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Gross On The Futility Of The European Deus Ex Machina: "A French/German Guillotine Hangs Over The Markets"

Tyler Durden's picture




 

Bill Gross continues with his rational Keynes bashing with the following statement from his latest monthly piece just released: "What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets and society no longer have an appetite for it. In addition to initial conditions of debt to gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge." In addition he also meaks it all too clear why the sudden reappearance of the Federal states of German-funded Europe proposal is a dead end: "On the fiscal side the EU’s solution has been to “clean up your act,” throw out the scoundrels and scofflaws (eight governments have fallen) and balance your budgets. Such a process, however, almost necessarily involves several years of recessionary growth and deflationary wage pressures on labor markets in the offending countries." Gross picturesque analogies never fail to amuse (maybe not the French though): "The ultimate vote of the working men and women in these countries will always hang over the markets like a Damocles sword or perhaps a French/German guillotine. If the axe falls, then bond defaults may follow no matter what current policies may promise in the short term." That's right. He went there. As for his conclusion, he is spot on: "Investors and investment markets will likely be supported or even heartened by recent days’ policy proposals. The problem of Euroland is twofold however. First of all, they will remain a dysfunctional family no matter what the outcome. You can’t tell a German much, and while they can issue what appear to be constructive orders and solutions to the southern peripherals, there is little doubt that none of them will “like it very much.”....Secondly, and perhaps more importantly however, investors should recognize that Euroland’s problems are global and secular in nature, reflecting worldwide delevering and growth dynamics that began in 2008."  And that's it folks: Europe will never submit to a federalist union controlled by Germany. And even if it does, it is not just Europe that is broken. It is the entire world.  Speaking of broken marriages, we wonder just how many CDS Gross is long parent risk-soaring Allianz?

Full note:

?Family Feud

  • Investors should recognize that Euroland’s problems are global and secular in nature; it will be years before Euroland and developed nations in total can constructively escape from their straitjacket of debt.
  • Global growth will likely remain stunted, interest rates artificially low and investors continually disenchanted with returns that fail to match expectations.
  • Investors should consider risk assets in emerging economies, such as Brazil and Asia, and bonds in the strongest developed economies, where the steep yield curve may offer opportunities for capital gains and potentially higher total returns.
A 12-year-old coffee mug has a permanent place on the right corner of my office desk. Given to me by an Allianz executive to commemorate PIMCO’s marriage in 1999, it reads: “You can always tell a German but you can’t tell him much.”
 
It was hilarious then, but less so today given the events of the past several months, which have exposed a rather dysfunctional Euroland family. Still, my mug might now legitimately be joined by others that jointly bear the burden of dysfunctionality.
 
"Beware of Greeks bearing gifts” could be one; “Luck of the Irish” another; and how about a giant Italian five-letter “Scusi” to sum up the current predicament?
 
The fact is that Euroland’s fingers are pointing in all directions, each member believing they have done more than their fair share to resolve a crisis that appears intractable and never-ending. The world is telling them to come together; they’re telling each other the same; but as of now, it appears that you can’t tell any of them very much.
 
The investment message to be taken from this policy foodfight is that sovereign credit is a legitimate risk spread from now until the “twelfth of never.”
 
Standard & Poor’s shocked the world in August with its downgrade of the U.S. – one of the world’s cleanest dirty shirts – to double A plus. But what was once an emerging market phenomenon has long since infected developed economies as post-Lehman deleveraging and disappointing growth exposed balance sheet excesses of prior decades.
 
Portugal, Ireland, Iceland and Greece hit the headlines first, but “new normal” growth that was structurally as opposed to cyclically dominated exposed gaping holes in previously sacrosanct sovereign credits.
What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets and society no longer have an appetite for it. In addition to initial conditions of debt to gross domestic product and related metrics, the ability of a sovereign to snatch more than its fair share of growth from an anorexic global economy has become the defining condition of creditworthiness – and very few nations are equal to the challenge.
 
It was in this “growth snatching” that the dysfunctional Euroland family was especially vulnerable. Work ethic and hourly working weeks aside, the Euroland clan has long been confined to the same monetary house. One rate, one policy fits all, whereas serial debt offenders such as the U.S., U.K. and numerous G-20 others have had the ability to print and “grow” their way out of it.
 
Beggar thy neighbor if necessary was the weapon of choice in the Depression, and it has conveniently kept highly indebted non-Euroland sovereigns with independent central banks afloat during the past few years as well. Depressed growth with more inflation, perhaps, but better than the alternative straitjacket in Euroland. As currently structured, Euroland’s worst offenders now find themselves at the feet of a Germanic European Central Bank that cannot be told to go all-in and to print as much and as quickly as America and its lookalikes.

