Bill Gross Explains Why "We Are Witnessing The Death Of Abundance" And Why Gold Is Becoming The Default "Store Of Value"

Tyler Durden's picture

While sounding just a tad preachy in his February newsletter, Bill Gross' latest summary piece on the economy, on the Fed's forray into infinite ZIRP, into maturity transformation, and the lack thereof, on the Fed's massive blunder in treating the liquidity trap, but most importantly on what the transition from a levering to delevering global economy means, is a must read. First: on the fatal flaw in the Fed's plan: "when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street." And secondly, here is why the party is over: "Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time." Yet most troubling is that even Gross, a long-time member of the status quo, now sees what has been obvious only to fringe blogs for years: "Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper." Let that sink in for a second, and let it further sink in what happens when $1.3 trillion Pimco decides to open a gold fund. Physical preferably...

From PIMCO's Bill Gross:

Life – and Death Proposition

  • Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.
  • Most short to intermediate Treasury yields are dangerously close to the zero-bound which imply limited potential room, if any, for price appreciation.
  • We can’t put $100 trillion of credit in a system-wide mattress, but we can move in that direction by delevering and refusing to extend maturities and duration.

Where do we go when we die?
We go back to where we came from
And where was that?
I don’t know, I can’t remember
             Virginia Woolf, “The Hours”

I don’t remember much of this life, and like Virginia Woolf, nothing of the herebefore. How then, could I expect to know of the hereafter? I know at least that we all exist at and of the moment and that we make up those moments as we go along. I became a grandfather for the first time a few months ago and proud son Jeff asked for some fatherly advice as to how to go about raising his baby daughter Caroline. “We all do it in our own way, Jeff, you’ll make it up as you go along,” I said. Parenting, and life itself, is one giant experiment. From those first infant steps, to adolescent peer testing, flying from and departing the parental nest, gene replication and family building of our own, maturity and acquiescence, aging, decay and inevitable death – we experiment as best we can and make it up as we go along. 

That death part though, oh where do we go after we have done all the making? There was another Jeff in our family, beloved brother-in-law Jeff Stubban who was as kind a man as there ever could be. Dying within three months of an initial diagnosis of pancreatic cancer, our family sobbed uncontrollably at his bedside as his breath, his spirit, his soul, departed almost on cue while a priest recited the rosary. Where had he gone, where is he now, what will become of him and all of us? Like many grieving families we look for signs of him and in turn for clues to our own destination. A lucky penny in the street, a random mention of his beloved New Orleans, an exterior resemblance of his shiny bald head in a mingling crowd. Where are you, Jeff? Tell us you are safe so that we might meet again. 

Having now matured to trust reason more than faith I offer not so much a resolution, but an alternative to the unanswerable question of Virginia Woolf and the departed souls of Jeff Stubban and billions of others. If we don’t meet again – up there – then perhaps we’ll meet once more – down here. After all, the one thing I know for sure is that we got here once – and because we did, we could do it again. Rest easy, dear Jeff, and welcome to this world, dear Caroline. We’ll all just have to make it up as we go along. 

The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter. A multitude of liability structures dependent on a certain level of nominal GDP growth require just that – nominal GDP growth with a little bit of inflation, a little bit of growth which in combination justify embedded costs of debt or liability structures that minimize the haircutting of or defaulting on prior debt commitments. Global central bank monetary policy – whether explicitly communicated or not – is now geared to keeping nominal GDP close to historical levels as is fiscal deficit spending that substitutes for a delevering private sector. 

Yet the imagination and management of the transition ushers forth a plethora of disparate policy solutions. Most observers, however, would agree that monetary and fiscal excesses carry with them explicit costs. Letting your pet retriever roam the woods might do wonders for his “animal spirits,” for instance, but he could come back infested with fleas, ticks, leeches or worse. Fed Chairman Ben Bernanke, dog-lover or not, preannounced an awareness of the deleterious side effects of quantitative easing several years ago in a significant speech at Jackson Hole. Ever since, he has been open and honest about the drawbacks of a zero interest rate policy, but has plowed ahead and unleashed his “QE bowser” into the wild with the understanding that the negative consequences of not doing so would be far worse. At his November 2011 post-FOMC news briefing, for instance, he noted that “we are quite aware that very low interest rates, particularly for a protracted period, do have costs for a lot of people” – savers, pension funds, insurance companies and finance-based institutions among them. He countered though that “there is a greater good here, which is the health and recovery of the U.S. economy, and for that purpose we’ve been keeping monetary policy conditions accommodative.” 

