Bill Gross

All you need to read.

The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.

By the time Operation Twist (1) ends in just over 40 days time, on June 30, Fed Chairman Ben Bernanke, according to his previously announced "loose" target, will hope to have extended the average maturity of all bonds in the System Open Market Account (SOMA) to a record of roughly 100 months from 75 month at the onset of the program in October 2011. After all the sole purpose of Twist was to load up the Fed's portfolio with duration, forcing the rest of the market to shift its investing curve even further into risky assets, as the Fed will have effectively onboarded the bulk of securities in the 3-4% return interval. Now as we showed back in early April, hopes that the Fed will simply continue with Operation Twist 2 after the end of "season" 1, as suggested by some clueless "access journalists" who merely relay what they are told by higher powers, are completely misguided as the Fed simply does not have enough short-term securities (1-3 years) to sell, and would have at most 2 months of inventory for a continued sterilized operation. Which however, does not mean that the Fed can not be quietly ramping up its operations in the ongoing Twisting episode. Because as Stone McCarthy demonstrates, as of the past week, the Fed has already surpassed its 100 month maturity target of 100 months, and is at 102.82 months as of May 16. And this is with 6 more weeks of Twist to go: at the current rate of SOMA purchases, the Fed will have a total portfolio average maturity of just shy of 110 months by June 30! Which means that contrary to market expectations of what the Fed's own stated goal may have been, Bernanke will have gobbled up nearly 40% more long-dated Flow relative to estimates! In other words, Ben does not need to do a full blown Operation Twist 2 episode: by the time Twist 1 is over, he will have attained nearly 40% of the goals of the next potential sterilized operation.

Not many changes in this month's Total Return Fund (PIMCO) flagship fund update: Bill Gross kept his MBS exposure at 53%, while lowering his net margin cash position from -23% to -18%, courtesy of a decline in Emerging Markets exposure from 10% to 7%. Exposure to all other products remained relatively flat. The one major difference is that TRF AUM rose from $252.5 billion to $258.7 billion, a $6 billion inflow in one month, and an all time high for the fund. As a result, the proportional exposure to MBS rose to $137 billion from $134 billion in absolute notional: also an all time record. Despite recent jawboning by both good and bad Fed cops, Gross is not wavering and is certain that when QE comes, and it will, it will not be some sterilized intervention (which is impossible as the Fed no longer has short-term bonds to sell), but outright MBS/QE, most likely in a 5/3 ratio. Additionally, we also learned that the effective duration of the TRF portfolio slumped to 4.61 years, the lowest since July 2011, when Gross was convinced America was going to hell. This one is somewhat confusing although we attribute the duration crunch to the ongoing surge in MBS holdings, and to a repositioning toward short-dated TSY paper.

All you need to read and some more.

The only relevant section from a just released note by Jan Hatzius titled "Still Dreary" (guess what he is referring to), is the following: "we have stuck with our forecast of some additional monetary easing at the June 19-20 FOMC meeting for now, despite the less-than-encouraging noises from Fed officials in recent weeks. However, it is a close call, and we worry about a re-run of the 2010 and 2011 experience—the last two times Fed officials decided to let a purchase program lapse without having put a successor program in place. In both cases, the economy slowed and financial conditions tightened to a degree that pulled them back into the market before long. It is easy to see how this could happen again, given the renewed turmoil in Europe and the possibility that US markets will ratchet up their concerns about the impending fiscal cliff in the run up to the election. In such an uncertain environment, taking out a bit more insurance still looks like the sensible choice for US monetary policymakers." Replace "US monetary policymakers" with "banker bonuses" and you get the picture. And here is our free tip to Goldman: the Fed has finally understood that in order to surprise the market with more easing it has to, gasp, surprise the market with more easing (and banks obviously have to play along and all act like they don't expect more easing, wink wink). Don't worry Jan - Bernanke knows the game plan and will not leave you hanging. However, as has been constantly repeated, there first has to be a deflationary scare before any announcement: such as oil crumbling, gold plunging, and stocks tumbling. Kinda like today. Who whouda think that Greece would serve the role of Lehman... over and over and over. In the meantime keep an eye on Bill Gross holdings of MBS securities when the April update is announced shortly- we fully expect a new all time record high, not to mention an imminent Hilsenrath Op-Ed suddenly hinting that, forget Twist, the Fed is now outright contemplating full blown MBS and UST LSAPs all over again. Because this time it will be different.