Proposals from the German/French axis in the last few days have heartened risk markets under the assumption that fiscal union anchored by a smaller number of less debt-laden core countries will finally allow the ECB to cap yields in Italy and Spain and encourage private investors to once again reengage Euroland bond markets. To do so, the ECB would have to affirm its intent via language or stepped up daily purchases of peripheral debt on the order of five billion Euros or more. The next few days or weeks will shed more light on the possibility, but bondholders have imposed a “no trust zone” on policymaker flyovers recently. Any plan that involves an “all-in” commitment from the ECB will require a strong hand indeed.

On the fiscal side the EU’s solution has been to “clean up your act,” throw out the scoundrels and scofflaws (eight governments have fallen) and balance your budgets. Such a process, however, almost necessarily involves several years of recessionary growth and deflationary wage pressures on labor markets in the offending countries. While the freshly proposed 20-30% insurance scheme of the European Financial Stability Facility (EFSF) offers hope for the refunding of maturing debt, it is the deflationary, growth-stifling, labor/wage destroying aspect of the EU’s original currency construction that threatens a positive outcome over the long term. Without an ability to devalue their currency vs. global competitors or even – “Gott im Himmel” – Germany itself, peripheral countries may have survival to look forward to, but little else. Perhaps the Italians and Spaniards will put up with it, but maybe they won’t. The ultimate vote of the working men and women in these countries will always hang over the markets like a Damocles sword or perhaps a French/German guillotine. If the axe falls, then bond defaults may follow no matter what current policies may promise in the short term.
 
Investors and investment markets will likely be supported or even heartened by recent days’ policy proposals. The problem of Euroland is twofold however. First of all, they will remain a dysfunctional family no matter what the outcome. You can’t tell a German much, and while they can issue what appear to be constructive orders and solutions to the southern peripherals, there is little doubt that none of them will “like it very much.” Slow/negative growth and historically wide bond yield spreads will therefore likely continue. Globalized markets themselves will remain relatively dysfunctional, pointing towards high cash balances in presumably safe haven countries such as the United Kingdom, Canada and the United States. The U.S. dollar should stay relatively strong, ultimately affecting its own anemic growth rate in a downward direction.
 
Secondly, and perhaps more importantly however, investors should recognize that Euroland’s problems are global and secular in nature, reflecting worldwide delevering and growth dynamics that began in 2008. It will be years before Euroland, the United States, Japan and developed nations in total can constructively escape from their straitjacket of high debt and low growth. If so, then global growth will remain stunted, interest rates artificially low and the investor class continually disenchanted with returns that fail to match expectations. If you can get long-term returns of 5% from either stocks or bonds, you should consider yourself or your portfolio in the upper echelon of competitors.
 
To approach those numbers, risk assets in developing as opposed to developed economies should be emphasized. Consider Brazil with its agricultural breadbasket and its oil. Consider Asia with its underdeveloped consumer sector but be mindful of credit bubbles. In bond market space, the favorite strategy will be to locate the cleanest dirty shirts – the United States, Canada, United Kingdom and Australia at the moment – and focus on a consistent, “extended period of time” policy rate that allows two- to ten-year maturities to roll down a near perpetually steep yield curve to produce capital gains and total returns which exceed stingy, financially repressive coupons. A 1% five-year Treasury yield, for instance, produces a 2% return when held for 12 months under such conditions. Bond investors should also consider high as opposed to lower quality corporates as economic growth slows in 2012.
 
Because of Euroland’s family feud, because of too much global debt, because of deflationary policy solutions that are in some cases too little, in some cases ill conceived, and in many cases too late, financial markets will remain low returning and frequently frightening for months/years to come. I can imagine the coffee mugs for 2020 now: “Gesundheit!” from the Germans, “C’est la vie,” from the French and “Stiff Upper Lip,” from the British. In the United States I suppose it’ll still say, “Let’s go shopping,” although our wallets will be skinnier. You can always tell an American, you know, but you can’t tell ‘em to stop shopping. Likewise, investors should always be able to tell a delevering, growth constrictive global economy – but perhaps not. Dysfunction is not exclusive to politicians. Families, it seems, feud everywhere.
 

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Tue, 11/29/2011 - 09:29 | 1924862 jcaz
jcaz's picture

Fine, go ahead and default already-  that's a function and fault of a nil-interest credit market.....

Tue, 11/29/2011 - 10:22 | 1925105 Harlequin001
Harlequin001's picture

A default hammers a nail in the coffin of the one-world-central-controlled-bilderberg-conspiracy-theorists...

