Bill Gross

When we first reported on Bill Gross' massive surge in duration and accelerated purchase of Mortgage Backed Securities a week ago, we said, "That's either what is called betting one's farm on Operation Twist, or, betting one's farm that the next thing to be purchased by the Fed in QE3 or QE4 depending on how one keeps count, will be Mortgage Backed Securities." It was the letter. Confirmation that Bill once again frontran the Fed comes courtesy of Daniel Tarullo who in a speech at Columbia University, talking about the labor market of all things, just said the following: "I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009 in order to provide more support to mortgage lending and housing markets." And there you go: watch as the market rips on the expectation that the US will bail out China all over again. Oh wait, at this point China couldn't care less what happens to the GSEs stack. So unfortunately as can be expected, this is nothing but yet another bailout of US banks, which lately have been buying up MBS like crazy (Gross is not the only one with the hotline), and expecting to flip right back to Brian Sack: after all something has to be done to save the poor things from a total pancaking of the Treasury curve.

By now it is no surprise that Bill Gross has not exactly "caught the inflection points" in the market in the past year. Of recent note, as Zero Hedge first reported three days ago, in September he massively extended the duration of his holdings in an attempt to catch up with Operation Twist just in time for the 30 Year to have its biggest drop in quite a while. Which may explain why he has released a letter to investors titled, simply enough, "Mea Culpa" in which he essentially apologizes for underperforming the market, when he says "I am having a bad year". That's fine, and so are your clients. But what is far more troubling Bill, is that your corporate parent, Germany's Allianz, as is now well known is the entity pursuing the conversion of the EFSF into a multi-trillion "insurance" fund to backstop even greater trillions of corporate and sovereign fixed income exposure. Please tell us Bill that this is not your doing: that it is not your "influence" that has been upstreamed to corporate, and is forcing Europe's taxpayers to foot the bill for your, and others', "bad year." Because while everyone can make a mistake, those of us who are not too big to fail, read manage $1.2 trillion fixed income portfolios, get punished for said mistake. It is far more reprehensible when you come crawling to the same taxpayer and engage in the same activity you so loudly complain about in every single letter (there is a reason why the broader population has grown to loathe Warren Buffett). Anyway, with that aside, here is what Gross sees as happening in the future: "So where do we go from here? Our internal growth forecast for developed economies is now 0% over the coming several quarters and the portfolio more accurately reflects this posture." Well, while Pimco may have been spot on 10 days ago with this assessment, the subsequent 10%+ short covering squeeze has forced a dramatic sell off in the 10 Year (the 10s30s has flatten substantially in recent days). And naturally, in this world in which effect implies cause, the moves in the market now are taken to represent an avoidance of the recession. Granted that makes absolutely no sense, but such is bizarro world. So our only question is - did Gross just jinx the recession out of existence?

Two things stand out in the just released September holdings update of Pimco's flagship Total Return Fund: first, what appears to be a record cash short of 19% of the fund's total unchanged AUM of $245 billion, doubling the previous short of -9%. The incremental cash was used almost entirely to purchase Mortgage Backed Securities, which jumped to 38% of total from 32%, even as the fund kept its government exposure virtually flat at 22%( 21% previously). Yet where it gets downright surreal is the duration and maturity exposure of the fund. Duration has gone from a record low 3.6 in March to 4.56 in July to 6.27 in August to... well, just look at the black line on the chart below.

Everyone hoping that the last quarter of the year would start on an optimistic note was disappointed following not just the continuation of last week's manipulations now that hedge funds have their marching orders from their LPs, who are certainly seeking to redeem tens if not hundreds of billions in capital, but also from Bill Gross' monthly letter who in "Six Pac(k)in'" writes that "there are no double-digit investment returns anywhere in sight for owners of financial assets. Bonds, stocks and real estate are in fact overvalued because of near zero percent interest rates and a developed world growth rate closer to 0 than the 3 – 4% historical norms. There is only a New Normal economy at best and a global recession at worst to look forward to in future years." And pontificating on a theme started many months ago by Zero Hedge with observations on the relative contribution to income from labor and capital (a modern day warning to Marxists), Gross warns that "both labor and capital suffer as a deleveraging household sector in the throes of a jobless recovery refuses – if only through fear and consumptive exhaustion – to play their historic role in the capitalistic system. This “labor trap” phenomenon – in which consumers stop spending out of fear of unemployment or perhaps negative real wages, shrinking home prices or an overall loss of faith in the American Dream – is what markets or “capital” should now begin to recognize" His conclusion: "A modern day, Budweiser-drinking Karl Marx might have put it this way: “Laborers of the world, unite – you have only your six-packs to lose.” He might also have added, “Investors/policymakers of the world wake up – you’re killing the proletariat goose that lays your golden eggs." More or less reminds us of the warning above the gates of hell in Dante's Inferno...

