Bill Gross

A month ago, Zero Hedge first reported that Bill Gross had taken the stunning decision to bring his Treasury exposure from 12% to 0%: a move which many interpreted as just business, and not personal: after all Pimco had previously telegraphed its disgust with US paper, and was merely mitigating its exposure. This time, in another Zero Hedge first, we discover that it is no longer business for Bill - it has now become personal (and with an attendant cost of carry). In March, Pimco's flagship Total Return Fund (TRF) has now taken an active short position in US government debt: -3% on a Market Value basis (or $7.1 billion), and a whopping -18% on a Duration Weighted Exposure basis. And confirming just what PIMCO thinks of US-related paper is the fact that the world's largest "bond" fund now has cash, at a stunning $73 billion, or 31% of all assets, as its largest asset class on both a relative and absolute basis. We repeat: cash is more than PIMCO's holdings of Treasurys and Mortgage securities ($66 billion) combined. To paraphrase: in March PIMCO was dumping everything related to US rates (see chart below). This is the first net short position that PIMCO has had in Government-related debt since the Great Financial Crisis of 2008, and going positive in February of 2009 only after it became clear that the Fed would commence monetizing US debt one month later. This is the closest that Gross has come to making a political statement and is now without doubt putting his money where his mouth is. The only event that could possibly derail Gross' thinking is a huge market crash forcing a rush to Treasury safety. Alas, as has been made all too clear recently, US debt is no longer the safe haven it once was. Which begs the question: when will the TRF break out a "gold" asset holdings line item.

In a letter focusing on what has been well known to Zero Hedge readers for about two years now, Bill Gross' latest investment outlook does the usual attack of Beltway stupidity (as if Congress is in any way competent of making math-related decisions - they do what Wall Street - that's you Bill! - tell them to do, and you know it), emphasizing the impossible math of total US entitlement liabilities (on a net present value basis), which Gross estimates at $75 trillion. That Gross conclusion is predetermined from the onset is not surprising: "Unless entitlements are substantially reformed, I
am confident that this country will default on its debt; not in
conventional ways, but by picking the pocket of savers via a combination
of less observable, yet historically verifiable policies – inflation,
currency devaluation and low to negative real interest rates." Then again, that America is bankrupt is not really news to anyone. Neither is it news, that Gross, as we first reported, no longer has any US bonds to dispose of. What will be news is the inflection point at which Gross starts purchasing Treasuries once again. And after all with $220 billion in AUM in the Total Return Fund, what else will he do: hold on to cash? Buy Netflix? Then the only question will be how Gross spins the inevitable capitulation of the re-hypocrisy trade, validating that he, in a narrow sense, and PIMCO in a broad one, is perhaps the biggest cog in the very system that Bill spends so many hours writing letters about and complaining against. But yes, even that won't be all that surprising to us. After all, in this bizarro world absolutely everything is now priced in.

And many thought Bill Gross was only posturing when he said he is getting the hell out of dodge. Based on still to be publicly reported data by Pimco's flagship Total Return Fund, the world's largest bond fund, in the month of January, has taken its bond holdings to zero (and -14% on a Duration Weighted Exposure basis). The offset, not surprisingly, is cash. After sporting $28.6 billion in "government related" securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion (based on total TRF holdings of $236.9 billion as of February 28). This is the most cash the flagship fund has ever held, and the lowest amount in Treasury holdings since January 2009 before it was made clear that the Fed was going to adjust QE1 to include Treasurys in addition to Mortgage Backed Securities. PIMCO's Treasury holdings peaked in June 2010 at $147.4 billion and have declined consistently ever since. And while we expected that the spike in MBS holdings (at times on margin) was indicative of an expectation that QE3 would monetize mortgage backed securities, the ongoing decline in that asset class now leads us to believe that Bill Gross is now convinced there will be no QE3 at all, at least based on his just putting his money where his monthly pen is! And if Bill Gross, the most connected person to the upcoming actions by the Fed, believes there is no more quantitative easing, it is really time to get the hell out of dodge in all security classes - bonds, and most certainly, equities.

