PIMCO

The world is awash in contradiction with stocks rising to new highs as interest rates reflect a slowing economy. It is an upside down world according to PIMCO's Mohamed El-Erian. As Lance Roberts annotates, the moustaced maestro explains individuals are both excited and anxious. They are excited by the rally in the markets as they see their portfolios increase in values but at the same timed overwhelmingly concerned about the economic future. It is a world with an enormous contrast between the markets and the real economy. That is the world we are navigating and it is incredibly unusual. This is why it is an unloved rally. His discussion at the recent Strategic Investment Conference is about a simple framework to reconcile these issues. The long term view matters greatly - but the short term matters also.

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."

When Spanish bonds traded at yields above 7% last Summer, the world's central banks went into a whirlwind to proclaim that these levels did not represent reality (in spite of the depression-era style economic data the nation was spewing). Fast forward nine months, the data is worse and getting worserer but yields - through the guiding hand of Draghi, the self-referential buying of domestic banks, and the BoJ's risk-is-no-object reach for anything non-JPY denominated - have crushed to 4.3% pre-crisis levels. Meanwhile, a few thousand miles south, the nation of Rwanda is issuing its first international debt today at a 7% yield (to the Japanese we are sure) as over 90% of the world's sovereign bond markets are at or near all-time low yields. But, the smart money is leaving, as PIMCO notes, "this central bank-inspired rally has made the markets expensive... relative to fundamentals"

Since reams of Powerpoint presentations, or pages of PDFs seem to pass most 'investors' by these days, PIMCO's Bill Gross' new chosen media appears to be Twitter's 140 characters. He is on a roll of soundbite superbness. Today's headline suggests just four little words we should all be aware of: "Bubbles are getting Bubbly."

Gross: #Yen carry trade driving all asset prices higher. Bubbles getting more bubbly. Will #QEs produce growth?

— PIMCO (@PIMCO) April 24, 2013

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.

"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

Friday saw panic selling in gold as the metal broke $1,500 in a free-fall move. Is this a sign of “risk on” or something more sinister? Perhaps Cyprus is a major seller or there’s a large margin call somewhere. Some even assert some countries with debt problems are selling gold to raise capital to finance their country’s needs.

Following much anticipation that today's 30 Year would go off like gangbusters, and with the When Issued ripping to 2.990% at 1 PM, the final result was essentially a dud, with the high yield pricing at 2.998%, leading to a rather substantial tail of 0.8 bps. The internals were rather poor as well, with the Bid to Cover coming in well below the 12 TTM average of 2.62 at 2.49, the Directs taking down 19.2%, Dealers left with their usual average of 49.3%, but with Indirects, which is precisely where the Japanese bid would have materialized, ending with just 31.4% of the take down, well below the 42% in March, below the TTM of 35.4% and the lowest since October's 26.5%. So what gives? And was the surge in the USDJPY ahead of the auction unwarranted? It would appear so. But where are the Japanese FI outflows going then? Simple - it seems that at least one group of buyers has ignored Pimco and BlackRock's advice, and instead has allocated all their "rotating" cash into high yielding Italian and Spanish bonds to capitalize on the EURJPY carry trade. What can possibly go wrong? We will let Mr. Jon Corzine explain that to Mrs. Watanabe...

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

Wondering why the Italian bond market has been stable and "improving" in recent months, with yields relentlessly dropping as a mysterious bidder keeps waving it all in despite the complete political void in the government and what may be months of uncertainty for the country, and despite both PIMCO and BlackRock recently announcing they are taking a pass on the blue light special offered by BTPs? Simple. As the Bank of Italy reported earlier today, total holdings of Italian bonds by Italian banks hit an all time record of €351.6 billion in February.

As the holiday weekend starts and quarter ends, what better time is there to go out on a new S&P 500 Index high? The new high was in the cards.

One thing bulls should worry about is a report that pension plans may rebalance as much as $29-35 billion out of stocks to bonds and other assets with the quarter end. We’ll see how that works this coming week.

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.