After all the hollow rhetoric and scapegoating over the past few days about S&Ps "treasonous act" from Friday, we were delighted to finally hear one person say the truth. "I have been criticizing them and Moody's and Fitch for a long time. Moody's and Fitch are on the "S" list. I think S&P finally demonstrated some spin. S&P finally got it right. They spoke to a dysfunctional political system and deficits as far as the eye can see. They are enforcing some discipline. My hat is off to them." The person in question: PIMCO's Bill Gross, who says what everyone is thinking but afraid to say it for fear it would insult our oh so sensitive, and so incompetent, administration. Because if criticizing S&P over being far too late to the subprime party is justified, at least they have the guts (unlike those tapeworms from Moody's) to finally step against the tide of conventional sycophantic wisdom and tell everyone even a modest part of the whole truth. If that is not the first step toward penitence, then nothing is. And yes, America's real credit rating at the current level of deficit accumulation most certainly does not begin with the letter A, or B or even C for that matter. Because what America is doing is heading straight for default, however not by officially filing in the Southern District of New York, but by terminally hobbling its own currency in hopes of stimulating rampant inflation thereby cutting its debt load through devaluation. A sad side effect of that of course is the wipe out of its own middle class as well. But all is fair in love and preserving the wealth of the status quo.

In his latest letter, Kings of the Wild Frontier, crushes the optimism of all those, roughly 4 altogether in the entire world whose combined IQ barely breaks into triple digit territory, who believe that the debt ceiling "compromise" does anything at all for US spending patterns, weather it is for total marketable debt, or the $66 trillion in NPV of future liabilities. Gross, however, does show us the 5 ways (well, 4 plus default) that the "debt man walking", aka Uncle Sam and his tens of trillions of future liabilities, plans to rob from you: dear taxpayer, in order to minimize the present value of these unmanageable future liabilities. To wit:

1. Balance the budget and/or grow out of it
2. Unexpected inflation
3. Currency depreciation
4. Financial repression via low/negative real interest rates

All of these guarantee that investor pocketbooks will be dramatically affected... Adversely. Let's dig in...

Just out from Bill Gross:

A few weeks ago we pointed out what may be the most troubling (and Marxist) observation in America's labor arena, namely that the labor's share of national income has dropped to the lowest in history as a record number of Americans now focus on wealth creation through assets (i.e. owners of capital) instead of labor. In his just released latest letter (below) Bill Gross piggybacks on this observation in what is one of the most scathing notes blasting the traditional of higher education, and in essence claiming that college, as means of perpetuating a broken employment status quo whcih redirect labor to a now-expiring Wall Street labor model, is now worthless: "The past
several decades have witnessed an erosion of our manufacturing base in
exchange for a reliance on wealth creation via financial assets. Now,
as that road approaches a dead-end cul-de-sac via interest rates that
can go no lower, we are left untrained, underinvested and overindebted
relative to our global competitors. The precipitating
cause of our structural employment break is both internal neglect and
external competition. Blame us. Blame them. There’s plenty of blame to
go around." And why college graduates have only a 6 digit loan to look forward to: "American citizens and its universities have experienced an ivy-laden ivory tower for the past half century. Students, however, can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace." And some very bad news for the communists in the White House and the chimpanzees in the San Francisco Fed who continue to believe that unemployment is anything but structural: "The “golden” days are over, and it’s time our school and jobs “daze” comes to an end to be replaced by programs that do more than mimic failed establishment policies favoring Wall as opposed to Main Street."

Bill Gross released a very troubling tweet earlier:

Why is it odd? Because as David Rosenberg predicted two weeks ago when he expected that Operation Twist could be coming back with the Fed "capping" the 10 Year, Bill Gross, who has Larry "Fed Expert Network" Meyer in his ear and thus knows better than most what is coming, is predicting some "Twisting" though not at the 10 Year mark, but at the very short end. This is very disturbing. Because as we suggested at the end of May, QE3 will in reality be Operation Twist 2...

The latest soundbite from Bill Gross comes from the Morningstar fund conference, where he again repeated his conviction that there will be no QE3. Reuters reports: "Pimco co-chief investment officer Bill Gross said the Federal Reserve would not be able to start a third round of quantitative easing after the second round expires at the end of this month. The members of the central bank's open market committee are "balanced but divided," Gross, manager of the world's largest bond fund, said on Wednesday in a speech at the Morningstar fund conference. "It will be difficult to initiate a QE3." Instead, the Fed will try to keep interest rates low with its official statements, Gross said. Gross's fund, the $243 billion Pimco Total Return Fund, has gained 3.24 percent so far this year, trailing 58 percent of similar funds, according to Morningstar data."