My goal in this Investment Outlook is not to pick a “doggie bone” with the Chairman. He is makin’ it up as he goes along in order to softly delever a credit-based financial system which became egregiously overlevered and assumed far too much risk long before his watch began. My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic. When interest rates approach the zero bound they may transition from historically stimulative to potentially destimulative/regressive influences. Much like the laws of physics change from the world of Newtonian large objects to the world of quantum Einsteinian dynamics, so too might low interest rates at the zero-bound reorient previously held models that justified the stimulative effects of lower and lower yields on asset prices and the real economy.

It is instructive to mention that this is not necessarily PIMCO’s view alone. Chairman Bernanke and Fed staff members have been sniffin’ this trail like the good hound dogs they are for some time now. In addition, Credit Suisse, in their “2012 Global Outlook,” devoted considerable pages to specifics of zero-based money with commonsensical historical comparisons to Japan over the past decade or so. The following pages of this Outlook will do the same. At the heart of the theory, however, is that zero-bound interest rates do not always and necessarily force investors to take more risk by purchasing stocks or real estate, to cite the classic central bank thesis. First of all, when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street. 

What perhaps is not so often recognized is that liquidity can be trapped by the “price” of credit, in addition to its “risk.” Capitalism depends on risk-taking in several forms. Developers, homeowners, entrepreneurs of all shapes and sizes epitomize the riskiness of business building via equity and credit risk extension. But modern capitalism is dependent as well on maturity extension in credit markets. No venture, aside from one financed with 100% owners’ capital, could survive on credit or loans that matured or were callable overnight. Buildings, utilities and homes require 20- and 30-year loan commitments to smooth and justify their returns. Because this is so, lenders require a yield premium, expressed as a positively sloped yield curve, to make the extended loan. A flat yield curve, in contrast, is a disincentive for lenders to lend unless there is sufficient downside room for yields to fall and provide bond market capital gains. This nominal or even real interest rate “margin” is why prior cyclical periods of curve flatness or even inversion have been successfully followed by economic expansions. Intermediate and long rates – even though flat and equal to a short-term policy rate – have had room to fall, and credit therefore has not been trapped by “price.” 

When all yields approach the zero-bound, however, as in Japan for the past 10 years, and now in the U.S. and selected “clean dirty shirt” sovereigns, then the dynamics may change. Money can become less liquid and frozen by “price” in addition to the classic liquidity trap explained by “risk.” 

Even if nodding in agreement, an observer might immediately comment that today’s yield curve is anything but flat and that might be true. Most short to intermediate Treasury yields, however, are dangerously close to the zero-bound which imply little if any room to fall: no margin, no air underneath those bond yields and therefore limited, if any, price appreciation. What incentive does a bank have to buy two-year Treasuries at 20 basis points when they can park overnight reserves with the Fed at 25? What incentives do investment managers or even individual investors have to take price risk with a five-, 10- or 30-year Treasury when there are multiples of downside price risk compared to appreciation? At 75 basis points, a five-year Treasury can only rationally appreciate by two more points, but theoretically can go down by an unlimited amount. Duration risk and flatness at the zero-bound, to make the simple point, can freeze and trap liquidity by convincing investors to hold cash as opposed to extend credit. 

Where else can one go, however? We can’t put $100 trillion of credit in a system-wide mattress, can we? Of course not, but we can move in that direction by delevering and refusing to extend maturities and duration. Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper. 

Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.

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GeneMarchbanks's picture

Billy boy is no longer part of the club. Shame really. Poor guy now has to resort to gold.

In other news: Happy new low...

Rans:

'Baltic Dry index falls 2.6% to 662 points'
VanillAnalyst's picture

Anyone else feel like that outlook read more like a eulogy for the global economy? Scary.....

Oh regional Indian's picture

Of course it did, it si over. Bill has probably been assigned the role of soothesayer. His "letters" have been getting more and more dirgey every time.

And I wish everyone would just start calling "Credit"...."Debt". Credit, warm and Fuzzy, Debt=Death. 

