Bill Gross Releases Latest Monthly Outlook: The Lending Lindy

Tyler Durden's picture


Having operatied for years under ZIRP, and with the NIRP neutron bomb just around the corner, and already implemented in various European countries, one question remains: can banks be banks, i.e., can they make money, in a world in which borrowing short and lending long, no longer works, courtesy of ubiquitous and pervasive central planning which is now engaged solely and almost exclusively (the other central bank ventures being of course to keep FX rates and equities within an acceptable range) on the shape of the yield curve. Since 2009 our answer has been a resounding no. Today, Bill Gross speaks up as well, and his answer is even more distrubing: "If the dancing has slowed down, then the reason is not just an overweight partner. It’s that the price of money (be it in the form of a real interest rate, a quality risk spread, or both) is too low. Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it. When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over." Indeed, according to Gross central banks have now clearly sown the seeds of the entire financial system's own destruction. That he is right we have no doubt. The only question: how soon until he is proven right.

From Bill Gross of Pimco

The Lending Lindy

  • Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it. 
  • In a New Normal economy where lenders dance to the Blue Danube instead of the Lindy, how should we move our own feet?  Carefully, I suppose, and with recognition that historic returns are just that – historic.?



Citigroup’s Chuck Prince will likely join Irving Fisher in the annals of market history for his now infamous “As long as the music is playing, you’ve got to get up and dance.” Unlike Fisher’s quote, however, which affirmed a permanent plateau of prosperity in 1929, Prince’s faux pas may have been interpreted unfairly. History books will never record the context under which his statement was made, but what if instead of subprime-specific, Mr. Prince was referring to his job as a banker? What if he had rephrased his response to “It’s the job of a banker to keep on lending”? Well now, that would be a different story altogether. Today, that quote would earn him a Medal of Freedom from President Obama at a White House gala! And so I suggest in this instance we don’t take him at his literal word, but take him at his role as an ex-CEO of one of the world’s largest banks and see just where that takes the lot of us – sovereign, institutional and individual investors who in combination comprise what we now call our global financial system – all $150 trillion or so of it.

Too much debt

Credit, of course, is what makes the global economy go. We wouldn’t have gotten very far over the past several centuries despite Edison, Bell and Steve Jobs if barter was the accepted form of commerce. Even cash, serving as a medium of exchange and a disreputable store of value could not have promoted 3–4% real GDP growth in this gargantuan economy unless borrowers and savers were willing to exchange future promises – to utilize credit. Wimpy – in my oft-cited cartoon – said it best, “I’ll gladly pay you Tuesday for a hamburger today.” So McDonald’s grew from a million to 500 billion served and Wimpy and his wimpalikes were delighted in the exchange, although their arteries and midsections inevitably came out a loser. Still, the point is that our modern financial system, levered and fragile as it is, has been a beneficial and productive component of prosperity. If it were otherwise, our global economy would resemble something out of the dark ages in the early 20th century. High fives, then, for the Princemeister and his alter ego Mr. Wimpy – they have made a great combo-platter. But in order to promote and indeed foster continuing symbiosis, both borrower and lender need to operate in a nutrient-rich environment, a “credit” petri dish of sorts which fosters strong bones and healthy lenders and borrowers in their adult years. That unfortunately does not seem to be the case.

Wimpy’s weight-challenged midsection is an obvious testament to the overleveraged condition of today’s global borrowers. Too much debt leads to forced diets and delevering, a process which has been ongoing since Lehman 2008. Not only households, but financial institutions as well as many countries have reduced their caloric intake which in turn has promoted slow growth and in some countries near recession and/or depression. Borrowers are just not in a healthy place and if history is our guide, their restoration may be almost Biblical in terms of timing: seven years of fat followed by seven years of lean – perhaps even longer.

Too little return
Lender Chuck Prince’s figurative health, however, is not so obvious. Certainly bank balance sheets and creditors in general need to downsize assets, increase equity, or both. That by itself will be a disincentive for economic growth. But in addition there is the lender’s current precarious lack of return, yield, or call it “carry” that threatens additional credit extension in future years.

