Currently, central banks around the world are walking in lock step down a dangerous path of money creation. Led by the Federal Reserve and the Bank of Japan, economic policy is driven by the idea that printed money can be the true basis of growth. The result is an unprecedented global orgy of currency creation. The only holdout to this open ended commitment has been the hard money bias of the German-dominated European Central Bank (ECB). However, growing political pressure from around the world, and growing dissatisfaction among domestic voters have shaken, and perhaps cracked, the German resolve. While German capitulations in the past have been welcome occurrences, in this instance the world would be better served if the Germans could stick to their guns. However, it seems presciently, that the ECB is looking for ways around Germany's oppostion to outright monetization by securitizing SME loans and buying ABS directly on to their own balance sheet.
Gross: Dow hits 15,000 & PIMCO’s internal Corp & Hi Yield Index hits all-time yield lows. Thanks Chairman #Bernanke! Got any more?
— PIMCO (@PIMCO) May 7, 2013
Gross: World awash in money. Fed buys 85 billion per month. BOJ 75 billion. ECB hints at neg interest rates. Don’t buy – sell risk assets.
— PIMCO (@PIMCO) May 2, 2013
“… current policies come with a cost even as they act to magically float asset prices higher…, a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing." Bill Gross, PIMCO
The highlights from Bill Gross' monthly letter: "The past decade has proved that houses were merely homes and not ATM machines. They were not “good as money.” Likewise, the Fed’s modern day liquid wealth creations such as bonds and stocks may suffer a similar fate at a future bubbled price whether it be 1.50% for a 10-year Treasury or Dow 16,000.... if there are no spending cuts or asset price write-offs, then it’s hard to see how deficits and outstanding debt as a percentage of GDP can ever be reduced.... Current policies come with a cost even as they act to magically float asset prices higher, making many of them to appear “good as money”. And the take away: "PIMCO’s advice is to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond. While this Outlook has indeed claimed that Treasuries are money good but not “good money,” they are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate....a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing."
In his increasingly ubiquitous manner, the bond king has reduced his thesis to 140 characters, summed up in just two words... Sell Euros
Gross: Expect an ECB cut soon but will it lead to real growth? Doubtful. Euro needs to go down. Sell Euro.
— PIMCO (@PIMCO) April 23, 2013
It seems sometimes there is no need for a 300-page Powerpoint presentation.
"While I think this policy is fundamentally right, I think [austerity] has reached its limits," was EU President Barroso's firestarter comment yesterday. As the WSJ reports, the IMF also said last week that the bloc should ease back on austerity, while a number of governments outside the EU have made the same call, arguing that its belt-tightening is holding back the global economic recovery and could end up being self-defeating. Of course, the beggars are once again trying to be choosers as Spain's de Guindos pushes his agenda along this 'growth vs austerity' path, "What we are going to do now is strike a better balance between deficit reduction and economic growth," but it is the bagholders (or money-men) of Europe that has the last word. As we noted yesterday, Merkel's expectations are no more money without ceding sovereignty, this morning it is German MPs who are up in arms as Nobert Barthle condemns Barroso's statements on austerity and Hans Michelbach flatly rejects this path of no resistance as it "undermines fiscal consolidation efforts." Perhaps the most clear message was from Volker Wissing who added, "demanding more money or time would send a 'fatal' signal to financial markets on reforms." With German PMIs so bad this morning, we are reminded of Bill Blain's comment, that ultimately growth is about confidence - and right now, Europe is a very unhappy place.
"Tough Slog" or "The Unimaginable"
Gross: The world looks 4 a new Keynes but w/ hi deficits & 0% rates there is only a long tough slog ahead @ best & the unimaginable @ worst.
— PIMCO (@PIMCO) April 21, 2013
A Roundup of Opinions
The bond king is pissed:
GROSS: Fed’s secret Email list bothers no one it seems.I’ll give up my rant but remember it please.
— PIMCO (@PIMCO) April 11, 2013
Uninsured Deposits Could Be Used In Future Bank Failures Says Influential CEO Of Italy's Largest BankSubmitted by GoldCore on 04/05/2013 10:02 -0400
The CEO of Unicredit Federico Ghizzoni said yesterday that uninsured deposits could be used In future bank failures. He said that the savings which are not guaranteed by any protection or insurance could be used in the future to contribute to the rescue of banks who fail and that uninsured deposits could be used in future bank failures provided global policy makers agree on a common approach.
When wondering why AAPL disappoints once more on its next earnings release, please pull a Bill Gross and look in the mirror, dear broke consumer, because it is your fault. At least that is the spin by the CEO of France Telecom, who says that iPhone sales are now being threatened by, drumroll please, "frugal buyers." That's right: in France "frugal" is now a dirty word. Not socialism, not 75% taxes, not budget ministers charged with rooting out tax fraud and lying about their Swiss bank accounts, not movie legends who can't wait to get Russian passports - it's "frugality" that is at fault. Because how dare French consumers not load up on cheap, government subsidized credit card debt and splurge like good old Americans who can't wait to pledge their shotguns as collateral for clunkers, and who haven't paid their mortgage in years courtesy of pervasive debt forgiveness for deadbeats, spending on iCrap instead? The France Telecom CEO demands answers now!
Am I a great investor? No, not yet. To paraphrase Ernest Hemingway’s “Jake” in The Sun Also Rises, “wouldn’t it be pretty to think so?” But the thinking so and the reality are often miles apart. When looking in the mirror, the average human sees a six-plus or a seven reflection on a scale of one to ten. The big nose or weak chin is masked by brighter eyes or near picture perfect teeth. And when the public is consulted, the vocal compliments as opposed to the near silent/ whispered critiques are taken as a supermajority vote for good looks. So it is with investing, or any career that is exposed to the public eye. The brickbats come via the blogs and ambitious competitors, but the roses dominate one’s mental and even physical scrapbook. In addition to hope, it is how we survive day-to-day. We look at the man or woman in the mirror and see an image that is as distorted from reality as the one in a circus fun zone.
The underlying question in Bill Gross' latest monthly letter, built around Jeremy Stein's (in)famous speech earlier this month, is the following: "How do we know when irrational exuberance has unduly escalated asset values?" He then proceeds to provide a very politically correct answer, which is to be expected for the manager of the world's largest bond fund. Our answer is simpler: We know there is an irrational exuberance asset bubble, because the Fed is still in existence. Far simpler.