Bill Gross & PIMCO's newly created ETF (BOND) and Jeffrey Gundlach's total return fund (DBLTX) are battling the Fed and the mainstream media's strict adherence to the Dow Infinity theorem.

PIMCO's Bill Gross spent a longer-than-soundbite period discussing QE3, the chance of a US double-dip, and Europe's ongoing dysfunction with Trish Regan on Bloomberg Television this afternoon. Given more than his typically limited-to-ten-second thoughts some other media outlets appear to prefer, the old-new-normal-bond-king believes the Fed will resist another round of quantitative easing in the short-term but "if unemployment begins to rise for two-to-three months then QE3 is back on". Noting that investors should focus on nominal GDP growth tomorrow, he goes on to dismiss the idea that the US can decouple from a troubled Europe pointing the political dysfunction between the Germans and the rest as greater than the polarity between Democrats and Republicans here at home. Preferring to play a slightly levered long bet on low rates holding for a longer-period, he like MBS (as we have discussed in the past) but does not see the 10Y yield dropping precipitously from here though he does echo our thoughts entirely in his view of the 'flow' being more critical than the 'stock' when it comes to the Fed's balance sheet and hence the June end-of-Twist may be a volatile period for all asset classes.

"In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!" is how PIMCO's El-Erian introduces the game-theoretic catastrophe that is potentially occurring around us. In a lecture to the St.Louis Fed, the moustachioed maestro of monetary munificence states "let me say right here that the analysis will suggest that central banks can no longer – indeed, should no longer – carry the bulk of the policy burden" and "it is a recognition of the declining effectiveness of central banks’ tools in countering deleveraging forces amid impediments to growth that dominate the outlook. It is also about the growing risk of collateral damage and unintended circumstances." It appears that we have reached the legitimate point of – and the need for – much greater debate on whether the benefits of such unusual central bank activism sufficiently justify the costs and risks. This is not an issue of central banks’ desire to do good in a world facing an “unusually uncertain” outlook. Rather, it relates to questions about diminishing returns and the eroding potency of the current policy stances. The question is will investors remain "numb and sedated…. by the money sloshing around the system?" or will "the welfare of millions in the United States, if not billions of people around the world, will have suffered greatly if central banks end up in the unpleasant position of having to clean up after a parade of advanced nations that headed straight into a global recession and a disorderly debt deflation." Of course, it is a rhetorical question.

So much for the endless string of "Jobless Claims in US fall to lowest since 2008" propaganda. First of all, just as we predict every week with 100% accuracy, last week's "decline" from a revised 363K to 357K was revised, and instead it surged from 357K to a revised 367K. So much for the spin. More importantly, the current weekly claims number exploded to 380K, on expectations of 355K - the highest print since January, and the biggest claim miss in a year! And also just as predicted, the "economic weakness" period to butter up the country for the NEW QE begins. Don't be surprised as claims surge to close to 400K in the next few weeks in advance of an epic BLS miss next month, all to be blamed on the "warm weather", "Chinese new year", "Sumatra earthquake" and "Bush" of course, it never happens just because, in time for the FOMC's June meeting to set the stage for MBS LSAP, just as Bill Gross has been expecting all along. 

The trend continues: as has pointed out here every month for the past five months, Pimco's Bill Gross continues to layer into the "NEW QE" trade, only this time he is making it more clear than ever that he is certain that the Fed will have no choice but to monetize Mortgage Backed Securities. Indeed, in March the firm added another 100 bps in its MBS exposure, bringing the total to 54% of total, or a record $134 billion of the fund's $253 billion in AUM. And while before Gross would buy MBS and TSYs pari passu, that is no longer the case. In fact in March, Gross dumped the most Treasurys since February 2011, cutting his net exposure from 38% to 32%, and likely is in part or whole responsible for the big bond dump in the middle of March, now long forgotten (that or he merely piggybacked on the negative sentiment: April holdings will be indicative of that). Other notable shifts: Gross continues to sell European sovereign exposure, with Non-US Development holdings down to 6%, the lowest since April 2011, and surprisingly even cutting Investment Grade holdings to just 14%, the lowest since October 2008: is Gross smelling a bond bubble (in both IG and HY) and is getting out while the getting is good? Sure looks like it.