A lender will not easily lend money to an obese over-indebted borrower – that much is clear – but she will also not extend a check when the yield, carry and return on investment is so low that it cannot compensate for historic business model overheads. That is when Chuck Prince’s dancing turns from a quick step into a waltz. When yields are too low, and acceptable risk spreads so narrow that top line interest revenue is increasingly marginalized, then lending is at risk. Excessive historical overhead represented by rents, salaries, pension and health benefits, to name just a few, force financial and lending institutions to do one of two things: They lever up to cover those costs or they slow or shut lending down to preserve equity and the ultimate franchise. The levering up is indeed difficult given the 2008 financial crisis and the ensuing follow-through of intensified regulatory oversight. And so, what we are witnessing instead is the beginning of a waltz, a dance where financial institutions such as banks, insurance companies and investment management firms fail to reap the economies of scale so reminiscent of the prior era of fat as opposed to the present one of lean. In the process, they lay off, instead of hire new workers; close branch offices or even ATM machines by the thousands as did Bank of America recently; and yes, ultimately reduce the rate of lending or credit growth which propelled the global economy so effortlessly over the past century.

If the dancing has slowed down, then the reason is not just an overweight partner. It’s that the price of money (be it in the form of a real interest rate, a quality risk spread, or both) is too low. Our entire finance-based monetary system – led by banks but typified by insurance companies, investment management firms and hedge funds as well – is based on an acceptable level of carry and the expectation of earning it. When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over.

For the current shipwreck perhaps we have the Fed and other central banks to blame. Zero bound interest rates according to their historical models should inevitably and inexorably lead to dynamic real economic recovery. Who wouldn’t borrow at near 0% yields – namely the banks – in order to relend at seemingly profitable spreads? Who wouldn’t borrow at 3.5% for a 30-year mortgage – namely homeowners – in order to match or even reduce current rent payments? Well, they haven’t. Not in the amounts they were supposed to in any case. Structured impediments such as regulatory risk standards for banks and fear of losing money for households have thrown a monkey wrench into those models. Central banks are agog in disbelief that the endless stream of QEs and LTROs have not produced the desired result. Wimpy and Chuck are waltzing, not quickstepping, even with a band playing in up tempo.

Strategy recommendations

What then is an investor to do? In a New Normal economy where lenders dance to the Blue Danube instead of the Lindy, how should we move our own feet? Carefully, I suppose, and with recognition that historic returns are just that – historic. Last month’s “dying cult of equity” Investment Outlook elicited a lot of excitement, but somehow failed to impress readers with its main point: Returns from both stocks and bonds will be stunted. How could one argue otherwise on the bond side with investment grade bonds yielding only 1.75%? How could one argue otherwise for stocks under the assumption that bond and stock returns were at least in part mathematically conjoined at the hip? How could one argue otherwise when it is obvious that boomers and X’ers, Y’s and Z’ers are likely to be disenchanted for their own good reasons for years? How could one argue otherwise when it is apparent that stock market trading has been taken over by machines – that HAL rules the stock exchange roost and does a bad job of it at that? Well, some did and some will continue to argue the counterpoint. Chart 2, however graphically displays the mood of the public as opposed to the mood of the pundits. Only time will determine who was right and who was wrong, even if stocks outperform bonds as indeed I predicted.
he Dying Cult of Equity 
Most individual investors don’t have the privilege of time nor the choice of risking their investment dollars while being able to recoup it only at .1% money market or CD rates. An investor, it seems, must learn a new dance to fit the diminished return size of the modern dance floor.
If I were an individual investor, I would do this: Balance your asset mix according to your age. Own more stocks if you are young, but more bonds if you are in your 60s, like myself. If you choose an investment advisor, a mutual fund, or an ETF, make sure that your fees are minimized. After all, if overall returns average 3–4% annually how can you possibly afford to give 100 basis points of it back? You cannot. And be careful. The age of credit expansion which led to double-digit portfolio returns is over. The age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price – both stocks and bonds.
If you are an institution be cognizant as well of the above, but in addition, recognize that higher returns – from both stocks and bonds – usually emanate in countries and economies which exhibit higher growth. And don’t trust any country, including the United States, to forever remain a clean dirty shirt. There’s mud aplenty in our future, which I’ll expound more about in next month’s Investment Outlook.
Until then, like Chuck Prince and his buddy Wimpy, you should keep on dancin’. It won’t likely be the Lindy or the Quickstep, because our credit-based financial system is burdened by excessive fat and interest rates that are too low. It will be a new, slower-paced dance by necessity but Chuck was right: it’s better to be on the dance floor than a wallflower on the sideline. You’ve just got to watch your step.
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Wed, 09/05/2012 - 08:14 | 2763894 GetZeeGold
GetZeeGold's picture