In fact, if you re-read this entire article, with the world Debt replacing Credit, it would paint an even scarier picture.

ori

/watershed-day-may-this-pour-through-a-million-pairs-of-eyes/

gmrpeabody's picture

Perhaps these banks should begin selling insurance policies on the purity of gold bars..., or maybe to insure that your gold fund actually has gold in it.

Hmmm...., endless possibilities.

HoofHearted's picture

Big yellow hat tip to Bill Gross for getting before many of his peers, though way after some of us...

Badabing's picture

Big yellow hat tip.... like the dog?

or this line from Bill

“Letting your pet retriever roam the woods might do wonders for his “animal spirits,” for instance, but he could come back infested with fleas, ticks, leeches or worse, Fed Chairman Ben Bernanke”

And all i did was change a period to a comma.


Maybe I can get a job with the MSM taking quotes out of context?

 

 

Mr Lennon Hendrix's picture

+1, That was funny.

Who knew Gross even knew what gold was?  I figured he spent all his spare time on his stamp collection and hitting his vape.

The Big Ching-aso's picture

 

 

"This is Karl Denninger.     Let it be known by fiat declaration that Bill Gross has been banned from my blog forever.  Anyone that agrees with Bill Gross about the merits of gold will be banned from my blog forever.   You have been duly forewarned.     Especially you, Photoguy."

http://www.youtube.com/watch?v=WCwWfSYBwOQ

redpill's picture

Welcome to the gold fold Billy boy.  Come on in, the waters fine.

Mr Lennon Hendrix's picture

I think our club needs hats.  And swords.  We need hats and swords.

redpill's picture

The Masons will get jealous!

The Big Ching-aso's picture

 

 

Hats, swords, and gold blunderbusses.    But no badges.

The Limerick King's picture

 

 

PIMCO has left the reserve

Kleptos they no longer serve

Bill's freaking out

He's starting to doubt

The poor boy has lost all his nerve!

mr_T's picture

Bill & Mohammed probably built a bullion vault under their newport building. Or better yet have a lot stashed in Singapore. These guys know which way the wind blows. Except the ust call last year ... Safe is good

PaJoad's picture

Turd got first dibs on big yellow hats....

Scisco's picture

Our club already has a lot of guns. But ya, swords would be cool as well.

trav7777's picture

Just read the last paragraph people...it tells you what the problem is.

Gross is a paperbug.  The last 30 to 50 years have produced "outsized gains" for finanical assets, aka paper.  It has allowed people like him to have "AUM" that they turn into massive gains and skim off those gains to themselves, along the way buying private islands and yachts.

What Gross is saying is that those days are over.  People like him are facing extinction and the possibility of having to WORK (gasp) for their money instead of skimming off a ponzi of financial asset growth.

Gross is pissed that NONE of his stupid assets can earn a coupon that his other rentier class customers have become used to and he faces being discarded for it.

But Gross doesn't seem to get why things are contracting anymore than the other paper pushers.  Or maybe like other "unthinkable" topics such as race and equality, people who deep down in places they don't talk about do know the truth just consciously refuse to face it.

Ghordius's picture

trav, try not to make your race-unrelated points without getting back to race - it's bad for your health

Gross has made some two billions riding the bonds way down for years - he could count himself lucky, couldn't he?

trav7777's picture

why?  That's just another topic that people avoid.

Gross may or may not know the truth just like people may or may not know that you can't nurture girls to be boys.  People routinely avoid things that they wish weren't true.  This is just one of them.  I used the other one as an example.

There's nothing the fuck wrong with my health, dude...I'm not like you.

Billions isn't enough for a dude like Gross.  There's never enough.

Raging Debate's picture

Thanks for the link Big Ching. Funniest stuff I have seen in a month. I like Karl's pursuit of justice but crushing dissenting opinion turned me off .

JW n FL's picture

 

 

The Big Ching-aso

"This is Karl Denninger. Let it be known by fiat declaration that Bill Gross has been banned from my blog forever. Anyone that agrees with Bill Gross about the merits of gold will be banned from my blog forever. You have been duly forewarned. Especially you, Photoguy."

http://www.youtube.com/watch?v=WCwWfSYBwOQ

I watched it 3 times..

Fantastic.. I dont know who this Denninger ass munch is.. but if it was not for people like him.. we would not be able to afford Gold or silver today..

SO! Lets be happy about the cheap prices in Gold and Silver!

 

 

akak's picture

I watched it FIVE times yesterday, and laughed hysterically each time!