After serving as the inspiration for the Chairsatan's latest appellation with his February missive, Bill Gross now goes for the jugular with the $64,000 question: with "nearly 70% of the annualized issuance since the beginning of QE II
has been purchased by the Fed, with the balance absorbed by those old
standbys – the Chinese, Japanese and other reserve surplus sovereigns.
Basically, the recent game plan is as simple as the Ohio State Buckeyes’
“three yards and a cloud of dust” in the 1960s. When applied to the
Treasury market it translates to this: The Treasury issues bonds and the
Fed buys them. What could be simpler, and who’s to worry? This Sammy
Scheme as I’ve described it in recent Outlooks is as foolproof
as Ponzi and Madoff until… until… well, until it isn’t. Because like at
the end of a typical chain letter, the legitimate corollary question is –
Who will buy Treasuries when the Fed doesn’t?" Bingo, we have a winner. This is precisely the issue that Zero Hedge has been exposing over the past 6 months, and is the reason why the Fed is now locked in a QEasing corner from which there is no exit. To his credit, Gross attempts to provide an answer: "Someone
will buy them, and we at PIMCO may even be among them. The question
really is at what yield and what are the price repercussions if the
adjustments are significant... What I
would point out is that Treasury yields are perhaps 150 basis points or
1½% too low when viewed on a historical context and when compared with
expected nominal GDP growth of 5%." And the stunner: "Bond yields and stock prices are
resting on an artificial foundation of QE II credit that may or may not
lead to a successful private market handoff and stability in currency
and financial markets. 15% gratuities may lie ahead, but more than
likely there is a negative two-bit or even eight-bit tip lying on the
investment table. Like I did 45 years ago, PIMCO’s not sticking around
to see the waitress’s reaction." Translation: Pimco just issued a "sell" rating on everything.

"To rebalance debt loads and re-equitize financial institutions that should have known better, central banks and policymakers are taking money from one class of asset holders and giving it to another. A low or negative real interest rate for an “extended period of time” is the most devilish of all policy tools. And the asset class holder that it affects, or better yet, “infects,” is the small saver and institutions such as insurance companies and pension funds that hold long-term fixed income assets. It is anyone who holds bonds with coupons that cannot keep up with inflation or the depositor in a local bank who cumulatively holds trillions of dollars in time deposits that don’t earn a real rate of interest. This is the framework that has been created by modern-day policymakers who have innovated far beyond their biblical counterparts. To put it bluntly, they are robbing savers and taking money surreptitiously from longer-term asset holders who are incorrectly measuring future inflation." - Bill Gross

Yup ...

While the fact that PIMCO is not a big fan of Europe is not surprising, nor is it surprising that Bill is talking his BAB book, and is therefore bullish on the muni question (especially on a relative basis, in essence saying that the US Treasury is in the same insolvency boat as California), what is surprising is that Newportbeachian, at least superficially, appears honestly confused what happens in June when QE2 ends. Which is funny: Fed's Fisher earlier said that the central bank has reached its limit of asset purchases... barring unexpected shock. Which of course means completely expected to the Fed. And since the Fed has to continue monetizing all the deficit issuance, it has no choice but to continue QE2. The conclusion is that in April or May, something "unexpected" will happen to give the Fed ammo to continue monetizing. May 6 anniversary anyone?

Just headlines for now. And so we have gotten to the point where even the 'smart money' is publicly denouncing the global Bernanke put, and the world's central bank "white knights" in the form of China (whose real debt number is wrapped in boxes, mysteries and enigmas), and Japan (which has more debt as a % of GDP than any other developed country). Luckily both can afford to buy a little debt of some other Ponzi nation, and thus preserve their own trade surplus status quo for a few more months. In the meantime the world's biggest bond fund is implicitly saying that frontrunning the last recourse EUR backstops is too risky for him.

When Nassim Taleb and Marc Faber say that US government debt is a suicide investment, one can be allowed some skepticism. After all, they are likely just talking their book. On the other hand, when the manager of the world's biggest bond fund, whose flagship fund Treasury holdings amount to almost $80 billion goes on Bloomberg and says to "avoid dollar-denominated government debt" better known as US Treasuries, and instead recommends viewers invest in "stable" currencies like the Peso, the BRL or the CAD, then you know the bottom in bonds is in. So in addition to dumping fixed rate bonds (which means Pimco will again be able to buy on the cheap ahead of QE3, which as Larry Meyer has by now likely advised Pimco is a sure thing), Gross also told Bloomberg that his other two strategies are to buy floating rate debt (over fixed), and lastly recommend credit spreads over interest rate duration risk. For those who find something troubling with a $1 trillion fixed income manager talking down his investments, and are still wondering whether or not QE3 is coming, we suggest putting one and one together. And while at it, they should also consider that Pimco now holds over $100 billion in MBS: a notional amount last held just as QE1 was announced.