The Lending Lindy


No thank returns from Jon Corzine are rocking. Don't need to borrow.....thanks anyway Lindy.

Wed, 09/05/2012 - 08:15 | 2763896 fonzannoon
fonzannoon's picture

you gotta love Bill talkin his book at the end.

Wed, 09/05/2012 - 08:24 | 2763921 Biosci
Biosci's picture

Well, it is his job, and the whole point of this letter.

But this:

Even cash, serving as a medium of exchange and a disreputable store of value...

is encouraging.  He sees the light.

Wed, 09/05/2012 - 09:23 | 2764129 ElvisDog
ElvisDog's picture

He is right even if he is talking his book. Our entire retirement philosophy is based on accumulating "your number", but the only way to do that is to earn 7-8% real rate of return on your retirement account. Earning less than 1% in bonds and money market funds makes it mathematically impossible to reach the mythical number - someone would have to contribute $40K a year for 40 years to reach $2 million for instance. He didn't quite say it, but the reality is that most people have no chance to reach their number and need to downsize their retirement expectations accordingly.

Wed, 09/05/2012 - 12:18 | 2764734 dirtbagger
dirtbagger's picture

Gross seldom talks about the real effect of low interest rates.   Low rates are simply a mechanism for transfering wealth from savers to borrowers.  In today's world that means all of us little people who have been saving towards retirement are being raped by the FIRE industry.

Wed, 09/05/2012 - 17:18 | 2765849 mrdenis
mrdenis's picture

Of course Government workers don't have to reach "their number" because it's all guarenteed by the taxpayer 

Wed, 09/05/2012 - 08:16 | 2763898 LongSoupLine
LongSoupLine's picture

The only question: how soon until he is proven right.


The only way to truly know, is with a full audit of the Federal Reserve Bank.  This can be accomplished, via Congress or revolutionary acts of seizure (see: DHS liberal use of "terrorism" label) .

Wed, 09/05/2012 - 08:19 | 2763901 buzzsaw99
buzzsaw99's picture

I can't believe that I read every word of that retarded shit.

Wed, 09/05/2012 - 08:22 | 2763914 GetZeeGold
GetZeeGold's picture



Heh heh.....sucker.


Tue, 09/11/2012 - 20:47 | 2783773 CrawdadMan
CrawdadMan's picture

Either you didn't read it or you are too stupid to understand it. 

Which is it?

Wed, 09/05/2012 - 08:24 | 2763919 AynRandFan
AynRandFan's picture

Apparently we haven't monetized our way to prosperity, but instead to stagflation.  No demand, high costs.

Here's a chart that shows the failure of central bank reflationary efforts (distillate demand):

Wed, 09/05/2012 - 08:25 | 2763927 bnbdnb
bnbdnb's picture

No forex, at any age, and hope you are lucky.

Wed, 09/05/2012 - 08:28 | 2763932 orangedrinkandchips
orangedrinkandchips's picture


yeah, I skipped a bunch because he can sum it up nicely by saying....




The more you manipulate, the more of a mess it becomes.....

Wed, 09/05/2012 - 08:28 | 2763933 Unbezahlbar
Unbezahlbar's picture

"The age of inflation is upon us...."