No one has as yet explained how a one world government intends to control the rioting masses.

or how they ever did.

Tue, 11/29/2011 - 13:17 | 1926059 falak pema
falak pema's picture

But it increases the risks of regional wars and nuclear conflict. The world will shrink financially, economically; it will change with more power going to South & East, more productive and with more human growth potential; as poor and young. It will mean more wars as the North and West won't give up power simply because they are drowning in debt. It is the sign of the times and the scenario when "clash of civilizations" will get much worse, not much better; much to the dismay of the new generation who have no political power, will have lost all economic power, wil have only solution in violent revolution in West. So clash of civilizations will be compounded by clash of social classes and generation gap in the West. ...Very complicated, anarchy begetting scheme for West, in power cum social decadence spiral. 

You can already see that the Euro gridlock will create a lot of rancour along north-south continental divide as the Euro implodes;not if. Same is true for  Usa and Japan. We will move backwards and creating more wars outside our own frontiers may backfire even more; "may" is an understatement IMHO.

 

Tue, 11/29/2011 - 14:06 | 1926294 Harlequin001
Harlequin001's picture

True, but I have long argued that there is no plot to rule the world by some supposed elitist Bilderberg group because the common man makes it ungovernable.

What you say may be true, and I believe it is but it does not change my view that this whole mess is the responsibility of governments that pander to the masses demanding welfare, and that governments support banks because they need to, and not because they have to. Banks don't rule the world - they influence it but they don't rule it. Ultimately the common man does, and when he decides to riot the game is over.

Still ain't seeing no  centrally run conspiracy Bilderberg plot to run the world...

I see anarchy, unfortunately...

Tue, 11/29/2011 - 09:30 | 1924866 HD
HD's picture

What? "Let them eat cake" may not work out for the money printers? I'm shocked. SHOCKED!

Tue, 11/29/2011 - 09:33 | 1924877 Undecided
Undecided's picture

http://www.bloomberg.com/news/2011-11-29/norway-mass-killer-breivik-declared-insane-may-face-compulsory-treatment.html

Figures, I don't see him spending less then ten years. If you can plan something along these lines there is no such thing as insanity! i guess being part of certain groups helps your case Immensely. For shame!

Tue, 11/29/2011 - 10:10 | 1925032 onceinalifetime
onceinalifetime's picture

I think that Norway government didn't want him to speak in the court.

Tue, 11/29/2011 - 10:29 | 1925151 Undecided
Undecided's picture

They could have made it closed doors to the media then.  Now he will sit in a cozy little mental institution.  This is one of the few times i advocate the death penalty.

Tue, 11/29/2011 - 09:33 | 1924878 Schmuck Raker
Schmuck Raker's picture

F**k Bill Gross. F**k Hank Paulson.

Just sayin'...

Tue, 11/29/2011 - 09:35 | 1924884 Sunset chaser
Sunset chaser's picture

It looks like the end of the line for the "get out of debt by going further into debt" mantra.

Tue, 11/29/2011 - 09:38 | 1924894 cossack55
cossack55's picture

I would not bet on that.  Ink is cheap.

Tue, 11/29/2011 - 09:37 | 1924892 Antifederalist
Antifederalist's picture

Bill Gross. STFU

You are the problem. Not the solution .

Tue, 11/29/2011 - 09:54 | 1924914 Carlyle Groupie
Carlyle Groupie's picture

What has become obvious in the last few years is that debt-driven growth is a flawed business model when financial markets and society no longer have an appetite for it.

Tue, 11/29/2011 - 09:55 | 1924944 Antifederalist
Antifederalist's picture

Yep. Game the system, then morph into "I told you so.". Sorry Bill no dice

Tue, 11/29/2011 - 11:24 | 1925465 Hedgetard55
Hedgetard55's picture

Worse is the implication that the system is ok as long as there is appetite for new debt - i.e. as long as the Ponzi is growing. Gross is a putz.

Tue, 11/29/2011 - 09:37 | 1924893 WarriorClass
WarriorClass's picture

When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, ... when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their DUTY, to throw off such Government, and to provide new Guards for their future security.

Tue, 11/29/2011 - 11:04 | 1925351 Ricky Bobby
Ricky Bobby's picture

I am most sure those words are now classified as verboten. You are now in the big DATABASE.

Tue, 11/29/2011 - 09:43 | 1924908 jabaykhan
jabaykhan's picture

he already bought all these EM bonds. now your turn. he would sell it 2 u

Tue, 11/29/2011 - 09:44 | 1924913 fonzanoon
fonzanoon's picture

Okay everybody back to work.