I used to be a daily reader of Denninger's MarketTicker blog, but grew tired of his hyperbolic rants, then grew annoyed by and suspicious of his absurd and shrill bleating about the non-existent "threat of deflation", then grew disgusted with his wildly ignorant and even more hyperbolically idiotic denigration of gold and its advocates.  I then became outraged by his insane and wildly inaccurate disinformation on monetary history and theory, and the final straw for me was a brief and shocking period of delving into (but never directly participating in) his authoritarian echo chamber, gulag and complete mockery of a "forum", in which the slightest transgression, such as the mere  hint of a mention of gold outside the proper "free speech zone" to which it was relegated there, was grounds for instant and permanent banning. 

Denninger is simply a central bankster-loving, fiat-worshipping narcissist and egomaniac who doesn't know squat about financial or monetary history, and who believes that his prowess at having skimmed paper profits from the Ponzi at the height of a bubble market now entitles him to spout off in the most puerile, dishonest and disgusting manner on a whole host of topics over which he has no more (and probably even less) knowledge than any of the trained parrots on CNBC.

trav7777's picture

never thought I'd live to see the day when you got one right

dlmaniac's picture

When the entire spoiled "DEVELOPED" world spent several decades consuming rather than producing then what else do we expect other than the death of abundance as the result?

trav7777's picture

are you stoned?  SOMEONE produced so someone could consume..that is what GDP IS.

Abundance is decreasing because abundance is decreasing.  There are any number of physical resources that are presently in a state of decreasing abundance. 

Ghordius's picture

pass the spliff, man. I see it in your hand

though GDP also contains the bills for services, like haircuts, massages, psychoanalysis and consultancy fees - all in a state of increasing abundance

trav7777's picture

There is GDP and then there is GDP.

tmosley's picture

We are eating our capital base, which is like someone amputating a leg to have a nice meal.  Sure, you might be able to eat well for a few days, but you are crippled in any longer time period.

But you fail to understand such things.  You don't understand that more can be made with less with the use of capital.  To you, oil is converted directly into goods at a constant rate that can never change, and oil is the only possible source of such goods.

"Abundance is decreasing because abundance is decreasing"!?  Give me a fucking break.

trav7777's picture

you're a fucking idiot who understands next to nothing.

You raise strawmen all the time to knock down.  It's totally pointless. 

Name another POSSIBLE source, you fucking RETARD.  And by possible I mean something that isn't a mfin PIPE DREAM magical thinking that may as well be fuckin unicorns.

You still can't ACCEPT what is happening in front of your fucking eyes, can you?  You're so stupid and delusional, cliff.

tmosley's picture

A "POSSIBLE" source?  Ok, how about nuclear, specifically using breeder reactors to turn our stockpile of nuclear waste into fuel?  

"Hurr, but ya can't duh dat caus dats majikul tinkin"

But no, no answer will satisfy you, because you worship death and decline, and will brook no heresy against your lord Ba'al.

trav7777's picture

ROTFL...it simply DOESN'T WORK THAT WAY and it ISN'T THAT EASY.

Magic breeder reactors that turn all our nuclear waste into FUEL...like for FREE.  We can just fiss it, then fiss it AGAIN and AGAIN in magical reactors.

You fucking idiot. 

We already know how to reprocess spent rods to extract still-fissile uranium and other fissile byproducts such as Pu239.  It's simply not like the SNAP OF FINGERS that you bleat out that it is.  You do this all the time on very complex shit, acting like it's QED and shit, when you are a moron and have a child's understanding of the world.  You act because shit isn't metaphysically IMPOSSIBLE that somehow this makes it not only likely but EASY and anyone who says it isn't worships fucking Baal (who was a decent actor before his ego got out of control, but totally overshadowed by Heath Ledger).

Your brain seems incapable of responding to a criticism of the simplemindedness of the stupid shit you say without erecting a strawman.

When I said possible, I meant to replace what oil has done, which is provide literally free liquid energy and to have grown in supply.

Try again.  Pick unicorns this time.  Idiot.

StychoKiller's picture

Let's just build a Dyson sphere, problem solved.

JW n FL's picture

 

 

there is LOTS! of Oil!!