Wed, 09/05/2012 - 09:43 | 2764197 LMAOLORI
LMAOLORI's picture



+1 That was the most important sentence of the entire article. Just wait until the U.S. has to start paying higher interest on the trillions of debt.


Martin Feldstein: What worries me about QE

Election won't stop the Fed

Wed, 09/05/2012 - 08:30 | 2763937 youngman
youngman's picture

It would be interresting to go back in time to the Weinmar Republic and see what people were writing about then....things like..." its a good time to buy a infaltion is 1000%"...or "spend your today..half tomorrow".....or " gold is a relic...a tradition..only fools buy PM´s"....just sayin....what were the talking heads of the day saying at the time..?


Wed, 09/05/2012 - 10:12 | 2764282 Cpl Hicks
Cpl Hicks's picture

What were they saying... Youngman can't spell.

Wed, 09/05/2012 - 18:58 | 2766151 angela03
angela03's picture

More likely they would say that those who have nothing to say will instead correct for spelling errors.

Wed, 09/05/2012 - 08:31 | 2763940 orangedrinkandchips
orangedrinkandchips's picture

Humans in search of return is like water, one of the most powerful forces on earth!!!


If you built a house on Mars, or atleast if I did, I WOULD GET WATER IN MY's just me, I know, but water will find a way!!


Humans too.....we will find a way for return, whether it's HY or slinging bags....




They make it so fucking hard......

Wed, 09/05/2012 - 08:34 | 2763949 LawsofPhysics
LawsofPhysics's picture

Too little return on capital investment/creation, gee who would have thunk it?  You mean there is a very real cost for capital creation after all?  Damn, and here I was looking forward to my next business loan under NIRP, you where the bank pays me to take out the loan.

Now about those treasuries Gross....

Wed, 09/05/2012 - 08:36 | 2763964 adsanalytics
adsanalytics's picture

Lower yields make for higher equity risk premium (after the jump) - so since money has to go somewhere will it end up in stocks?


Wed, 09/05/2012 - 08:41 | 2763988 recidivist
recidivist's picture

Until risk returns to loans (be it a student loan or what a big bank can get at the Federal Reserve window), the market will be distorted.  Right now there is no incentive to invest in manufacturing.  Wipe away the unpayable debts, write down all the crappy mortgages, take your porfolio lumps, and get back to sound growth.

Wed, 09/05/2012 - 08:42 | 2763992 DavosSherman
DavosSherman's picture

"Perhaps" tip over.

Wed, 09/05/2012 - 08:47 | 2764018 Sandmann
Sandmann's picture

This is asymmetric however. It is BANKS that get high octane fuel at low price and it is the Real Economy that gets low octane fuel at a high price.

Money is very Expensive when sold at retail prices even if wholesale prices are low. The Circular Flow of Income is dammed up in the Banking System which is now a giant Leakage in the system. Banks are simply Capital Consumers and Capital Hoarders because they have a Black Hole where their balance sheet should be.

The Capitalist System is finished as is all economic activity so long as Banks corner all the Capital. Every household has its 'tipping point' and it is coming in waves of default as the tide goes out on more and more households. The system cannot be reset before it has imploded


Wed, 09/05/2012 - 09:03 | 2764068 LawsofPhysics
LawsofPhysics's picture

Yes,  maybe if we all yell together, ready go "Where is MY ZIRP?!?!?!?"

Wed, 09/05/2012 - 09:31 | 2764097 Zero Govt
Zero Govt's picture

Sandman  -  agree with your post only this is not so much about a capitalist system, which is about productivity and free markets ...this is all about the corrupt monopoly of State and central banks, the corrupt scum (banksters) holding the reigns of power to enrich themselves and prop-up their ongoing stupidity.. this 'news' is just dressing up and covering up their ongoing cheating of society

Wed, 09/05/2012 - 08:55 | 2764049 ebworthen
ebworthen's picture

Good 'ole "I'll gladly pay you tuesday for a hamburger today" Wimpy.

