Four years after he left the firm, PIMCO is hiring back Paul McCulley to save its brand and provide just enough ammo to defend its bullish/bearish positions now that El-Erian's disagreements have left. Unlike some firms who believe that 'chief economists' must be full-time - adding value each and every day with their extrapolations of every macro tick - McCulley will spend up to 100 days per year working in PIMCO offices. Bearing in mind McCulley's previous lazer-like focus on Capex (which is dismally flat still) and his belief in a "W" shaped recovery not a "U" or a "V", we suspect the bearded prognosticator will have a bullish bond bias - especially as the trillions of ticking time bombs in the shadow banking system remain as incendiary as ever.
Treasuries are still cheap. The FOMC statement says that “even after employment and inflation are near mandate-consistent levels” the committee may keep “the target federal funds rate below levels” viewed as normal in the longer run. Whenever we read this, we think of Desi Arnaz screaming, “Lucy! You got some ‘splainin’ to do!” Treasury prices do not care if Q4 is around 4%. Economic data matters little for the time being. Prices are being driven more by positions, relative value, and future Fed policy. Markets know the Fed is ending QE. What it really wants to know is the terminal Fed Funds level in the new ‘world order’. In the meantime, stay long.
Last month it was a tribute to his cat. This month, the manager of the world's largest bond fund discusses sneezing: "A sneeze is, to be candid, sort of half erotic, a release of pressure that feels oh so good either before or just after the Achoo! The air, along with 100,000 germs, comes shooting out of your nose faster than a race car at the Indy 500. It feels sooooo good that people used to sneeze on purpose." He also discusses the aftermath: "The old saying goes that when the U.S. economy sneezes, the world catches cold. That still seems to be true enough, although Chinese influenza is gaining in importance. If both sneezed at the same time then instead of “God bless you” perhaps someone would cry out “God have mercy.” We’re not there yet, although in this period of high leverage it’s important to realize that the price of money and the servicing cost of that leverage are critical for a healthy economy. " He also talks about some other things, mostly revolving around long-term rates of return assumptions and what those mean for investors.
We realize the future for blogging was bright, but this bright? Moments ago, Bloomberg View, Bloomberg's in house blogging operation, announced that El-Erian had joined it as a columnist. And just like that Mohamed has his own unedited venue in which to spill all the dirt on his former employer.
- Three dead in shootings at Kansas Jewish centers; man to face charges (WSJ)
- Sanctions Blowback in Russia Targets Burgers to Movies (BBG)
- Deadly Virus's Spread Raises Alarms in Mideast (WSJ)
- China group buys $6bn Glencore Peru copper mine (BBG)
- Iran lodges complaint against United States over U.N. envoy ban (Reuters)
- Russian assets down sharply on Ukraine conflict fears (Reuters)
- ECB comments knock euro, but not much (Reuters)
- World-Leading $25 Hourly Wage Roils Swiss Businesses (BBG)
Futures are treading water once more now that Ukraine has stormed to center stage from the backburner after everyone was convinced Putin would let the situation cool off after annexing Crimea. Guess not. Adding the renewed geopolitical jitters to what has already been a beta stock bloodbath into a holiday shortened week assures some high volatility fireworks. Cautious sentiment was observed over in Asia (Nikkei 225 -0.36%) amid renewed fears that geopolitical tensions in Ukraine will flare up again following reports of exchange gunfire with pro-Russian militants. This sentiment carried over into the European session with stocks lower across the board (Eurostoxx50 -0.71%). EUR is lower after ECB’s Draghi said any further strengthening of the EUR would warrant further action by the ECB, including non-standard measures such as quantitative easing - it is amazing how frequently and often the Virtu algos still fall for Draghi's jawboning trick which has now become all too clear will never be implemented and certainly not if he keeps talking about it daily, as he does.
Add a 70s style moustache (and a red Ferrari) and BusinessWeek's Bill Gross cover is the spitting image of Tom Selleck's infamous investigator... but the analogies run deeper as the PIMCO front-man continues to search for his next steps and figure out the past
*GROSS ON EL-ERIAN: "I THOUGHT I KNEW HIM BETTER"
*GROSS SAYS FOR MOST PART, "I'M THE PERSON I THOUGHT I WAS"
Very philosophical - but as the cover asks "is he really such a jerk?"
The main overnight event, which we commented on previously, was China's trade data which was a disaster. March numbers turned out to be well below market consensus with exports falling 6.6% YoY (vs +4.8% expected) and imports falling 11.3% YoY (vs +3.9% expected). The underperformance of imports caused the trade balance to spike to $7.7bn (vs -$23bn in Feb). Pricing on the Greek 5-year syndicated bond is due later today, with the final size of the bond boosted to EUR 3bln from EUR 2.5bln as order books exceed EUR 20bln (equating to a rough bid/cover ratio of over 6) as the final yield is set at 4.75% (well below the 5.3% finance ministry target and well above our "the world is a bunch of idiots managing other people's money" 3% target). Ireland sold EUR 1bln in 10y bonds, marking the third successful return to the bond market since the bailout. Also of note, this morning saw the release of lower than expected French CPI data, underpinning fears of potential deflation in the Eurozone.
