Bill Gross

"Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad or an economist."--Kenneth Boulding

While sounding just a tad preachy in his February newsletter, Bill Gross' latest summary piece on the economy, on the Fed's forray into infinite ZIRP, into maturity transformation, and the lack thereof, on the Fed's massive blunder in treating the liquidity trap, but most importantly on what the transition from a levering to delevering global economy means, is a must read. First: on the fatal flaw in the Fed's plan: "when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street." And secondly, here is why the party is over: "Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time." Yet most troubling is that even Gross, a long-time member of the status quo, now sees what has been obvious only to fringe blogs for years: "Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper." Let that sink in for a second, and let it further sink in what happens when $1.3 trillion Pimco decides to open a gold fund. Physical preferably...

All you need to read.

You've just crossed over...

And like that, this year's Davos World Economic Forum has come and gone, having achieved nothing except allowing a bunch of representatives of the status quo to feel even more self-righteous and important in the world's biggest annual circle jerk, in which fawning journalists ask the questions their cue cards demand, knowing too well their jobs are on the line if they ask anything even remotely provocative (and with the price of admission in the tens of thousands of dollars, one wonders just how many Excel classes these "journalists" could have taken as an alternative, in order to actually do some original math-based research, yes, shocking concept, to present to their readers instead of merely regurgitating others' talking points). Bloomberg TV has compiled the best video summary of the highly irrelevant soundbites by economists, CEOs and other people of transitory power, who provide absolutely no original insight into anything, and in which ironically it is Mexico's Felipe Calderon who summarizes it best: "we have a timebomb the bomb is in Europe and we are working together to deactivate it before it explodes over all of us." Lastly, we provide a quick glimpse into current and previous guests of Davos to show just how utterly worthless is the "braintrust" of those present.

The real outlook of Monetary Easing vs Treasury Yields

Are the markets already front running a potential announcement of a third round of Quantitative Easing (QE 3)?   Maybe so.  We had expected QE3 at the end of last summer as the economy weakened substantially from the impact of the Japanese earthquake/debt ceiling debate/Eurozone crisis trifecta.  However, with political pressures running high due to the raging battle in Congress raising the debt ceiling there was little support from the public for further intervention.  Furthermore, with inflation, as measured by CPI, already outside of the Fed's comfort zone, the Fed opted to institute "Operation Twist" (O.T.) instead. With the Euro-Crisis on the broiler, another debt ceiling debate approaching, the U.S. economy struggling along as Europe slips into a recession and corporate earnings being revised down there are plenty of reasons for stocks to decline in price.  Yet, they have continued to inch up.  With short interest on stocks having plunged in recent weeks it certainly sounds like the markets are betting on something happening and soon.

Just like in yesterday's weakish 10 Year auction, the thunder from Tuesday's strong 3 Year has all but gone. In today's issuance of $13 billion in 30 year reopening, the results were anything but strong, with the bond pricing at 2.985%, a a 3 bps tail compared to the 2.955% When Issued. Furthermore, the BTC was a big drop compared to last auction's record 2.98, coming at 2.60, compared to 2.68 in the last 12 auctions. And with Indirects taking down just 31.9%, and Directs sliding to a one year low of 7.2%, it means that it was the Fed, via the Primary Dealer repo mechanism that once again took down a whopping 60.9% of the entire auction. Needless to say, the bond market response was not pleasant, but was to be expected as the Fed continues to artificially massage the curve in any and every way possible. Most hilarious, however, was the tweet sent out by Bill Gross in the minutes after the auction which we present below: it speaks for itself.

All you need to read.

When back in December we observed that Pimco's Total Return Fund (which contrary to rumors actually closed the year at $244 billion, or $4 billion more than in the beginning) had a $60 billion margin "cash" position, the proceeds of which were used to purchase a near record $103 billion in Mortgage Backed Securities we thought this is about as far as Bill Gross would go betting the ranch on QE3, and specifically that kind of QE3 that assumes at least a big portion is used to buys MBS (the same instrument that SocGen believes, along with gold, will benefit the most from an imminent QE3 announcement). It turns out we were wrong, and in December the fund doubled down on its QE3 all in bet, by "borrowing" even more cash, or a record $78 billion, using the proceeds to buy even more MBS, as well as Treasurys, which hit a combined 31% of the TRF's holdings. In other words, between MBS and USTs, Pimco holds a whopping 79% of total, mostly in very long duration exposure. In fact, this combination of long duration and pre-QE exposure has not been seen at PIMCO since late 2008, early 2009, meaning that as many banks have been suggesting, Gross is convinced that the Fed will announce if not outright QE3 this January, then at least intimate it is coming.

Can Austerity Work?

Fed and/or ECB intervention is coming: whether it is called LSAP, QE x, Nominal GDP targetting, selling Treasury puts, or what have you. A regime that now exists only by central planning intervention, by definition requires ever more central planning intervention to sustain itself, let alone grow further. Furthermore, the banks not only want QE, they need QE. And since central banks serve other banks, not the people it is only a matter of time. Don't believe us? Read anything written by Bill Gross in the past year. So what to do ahead of QE3? Luckily, SocGen has released a complete cheat sheet of not only the dates of the next steps, but what to buy and what to sell ahead of the announcement. In short - one should buy Mortgage Backed Securities, in order to "simply buy MBS before the Fed" - something Bill Gross knows too well and has been hoarding MBS relentlessly as a result, as reported here. More importantly - one should buy gold. Lots of it as "USD debasement restarts." You didn't think the Fed will allow US corporate earnings - the only thing keeping the market alive - to be crushed with a EURUSD that will soon go under 1.20, now did you? And as for crude going to $250 - yes, it may cause huge headaches for regular folks but for banks it means record bonuses, and as a reminder, the Fed works for the banks, not the people, pardon neo-feudal debt slaves...

In his latest letter, Bill Gross, obviously for his own reasons, essentially channels Zero Hedge, and repeats everything we have been saying over the past 3 years. We'll take that as a compliment. Next thing you know he will convert the TRF into a gold-only physical fund in anticipation of the wrong-end of the "fat tail" hitting reality head on at full speed, and sending the entire house of centrally planned cards crashing down. "How many ways can you say “it’s different this time?” There’s “abnormal,” “subnormal,” “paranormal” and of course “new normal.” Mohamed El-Erian’s awakening phrase of several years past has virtually been adopted into the lexicon these days, but now it has an almost antiquated vapor to it that reflected calmer seas in 2011 as opposed to the possibility of a perfect storm in 2012. The New Normal as PIMCO and other economists would describe it was a world of muted western growth, high unemployment and relatively orderly delevering. Now we appear to be morphing into a world with much fatter tails, bordering on bimodal. It’s as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012...For 2012, in the face of a delevering zero-bound interest rate world, investors must lower return expectations. 2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable. Adjust your expectations, prepare for bimodal outcomes. It is different this time and will continue to be for a number of years. The New Normal is “Sub,” “Ab,” “Para” and then some. The financial markets and global economies are at great risk."