Tue, 11/29/2011 - 22:02 | 1928277 StychoKiller
Tue, 11/29/2011 - 09:49 | 1924926 MFL8240
MFL8240's picture

This piece is interesting as recently Gross loaded up on US treasuries so none of this global bullsht passes the smell test.

Tue, 11/29/2011 - 09:52 | 1924935 monopoly
monopoly's picture

Tick, tick, tick.......

Tue, 11/29/2011 - 09:54 | 1924939 Smiddywesson
Smiddywesson's picture

...almost necessarily involves several years of recessionary growth and deflationary wage pressures on labor markets in the offending countries."

....it will be years before Euroland and developed nations in total can constructively escape from their straitjacket of debt. 

... Global growth will likely remain stunted, interest rates artificially low and investors continually disenchanted with returns that fail to match expectations.

This assumes the whole shebang won't implode.  That's a very big assumption given the complexity of the system, the size of the derivatives market, and a 1000 years of history that teach us that war settles these matters

Most of the global debt he refers to can't ever be paid back and it's childish to even consider that it will.  Even if that were not so, don't expect a rebound in jobs or incomes or housing for a very long time.

Tue, 11/29/2011 - 09:54 | 1924942 Miss Expectations
Miss Expectations's picture

I can't stand some new words that have crept into our vocabulary...Euroland, Chicagoland, Homeland...where did they come from?

Tue, 11/29/2011 - 10:10 | 1925035 narapoiddyslexia
narapoiddyslexia's picture

Gagaland?

Tue, 11/29/2011 - 09:57 | 1924951 chubbar
chubbar's picture

Speaking of broken marriages, we wonder just how many CDS Gross is long parent risk-soaring Allianz?

Of course the follow-up question should be "what analysis have you done that leads you to believe the counter-parties of your CDS will actually pay off when the crash occurs?"

Tue, 11/29/2011 - 10:15 | 1925065 hollowbody
hollowbody's picture

Far be it for me to attmept any kind of defence of Keynes here, but a few things are deserving of thought before everyone blindly accepts the Huns in Germany as paragons of all monetary wisdom and virtue. Keynes argued consistently that 'corrective' measures were the responsibility of BOTH deficit and SURPLUS countries - although he got his way to an extent with the IMF's 'scarce currency rule', Harry Dexter White and his heirs did their best to neutralize the rest of this reasoning. The EU similarly placed obligations on surplus countries within the ER mechanism, legal rules which Europe's new masters chose to ignore, in clear breach of their treaty obligations, in just the same way as they have done with their bloated (deficit) spending, which to within a few pips has mirrored that of arch villain Greece throughout almost all of the last decade prior to the immediate Lehman fallout (check the charts). In a parallel to the US's and the UK's own bloated spending and currency manipulation, Germany has used the Euro almost exclusively for its own ends, its banks as recklessly as anyone else's, and I for one view the crazy sovereign rates now being paid by both the periphery and increasingly 'the core', as simply the fruit of what they have sown. They are responsible, in all senses of the meaning of that word, and in truth, the markets will eventually have no option but to price this in accordingly........

Tue, 11/29/2011 - 10:22 | 1925108 narapoiddyslexia
narapoiddyslexia's picture

"the markets will eventually have no option but to price this in accordingly........"

But the whole structure relies on markets not working. 

What may well happen is that "Euroland" governments will soon have no option but to prevent markets from pricing this in accordingly.

Just like Ben does.

Tue, 11/29/2011 - 10:36 | 1925192 Stuck on Zero
Stuck on Zero's picture

Everyone forgets that the top 1% conrols 40% of the world's wealth.  That 0.1% also controls all the legislatures, Congresses, central banks, media, and printing presses.  They can continue the system of fiat currencies, debt, and government forever.  The only thing they cannot supply is the labor that makes everything work.

Tue, 11/29/2011 - 11:33 | 1925482 Long-John-Silver
Long-John-Silver's picture

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Tue, 11/29/2011 - 11:39 | 1925540 bank guy in Brussels
bank guy in Brussels's picture

There may be a new Swiss - German currency shortly, maybe not fully 'freegold' or 'good as gold', but still impressive.

As said above, « Europe will never submit to a federalist union controlled by Germany.»

Bill Gross is right re « The ultimate vote of the working men and women in these countries. »

Those crazy things Germany is suggesting, about other EU nations being governed by commissars from Brussels or Berlin, would never last.

So I am increasingly thinking that it is possible that Germany is indeed secretly planning to leave the euro first, and create a super-strong Swiss - German currency which would soon be among the world's favourites.

The Swiss franc is already pegged to the euro, and if Germany and perhaps some other northern countries leave the euro, the Swiss would obviously shift their peg to the new German money.