- Nato chief defends eastern advance (FT)
- Russia looks east as it seeks to rebalance trade interests (FT)
- Plane from Guinea briefly quarantined in Paris after Ebola scare (AFP)
- US attacks Japan’s stance on Trans-Pacific Partnership (FT)
- Thank you IMF: Ukraine PM says will stick to austerity despite Moscow pressure (Reuters)
- U.S. Army seeks motive for Fort Hood shooting rampage (Reuters)
- China Slowdown Adds to Emerging-Market Growth Hurdles, IMF Says (BBG)
- Top investors press Allianz to step up oversight of Pimco (Reuters)
- U.S. to Evaluate Role in Mideast Peace Process, John Kerry Says (WSJ)
- Scientists dismiss claims that Yellowstone volcano about to erupt (Reuters)
- Ukraine detains 12 riot police on suspicion of 'mass murder' (Reuters) - on CIA orders?
Bill Gross lost "Bob" this week. The death of his cat sparked some longer-term reflection on the hubris of risk-takers, the mirage of magnificent performance, and the ongoing debate in bond markets - extend duration (increase interest rate risk) or reduce quality (increase credit risk). As the PIMCO boss explains, a Bull Market almost guarantees good looking Sharpe ratios and makes risk takers compared to their indices (or Treasury Bills) look good as well. The lesson to be learned from this longer-term history is that risk was rewarded even when volatility or sleepless nights were factored into the equation. But that was then, and now is now.
- Russia says expects answers on NATO troops in eastern Europe (Reuters)
- Dealers say GM customer anxiety rising, sales may take hit (Reuters)
- China Unveils Mini-Stimulus Measure (WSJ)
- Londoners Priced Out of Housing Blame Foreigners (BBG)
- New earthquake in Chile prompts tsunami alerts (Reuters)
- Ukrainian Billionaire Charged by U.S. With Bribe Scheme (BBG)
- Chinese Investments in U.S. Commercial Real Estate Surges (BBG)
- Old Math Casts Doubt on Accuracy of Oil Reserve Estimates (BBG)
- US secretly created 'Cuban Twitter' to stir unrest (AP)
- Why did Yellen use criminals in her employment case studies? Hilsenrath explainz (Hilsenrath)
- GM avoided defective switch redesign in 2005 to save a dollar each (Reuters)
- Xuzhou Zhongsen Said to Avert Bond Default on Guarantor Aid (BBG)
- France's New Finance Minister Faces Fiscal Challenge (WSJ)
- The magic is gone: Draghi’s Attempt to Talk Down Euro Lost on Traders (BBG)
- Another John Kerry smashing success: U.S. Gambit on Mideast Peace Talks Falters (WSJ)
- Combat-Ready China Military Seen as Xi’s Goal in Graft Battle (BBG)
- Huge earthquake off Chile's north coast triggers tsunami (Reuters)
- Pressure rises on Gross as investors pull $3.1 billion from Pimco's flagship fund (Reuters)
Following yesterday's uninspiring 2 Year bond auction, today's 5 Year issuance of $35 billion was a whopper. Because while it was known well in advance that today's closing high yield of 1.715%, which priced through the When Issued of 1.732% by 1.7 bps, would be the highest since May 2011. However, the stunners were all within the internals. First, the Bid To Cover of 2.99 was the highest since September 2012, and an abrupt turn in the recent general downward trend in BTCs - who would have thunk that all it took for greater interest in US paper was higher yields . But it was the takedown where the real shockers lay.
In the WSJ’s February 24th exposé of the turmoil at the helm of Pimco, we saw a curious bit about tension at “the Beach” increasing in the summer of 2013. During this period, according to the Journal, conflict between then co-CIOs Bill Gross and Mohamed E-Erian became apparent to staff, and Gross restricted trading at the firm. We wanted to see what insights a quantitative analysis of Pimco Total Return Fund (PTTRX) could offer about the summer and Total Return’s recent performance, a topic of increasing scrutiny amongst the investment community.
The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008. Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon. Actually, the Fed’s bubble blindness stems from even worse than servility. The problem is an irredeemably flawed monetary doctrine that tracks, targets and aims to goose Keynesian GDP flows using the crude tools of central banking. Not surprisingly, therefore, our monetary central planners are always, well, surprised, when financial fire storms break-out. Even now, after more than a half-dozen collapses since the Greenspan era of Bubble Finance incepted in 1987, they don’t recognize that it is they who are carrying what amounts to monetary gas cans.