Recently Bill Gross appeared on CNBC stating that contrary to what some "blog" had said, the firm was not short bonds. This provoked said "blog" to pen a response (actually two) to this somewhat misleading statement, which we equated to someone claiming they are long x million in cash exposure offset by y billion in synthetic. Today, when interviewed by Bloomberg TVs' Tom Keene, Gross declined to refuse he was short treasuries (in fact, ignored the topic entirely), merely saying the following: “We're not overweight Treasuries. We're certainly underweight Treasuries, but that does not mean we don't own lots of other bonds...It does not mean as well that we're not a little bit shy in terms of duration." And once again the bottom line, and what it is really all about: "We’re having a good year...so don't cry for Pimco." Simply said, Gross is concerned by what traditionally skittish fund investors will think about the fund manager being correct (yes, Gross is correct to be short bonds, especially in the long-run) but being late. That is understandable. But making statement such as Pimco is not short market, and especially duration equivalent exposure, that is both misleading and condescending. Far more from the Pimco boss in the full interview.

In the funniest piece of news today, we have Bill Gross accusing a "blogger" of spreading misinformation that Pimco, and especially the firm's Total Return Fund is short Treasurys, in order to defend himself from CNBC that he is underperforming the market in the current bond rally (somehow Roswell flying saucers got mixed up too). While it is unfortunate that Gross will actually not man up and tell the truth (and yes, you can be off by a month or a year in what is a correct call Bill - there is no shame in that, and you certainly don't have to defend your view to a bunch of teleprompter reading CNBC marionettes). Well, guess what: PIMCO is short Treasury, as disclosed by both Market Value and Duration Weighted Exposure. And while one can hide, if one so desires for disgruntled LP purposes, behind semantics, and Gross can say he is not notionally short cash Treasurys, he most certainly has a sizable synthetic short exposure. Those who actually wish to do the forensic analysis on the April TRF portfolio, will not that that his duration of the various sectors shows he is selling some long dated swaps/swaptions to obtain his negative US Govt exposure given his market value of govt holdings was -9,628 MM, dollar duration was -189,340 resulting in an avg duration of 19.7 yrs. And while HY exposure has been moving out the maturity spectrum as well, from 2.6 yrs to 3.0 yrs to 3.4 yrs, his cash has grown shorter from 5.6 yrs to 4.3 yrs to 4.0 yrs over the past 3 months. Perhaps next time anyone interviewing Gross will ask something more substantial than textbook "finance for retards/CNBC anchors" questions and demand an answer from the bond titan just how many hundreds of billions in UST short equivalent eurodollar notionals he has on his books? And while we wish we had an updated TRF holding (the last one is as of December 31, 2010), even using even stale data, we find that at the end of 2010 TRF had $608.3 billion in Net Futures held SHORT (link), and $588 billion in Eurodollar positions, which is precisely where his marginal synthetic rate bias/exposure is contained. Yes. This is a short equivalent position.

From Reuters, quoting Bill Gross, who previously did not believe in another round of QE:

PIMCO'S GROSS SAYS WILL CHANGE HIS MIND ON SHORTING US TREASURIES IF THERE IS POTENTIAL FOR ANOTHER RECESSION

And of course, another recession will mean more QE, which means more debt monetization, which means that naturally, the first and last buyer for Treasury bonds, the Fed, will be there for ever and ever, which means more fiat printing, which means $5+ trillion in Fed "assets", which means more inflation expectations, etc, etc.

In his latest just released monthly letter, Bill Gross continues to explain why those expecting a cover of PIMCO's short treasury exposure will be disappointed for at least one more month: "Although we have warned for
several years of the deteriorating creditworthiness of America’s AAA
rating, our de minimis Treasury positions had less to do with much more
immediate issues than America’s balance sheet prospects. We are highly
sensitive to the pocket-picking policies that governments in general
deploy to right the ship." This time the symbol for the US (and global) economy, and specifically artificially low interest rates is a "tanker" analogy: " While the global
financial tanker was on automatic pilot, we had changed course well in
advance and it has been relatively smooth sailing since." Needless to say, Gross is convinced said ship is on a collision course. Ergo the title of this month's piece: "The Caine Mutiny." As usual, it is the 'Treserve' that is at fault for doing everything in its power (selling treasury puts?) to keep rates artificially low, a move which Pimco not surprisingly not in favor of: "holding Treasuries at
these yield levels for an extended period of time represents an
abdication of responsibility." Yet Gross does not advocate an outright mutiny, but renewed vigilance: "PIMCO advocates not so much a mutiny but a renewed vigilance on this new ship, stressing bond market “safe spread” alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies." Bottom line: "The
Treasury market is on a collision course with financial repression and
it is time to adjust your rudder to starboard to get home safely." Undoubtedly the usual response will be that Gross is just being unjustly alarmist. That is, until he is proven 100% correct.