This is an explanation for why Chancellor Angela Merkel and the German leadership are acting so strangely ... so obstructionist to possible solutions to the euro-zone ordeal ... saying things that rather makes things worse ... pretending to support ridiculous pipe dream plans for 'supervising' Europe.

But Germany getting ready to leave the euro, explains the German 'No' to most solution measures, why Germany is suggesting ridiculous solutions ... why Germany is exacerbating the crisis ... which Germany will shortly solve.

It all makes sense. It is cheaper for Germany to re-capitalise its own banks (which would collapse from the debt they hold in euros on the other countries), than it is for Germany to promise to pay for all of Europe to infinity.

And this way the southern countries, they could keep the euro, the European central bank could inflate for them, they could print like Ben Bernanke, they could have cheaper currency to attract tourists and export, et cetera.

In the UK Telegraph, Ambrose Evans-Pritchard has been suggesting this for quite a while, Germany leaving the euro as the best solution for everybody, leaving the southern countries with a currency deflation option to rescue themselves.

It is of course unusual for Germany to be so bold in this way ... but maybe it is time for Germany to be bold again.

Am not sure I would predict to this happen ... but this does seem to be the best explanation of why a very smart German leadership would be acting like it has been acting.

In a few days Germany will lead a meeting which will establish procedures by which countries could exit using the euro ... theoretically they have Greece in mind, but maybe indeed, Germany is secretly preparing its own exit.

 

Tue, 11/29/2011 - 12:36 | 1925848 Treason Season
Treason Season's picture

If the scenario plays out then the forex markets will begin pricing this in. What will Germans holding Euros do? What wil anyone do holding the currency do once the handwriting is on the wall? Hmmm, ....to be continued.

Tue, 11/29/2011 - 11:47 | 1925619 vote_libertaria...
vote_libertarian_party's picture

Sooooooo we can safely say that PIMCO is short stocks???

 

I just saw El Arian saying things are pretty messed.

Tue, 11/29/2011 - 13:00 | 1925970 dirtbagger
dirtbagger's picture

Gross must have a large short position in sovereign and US bonds.  Still PIMPcoing his book.

Tue, 11/29/2011 - 13:45 | 1926189 earleflorida
earleflorida's picture

"so,... the puppet master's strings are `sewing signs of fraying, and unraveling - as threaded fatigue wears thin,... thus the anti-climatic n`th redux - 'the gross/fink condition audition' finale of a 'fbr/allianz bond',... now in it's final stage of 'carpel-tunnel-paralysis',  without even a shoeless, 'dutch-boot shoestring' for hope - damn,... this full recovery tied only in a gordian knot about the siamese neck of a bonifide two-headed shylock"

Tue, 11/29/2011 - 14:18 | 1926360 automato
automato's picture

I used to play poker in my youth but I 'retired' from the game after being thoroughly cheated by 2 cons speaking a foreign language to each other during the game. The moral of course is biblical in that you will never have trust among parties that exist at the 'Tower of Babel'. The EU must adopt a 'National Language' before any real trust will begin to emerge. It is elemental. You will always distrust someone speaking when you must rely on a third party to translate. Interpreters will invariably alter the text of the translation for fear of upsetting or for too many different motives to mention. They're screwed for the foreseeable future.

Tue, 11/29/2011 - 15:00 | 1926628 BlakeFelix
BlakeFelix's picture

Meh game the system if you can.  Not like Bill Gross who didn't play the game would get any headline time, or the game needed him playing to continue.  He'd be poor in a collapsing system, instead of rich in a collapsing system.  Using the system to get rich and then using your resulting fame to bitch about how stupid and broken the system is looks hypocritical, but it's still perhaps the best of bad alternatives.

Tue, 11/29/2011 - 18:00 | 1927545 Miles Kendig
Miles Kendig's picture

Bill Gross and Chauncey Gardiner both appreciate the situation...

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

Rather than attempting to avoid the inevatible in a race to the bottom [of the septic tank] it seems the first to embrace a full and complete clearing event will be the first to emerge from the winter of our own making.

Now all that's needed is a comptetent barber.  There is door number 1

http://www.youtube.com/watch?v=t8sNeozweTM

Door number 2

http://www.youtube.com/watch?v=Dq_0wPYFp9A&feature=results_main&playnext...

And, behind the washer

http://www.youtube.com/watch?v=JrEnEa3ZgUY

Door number 3

http://www.youtube.com/watch?v=I0mhX9hpq3g

Time to make a deal with Santa

http://www.youtube.com/watch?v=WKR6dNDvHYQ

Cheers Bill

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