Yet another odd letter comes from under Bill Gross' pen, in which he continues to bash "The Ben Bernank's" Ponzi policies ("policymakers at the Fed write trillions of dollars’ worth of checks under the guise of quantitative easing, a policy which takes Charles Ponzi one step further by purchasing the government’s own paper in a last gasp effort to support asset prices") while making it all too clear that the only beneficiaries are "Newport Beach mega-millionaires." Has Warren Buffet-style self-flagellation become trendy among the billionaire jet set? Lastly, Gross makes it clear that the American economy is doomed in the long-run absent a "policy revolution" in DC: "Unless developed economies learn to compete the old-fashioned way – by making more goods and making them better – the smart money will continue to move offshore to Asia, Brazil and other developing economies, both in asset and in currency space. The United States in short, needs to make things not paper, but that is not likely unless we see a policy revolution in Washington DC. In the meantime, our unemployed will continue to fill out forms and stand in line." And the Newport-beach mega-millionaires will continue to front-run the Fed. Nothing ever changes indeed.

Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky, the Wall Street Journal and Hyman Minsky agree ...

"It seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame."....The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next. You are doing what you have to do, and it may or may not work. But either way it will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment. - Bill Gross

Who cares what Benny and the Inkjets blink in morse code when you have the one and only Bill Gross. As we said last month, the best and only necessary and sufficient tell to decide what the Fed will do on November 3 is to keep track of the Total Return Fund's composition. Today, TRS just released its updated September holdings, and for all those hoping to see that Pimco Billy is betting the farm on QE2 - that's a bingo. Pimco has just increased its MBS holdings to the highest since July 2009, when Gross was already dumping MBS on the tail end of QE1. The biggest tell however, is that just like before QE1 abd QE Lite were announced, Bill has once again gone on margin, reducing his net cash exposure from $5 billion to ($7.6) billion. And keep in mind this is September: we are certain that once the October results come out, a few weeks after QE2 is effective, TRS will have a material margin position of more than $20 billion, and will have pumped up its MBS holdings up to $100 billion. So now that we are certain that Gross just telegraphed that QE2 is imminent, that leaves us with two questions: 1) why MBS and not USTs? Is Gross saying that Bernanke will once again be forced to come out and buy MBS in addition to USTs? or 2) did Gross just get screwed on his doubling down MBS? With fraudclosure forcing such reputable MBS managers as Gundlach to claim that it will have no impact on their business model, we are also certain that the entire Fashion Island campus is sweating bullets currently. If the entire MBS model is indeed unwound as some speculate, this could well be the end of PIMCO (and how poetic that would be). Yet these are considerations for the future. For now - anyone who may have had an ounce of doubt as to Bernanke's FOMC announcement intentions, can now put it away.

A week ago we wondered how it was that Pimco's Bill Gross, who is now rumored to be Larry Summers replacement as the QE infinity whisperer on the right side of President Obama, had an advance look into how the Fed will adjust its GDP forecast ahead of the general public. Today, we got the first half of the response: in a speech to the European Economics and Financial Centre in London, Minneapolis Fed president Narayana Kocherlakota has just lowered his GDP forecast from 3% to 2.5%. And most importantly, the Fed President's speech in decidedly QE-negative: our favorite quote on QE from a Fed president so far: "The Fed cannot literally eliminate the exposure of the economy to the risk of fluctuations in the real interest rate. It can only shift that risk among people in the economy. So, where did that risk go when the Fed bought the long-term bond? The answer is to taxpayers." Thank you Fed.

Some very troubling observations from Bill Gross. In summary: "What the U.S. economy needs to do in order to return to the “old” normal is to recreate nominal GDP growth of 5%, the majority of which likely comes from inflation. Inflation is the classic “coin shaving” technique of government since the Roman Empire. In modern parlance, you print money faster than required, pray that the private sector will spend it to generate investment and consumption, and then worry about the consequences in a later decade. Ditto for deficits and fiscal policy. It’s that prayer, however, which the financial markets are now doubting, resembling circumstances which in part are reminiscent of the lost decades in Japan since the early 1990s. If the private sector – through undue caution and braking demographic influences –refuses to take the bait, the reflationary trap will never snap shut. Investors will likely not know whether the mouse has grabbed for the cheese for several years forward...The most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living. Stan Druckenmiller is leaving, and with good reason. A future of low investment returns, and a heap of trouble for those expecting more, is what lies ahead."