a lot more fun to drive  then watching the money vanish in front of you. Buckle up kids we are going into a hairpin turn way to fast!

Imminent Collapse's picture

Somewhat off topic, but watch this lecture of from a former CIA agent of how blogs provide the only real information we are getting.  He rails about the state of the government, the Fed, and the "war on terror".  Worth your time.  10 minutes.


jcaz's picture

People here bash Bill, but gotta admit, he's not afraid of pissing off the Mothership that pays him.....

blindfaith's picture

well, what has he got to loose?  I mean he can quit today and be set for life.

I never have liked some of his "ideas" like this one:

Long Treasury maturities should be held in TIPS form.  If inflation really is coming, then an investor will want assets that offer inflation-protection.

With the gov in-charge of distortion and imaginary numbers this is a looser. 

And, what planet is Bill posting from that he doesn't see inflation has chewed up America and the world.


ViewfromUndertheBridge's picture

Lose and loser. Bill is at least from a planet that can fucking spell.

jc125d's picture

He always talks his book.

GetZeeGold's picture



Risk? This is the first I'm hearing about this.


You should have bought gold and silver 11 years ago. Don't you remember all the talking heads on CNBC screaming at you to buy?


Oh.....that's right.....that didn't happen......still isn't happening......and is not going to happen. Ask yourself.....why not?

Life of Illusion's picture



Bill the paper man finally realizes what CB planning is doing to his game, driving investors to real assets.  Bill is a frustrated politically correct paper pusher that should have purchased real assets years ago and still can’t.

No growth means CB’s print, currency devaluations, paper destruction, goes on for years.  I don’t think he will be saying gold is pricey a few years from now.


847328_3527's picture
Mortgage demand fell at year-end, purchases sag


This is another proof of what Bill Gross said about  " falling aggregate demand" .....a huge problem.

Ghordius's picture

Indeed Bill Gross is nearly quoting ZH - quite a compliment...

yes, the USD cash is king - until it isn't, but the question is timing

what he does not mention is that leverage is at risk

I think he must have quite a strange relation to his bosses... LOL

slewie the pi-rat's picture

yes, but given that there is nothing here tyler hasn't already covered [the CP market explanation is older than zirp] i was a bit wary of his calling the terms he was heisting from zH:  "...New Age and very “2012ish.”

bill is interested in maintaining investors' confidence in him

tyler's (and our) fringe blogging seems more about gleaning deeper truths about this situ and that situ (and The Situ?)

as we go into 2012, the fact is that tyler & zH has the most accurate and real analysies of 'where we're at', where we're heading, and what the big issues and choices are

since the MSM has been reined in by their corpo-fascist masters and makes even less sense than usual, at least bill gross has taken tyler's dialogue with him to heart and is capable of seeing the more-embracing paradigms and 'truths'

...also, ghordi, he mentioned "deleveraging" a few times...concluding that theme w/: Stocks yield more than bonds and will tend to do better in anything but a delevering fat left tail. That, however, is what worries us.

other than that, he can kiss my ass

RobotTrader's picture

First thing investors do is dump commodities and flee into bonds.


10-yr. back down to 1.94%.

If ES breaks below 1200, we'll see 1.5% and gold back under $1,500.

francis_sawyer's picture

First thing Robo Trader does is look at yesterdays candlesticks, and extrapolate trends from that...

css1971's picture

Yes that's the easy thing to see. What happens when it's the other way round? When goods are becoming more scarce due to energy pricing. Inflation is picking up and making bonds a loser. Bonds peak, start on the downslope and the money goes where? What does the money chase?

I have my own theory and asset allocation on that.

Calmyourself's picture

Good point robo, selling all my food production stocks and am buying treasuries.. I feel so safe.. :[

malek's picture

Waiting for it - I have the cash at hand to walk over to my coin dealer and pick up some more Au.

cranky-old-geezer's picture



Wow, $50 trillion debt paper bubble to keep inflated (keep from fucking crashing).

Good luck with that.

tarsubil's picture

The top gray fraction can expand to $50 tril while the bottom blue three decrease to 0. No problem.

Reform1776's picture

He has made some really terrible calls lately though. Is he turning into a great contrarian indicator?

new game's picture

massive leverage! THAT IS THE NEW NORM.

print next. only outcome avail (in their minds)

sure they understand all we do, but to give up the power?

when they dont have to. would you?

real outcome IMO; devaluation from printing of a new norm rate.

call it massive devalue for the masses; as in u fucked...

misterc's picture

I have a (suspended) pension plan (EUR) with Allianz - they promise me 4% return (bonds) forever. They took this plan out of retail in 2008.
I wonder where or how Pimco will make 4% year in, year out to make me whole... the only outcome I can imageine would be inflation at 7% and my returns at 4%. That's why I voted for Gold.

youngman's picture

They will have to buy Greek and Italian laugh...but they will...they have to chase "returns"...pensions too...

malek's picture

Only question for you is when German REAL inflation goes above 4%... then you are not making anything in real terms anymore

Mercury's picture

Fringe is fab.