With the first quarter of 2012 just about in the books, Nic Colas (of ConvergEx) looks at how the Exchange Traded Fund 'Class of 2012' has done in terms of asset raising to date. There have been 82 new ETFs listed thus far for the year and they have collectively gathered $1.1 billion in new assets through Wednesday’s close of business. While 63% of those funds have been equity-focused, fully 67% of the asset growth for the year has flowed into fixed income products. Just over half the total money invested in these new funds has had two destinations: the iShares Barclays U.S. Treasury Bond Fund (symbol GOVT, with $297 million in flows) and Pimco’s Total Return ETF (symbol TRXT, with $267 million in flows). The standout new equity funds of 2012 in terms of flows are all iShares products – Global Gold Miners (symbol: RING), India Index (symbol: INDA) and World Index (symbol: URTH). Bottom line: even with the continuous innovations of the ETF space, investors are still targeting international and fixed income exposure, a continuation of last year’s risk-averse trends and while 'ETFs destabilize markets' might be the prevailing group-think, this quarter’s money flows into newly launched exchange traded products reveals a strong 'Risk Off' investment bias. Interestingly, the correlation between inception-to-date performance and money flows is essentially zero.

Three months ago, this site was the first to discuss the impact of abnormally high temperatures on "better than expected" economic data, which the mainstream media in its perpetual permabullish bias attributed to economic "growth", and not even to $1.3 trillion in ECB liquidity, which today even the ECB's Constancio admitted was nothing but QE: "The purpose of the European Central Bank's two three-year longer-term refinancing operations was to address banks' short-term funding issues and "nothing else." "The sole aim of the LTRO was to cater to the funding stress of euro area banks in general," Constancio said at a colloquium on macro-prudential regulation here. "It never crossed our minds that we were solving the sovereign debt crisis" with these measures. Hence QE, albeit masked by worthless collateral exchange to make the naive Germans believe the ECB was not outright printing money. It was. Now that the 'economy', and by that we mean the stock market of course, is finally turning over, the topic of the weather will start being far more prominently featured, as there will have to be a validation to unleash QE at either the April or the June FOMC meeting (something which the Chairman hinted at on Monday, and which Bill Gross has been saying for months). Why blame it on the weather of course. It is in this context that we show the latest Goldman Sachs economic outlook piece from Zach Pandl who now states that "unseasonably warm temperatures have lifted the level of nonfarm payrolls by 70,000-100,000 as of February." Call it erroneous seasonal adjustments (as we have for the past two months), call it a trigger happy BLS, or just call it people leaving their home more than if there was 6 feet of snow outside, the point is that now up to 100,000 jobs will have to be "given back." Which in turn means that next Friday's NFP forecast of +213K may just end up being as low as 113K, with the print coming just in time for the Chairman to commence warming up the printers, and soon enough to where more QE will give the president the sufficient bounce in stocks he needs to mask the debt ceiling breach in September.

First it was Bob Janjuah throwing in the towel in the face of central planning, now we get the same sense from Bill Gross who in his latest letter once again laments the forced transfer of risk from the private to the public sector: "The game as we all have known it appears to be over... moving for the moment from private to public balance sheets, but even there facing investor and political limits. Actually global financial markets are only selectively delevering. What delevering there is, is most visible with household balance sheets in the U.S. and Euroland peripheral sovereigns like Greece." Gross' long-term view is well-known - inflation is coming: "The total amount of debt however is daunting and continued credit expansion will produce accelerating global inflation and slower growth in PIMCO’s most likely outcome." The primary reason for Pimco's pessimism, which is nothing new, is that in a world of deleveraging there will be no packets of leverage within the primary traditional source of cheap credit-money growth: financial firms. So what is a fund manager to do? Why find their own Steve McQueen'ian Great Escape from Financial Repression of course. " it is your duty to try to escape today’s repression. Your living conditions are OK for now – the food and in this case the returns are good – but they aren’t enough to get you what you need to cover liabilities. You need to think of an escape route that gets you back home yet at the same time doesn’t get you killed in the process. You need a Great Escape to deliver in this financial repressive world." In the meantime Gross advises readers to do just what we have been saying for years: buy commodities and real (non-dilutable) assets: "Commodities and real assets become ascendant, certainly in relative terms, as we by necessity delever or lever less." As for the endgame: "Is a systemic implosion still possible in 2012 as opposed to 2008? It is, but we will likely face much more monetary and credit inflation before the balloon pops. Until then, you should budget for “safe carry” to help pay your bills. The bunker portfolio lies further ahead."