LOTS AND LOTS of OIL!!

the problem isnt that we are running out of OIL!

the problem is.. that Lite Sweet Crude.. that America's refineries are built around.. is not as abundant as Heavy or Sour Crude and as we move forward... Heavy and Sour Crude will be becoming more and more the norm, as we move forward.

couple that Heavy Crude is the going to make up the bulk of supply with the fact that the easy to get too or reach Oil.. is running out.. and what the World is left with is Hard to Get Too or Hard to Reach.

The cost difference is the problem.

The World Economic Model is built on Wage Arbitrage, Cheap Labor equals Cheap Goods!

But when the Fuel Costs or more accurately the Transportation Costs.. eat away at the benefit of cheap labor.. then there is no point of shipping, trading and or sharing with the other Countries.. that we have tried so very hard to bring into the flock.. http://www.youtube.com/watch?v=wYuLjGQQ-jg

 

what we will end up with is Protectionism..

http://seekingalpha.com/article/91589-china-s-new-car-tax-could-make-luxury-cars-an-endangered-species <--- that is a Circa 2008 13% to 33% Tax by China on American cars.

http://moneyland.time.com/2011/12/14/u-s-very-disappointed-by-chinas-new-auto-import-tariffs/ <---- this one is from last month.. another 2% to 215 Tariff by China on American Cars..

Obama risks trade war with China http://www.washingtontimes.com/news/2012/jan/31/obama-risks-trade-war-with-china/?utm_source=RSS_Feed&utm_medium=RSS

The idiots are now SCREAMING! about how Obama is pissing off Americas 2nd Largest importer of goods, China.. for no REASON! just because Obama wants too!

Obama is a Liar..

the United States is sending its wealth to China..

Tyler did an article about Long Silver over night (China) and Short Silver during the day (United States).. which equates to.. China, the majority of the time enjoys low pricing from the price Pressure during the day that the FED thru JP Morgan put on pricing.

http://www.zerohedge.com/news/overnight-longintraday-short-gold-fund-more-doubles-just-over-year-generates-43-annualized-retu

http://www.zerohedge.com/article/guest-post-100-million-216-billion-under-ten-years-proposing-overnight-gold-fund

 

for the last 10 years, a decade.. China has enjoyed Cheap Precious Metals thru the Idiocy of the FED and JP Morgan.

and who does this fuck? We the People!

and who pays for this enrichment of China? We the People!

why do we drive the price down so China can buy cheap? because we are stupid? or maybe because the Majority of Americans are fucking stupid! from the fluoride in the water and public school system?

who knows and at this point.. who cares.

America is stupid and run by short sighted idiots and we will ALL pay the price for it!

Consensus Building? when the Majority is Special Needs! will allow for NO! good or even reasonable outcome.

 

JW n FL's picture

 

 

Uploaded by on Sep 13, 2011

A documentary on Michael Ruppert, a police officer turned independent reporter who predicted the current financial crisis in his self-published newsletter, From the Wilderness.

http://www.youtube.com/watch?v=FDjObEJy-hM&feature=g-all-f&context=G297449aFAAAAAAAAaAA

Al Gorerhythm's picture

Gold is going up because gold is going up.

StychoKiller's picture

Au is going UP because the VALUE of FRNs/Euroz/Yen/Drachmas, etc is going DOWN.

Tompooz's picture

That too. Until it does down because it goes down.

jimmytorpedo's picture

A Fed Chairman bit me once and I got granulocytic anaplasmosis. Like Lymes disease, only it makes you worship little pieces of paper. If you still believe in paper, get your blood tested, you might be infected.

SirPlayomic's picture

Banks selling insurance policies on the purity of gold bars... that's some dark humour there gmrpeabody. If gold is found to be counterfeit, it won't matter if you hold such an insurance policy, as it will be the end of the paper markets and thus the end of your policy :/

www.greedion.com

francis_sawyer's picture

Would that be like the "anti-serum" to the snake oil?

SirPlayomic's picture

If you are referring to Greedion, then yes, it's my attempt at an anti-serum.

Parabolic's picture

I'll purchase a CDS against that

Snidley Whipsnae's picture

gmpeabody... Before any of your suggestions the US gold should be audited... as should all central bank claims of gold stockpiles.

SAT 800's picture

A human mind is a terrible thing to waste; but that's mysticism for you. Your blog is a complete waste of electrons.

StychoKiller's picture

"There are more things in Heaven and Earth than are dreamt of in your Philosophy."

silver500's picture

Dont worry the yield curve wont go flat just yet, short term paper can still go negative.