Where is Popeye with his Spinach? 

It certainly isn't Bernanke, who is more of a Bluto.

Wed, 09/05/2012 - 09:34 | 2764080 Zero Govt
Zero Govt's picture

When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over." Indeed, according to Gross central banks have now clearly sown the seeds of the entire financial system's own destruction.

First It goes pear-shaped, then it crashes.

And that students is all you need to know to get a 1st Class Degree in Political History & (mis) Management.... easy peasy to learn, but it has most of society in a state of dizzy head-scratching confusion ... er, why? It couldn't be simpler to see the whole truth

Wed, 09/05/2012 - 10:06 | 2764269 michael_engineer
michael_engineer's picture

If only the author had tied in resource issues. That would complete the big picture.

Wed, 09/05/2012 - 10:20 | 2764273 Variance Doc
Variance Doc's picture

“Credit, of course, is what makes the global economy go.”

I stopped at this.

No Bill, credit does NOT make the global economy grow.  It is relatively cheap energy (e.g. the formerly high EROI on coal and oil) that makes the economy grow, not your beloved paper bullshit.

Furthermore, countries like the US were built on a combination of this (formerly) cheap energy and the (now) historical notion of real savings, which was channeled into productive uses, e.g. airplanes, phones, cars, etc.  But we don’t have this anymore:  households are over their heads in debt and underwater “assets” like houses, and shit wrapped in impressive sounding names like CDO and CDS.

How’s your credit based eCONonmy working again?


Wed, 09/05/2012 - 10:26 | 2764317 Lost Wages
Lost Wages's picture

All I know is I should have held on to my stocks this summer instead of listening to Charles Biderman and Charles Nenner, worthless fucking assholes. I'd be up 7% instead of only up 1% in the last 3 months. Not sure what lesson I'm going to take from this. Probably that I should never listen to a Jew named Charles.

Wed, 09/05/2012 - 11:14 | 2764491 hombreloco
hombreloco's picture

It's all noise. Don't listen, WATCH. Price is the only reliable directional indicator. Try a little charting voodoo. Everybody's wrong until proven otherwise. Price does not lie.

Wed, 09/05/2012 - 10:30 | 2764330 FrankTrades
FrankTrades's picture

I remember seeing a book, The Dow is Dead, 1979.  Written in 1979, the author saw the dow stagger from a high of 995 in 1966 to  a high of 1024 in 1981.: (watch the log scale).  The Dow components changed in that time frame, and have changed more recently for sure.  So I would not give up on the USA.  We may hit bottom again, but if we do, the rest of the worls will hit a lot harder.




Wed, 09/05/2012 - 10:48 | 2764377 ChacoFunFact
ChacoFunFact's picture

just renew the fed's 100 year charter and everything will turn around: real money supply, velocity of money, negative real interest rates, etc.

Wed, 09/05/2012 - 11:06 | 2764443 hombreloco
hombreloco's picture

Ah yes, the veriable replay of 1812! Greenmail al la mode.

Wed, 09/05/2012 - 11:04 | 2764435 hombreloco
hombreloco's picture

"...central banks have now clearly sown the seeds of the entire financial system's own destruction"

The only way anything is gong to be resolved is for what's left of the human market to come out of denial, accept that the destruction is on PURPOSE; that the current faux money regime is designed to consolidate power into a "Centralized Banking Authority" (that these fellows are not as stupid as they think), and demand systemic regime change.

It's just that simple

Wed, 09/05/2012 - 12:18 | 2764726 Unbezahlbar
Unbezahlbar's picture

Anyone get that $3,000 dollars yet?

I placed 2 'Thingamajigs' on Lay-a-Way.

Wed, 09/05/2012 - 13:55 | 2765119 Dr. Kenneth Noi...
Dr. Kenneth Noisewater's picture


Oh Wimpy..  Your FICO score alone won't let me do that!

Thu, 09/06/2012 - 01:45 | 2767120 agagshoes
agagshoes's picture

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