PIMCO

The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.

PIMCO vs GARY SHILLING - ROUND 1

When Mr. Market ultimately becomes disenchanted with the fiscal excesses of the sovereign deadbeats, he can express his ire most energetically. When the current bond bubble here in the US ultimately bursts, as it must, it's going to be a bloodbath.  Of course, there is much, much more at stake to coming to the correct answer on the recovery, or lack thereof, than that. For instance, poor economies make for poor reelection odds for political incumbents. And when it comes to maintaining a civil society, the lack of jobs inherent in poor economies often leads to a breakdown in civility. On that note, overall unemployment in Spain is now running at depression levels of almost 25%, and youth unemployment at close to 50%. How long do you think it will be before the citizens of this prominent member of the PIIGS will refuse being led to the slaughter and start taking out their anger on the swine (governmental and private) seen as bearing some responsibility for the malaise? Meanwhile, back here in the United States, the commander-in-chief is striding around the deck of the ship of state trying to look like the right man for the job in the upcoming election, despite the gaping hole of unemployment just under the economic water line. His future prospects are very much entangled with this question of recovery.

So, what's it going to be? Recovery… no recovery… or worse, maybe even a crash?

Billionaire investor George Soros significantly increased his shares in the SPDR Gold Trust in the first quarter. Soros Fund Management nearly quadrupled its investment in the largest exchange-traded gold fund (GLD) to 319,550 shares - compared with 85,450 shares at the end of the fourth quarter. John Paulson maintained his large stake, the ETF’s largest stake and other large and respected institutional buyers were PIMCO and the Teacher Retirement System of Texas. Paulson, 56, who became a billionaire in 2007 by betting against the U.S. subprime mortgage market, told clients in February that gold is a good long term investment, serving as protection against currency debasement, rising inflation and a possible breakup of the euro. Eric Mindich’s Eton Park Capital also bought  739,117 shares in the SPDR Gold Trust during the first quarter. The New York-based fund held no shares of the exchange-traded product as of December 31. Overall holdings in the SPDR Trust rose just over 8% in the first quarter, after a 2% gain in Q4 2011.

Not many changes in this month's Total Return Fund (PIMCO) flagship fund update: Bill Gross kept his MBS exposure at 53%, while lowering his net margin cash position from -23% to -18%, courtesy of a decline in Emerging Markets exposure from 10% to 7%. Exposure to all other products remained relatively flat. The one major difference is that TRF AUM rose from $252.5 billion to $258.7 billion, a $6 billion inflow in one month, and an all time high for the fund. As a result, the proportional exposure to MBS rose to $137 billion from $134 billion in absolute notional: also an all time record. Despite recent jawboning by both good and bad Fed cops, Gross is not wavering and is certain that when QE comes, and it will, it will not be some sterilized intervention (which is impossible as the Fed no longer has short-term bonds to sell), but outright MBS/QE, most likely in a 5/3 ratio. Additionally, we also learned that the effective duration of the TRF portfolio slumped to 4.61 years, the lowest since July 2011, when Gross was convinced America was going to hell. This one is somewhat confusing although we attribute the duration crunch to the ongoing surge in MBS holdings, and to a repositioning toward short-dated TSY paper.

The only relevant section from a just released note by Jan Hatzius titled "Still Dreary" (guess what he is referring to), is the following: "we have stuck with our forecast of some additional monetary easing at the June 19-20 FOMC meeting for now, despite the less-than-encouraging noises from Fed officials in recent weeks. However, it is a close call, and we worry about a re-run of the 2010 and 2011 experience—the last two times Fed officials decided to let a purchase program lapse without having put a successor program in place. In both cases, the economy slowed and financial conditions tightened to a degree that pulled them back into the market before long. It is easy to see how this could happen again, given the renewed turmoil in Europe and the possibility that US markets will ratchet up their concerns about the impending fiscal cliff in the run up to the election. In such an uncertain environment, taking out a bit more insurance still looks like the sensible choice for US monetary policymakers." Replace "US monetary policymakers" with "banker bonuses" and you get the picture. And here is our free tip to Goldman: the Fed has finally understood that in order to surprise the market with more easing it has to, gasp, surprise the market with more easing (and banks obviously have to play along and all act like they don't expect more easing, wink wink). Don't worry Jan - Bernanke knows the game plan and will not leave you hanging. However, as has been constantly repeated, there first has to be a deflationary scare before any announcement: such as oil crumbling, gold plunging, and stocks tumbling. Kinda like today. Who whouda think that Greece would serve the role of Lehman... over and over and over. In the meantime keep an eye on Bill Gross holdings of MBS securities when the April update is announced shortly- we fully expect a new all time record high, not to mention an imminent Hilsenrath Op-Ed suddenly hinting that, forget Twist, the Fed is now outright contemplating full blown MBS and UST LSAPs all over again. Because this time it will be different.

Simultaneous Global Printing Is Failing Miserably

PIMCO's Bill Gross spent a longer-than-soundbite period discussing QE3, the chance of a US double-dip, and Europe's ongoing dysfunction with Trish Regan on Bloomberg Television this afternoon. Given more than his typically limited-to-ten-second thoughts some other media outlets appear to prefer, the old-new-normal-bond-king believes the Fed will resist another round of quantitative easing in the short-term but "if unemployment begins to rise for two-to-three months then QE3 is back on". Noting that investors should focus on nominal GDP growth tomorrow, he goes on to dismiss the idea that the US can decouple from a troubled Europe pointing the political dysfunction between the Germans and the rest as greater than the polarity between Democrats and Republicans here at home. Preferring to play a slightly levered long bet on low rates holding for a longer-period, he like MBS (as we have discussed in the past) but does not see the 10Y yield dropping precipitously from here though he does echo our thoughts entirely in his view of the 'flow' being more critical than the 'stock' when it comes to the Fed's balance sheet and hence the June end-of-Twist may be a volatile period for all asset classes.

Sampling several investment banks' opinions on what to expect out of today's FOMC decision in a few hours, one would be left with the impression that absolutely nothing will happen. Not surprisingly, this is what the official party line reps and warrants as well, as telegraphed by that faithful mouthpiece, Jon Hilsenrath. And yet if the Fed has finally understood that its role is only effective if it is surprising, this gives all us all the opportunity to not only doubt what the media and the sellside wants us to expect, but to naturally fade Goldman - one of the best trades in the past three years - who says: "We expect no clarity from Wednesday's FOMC statement and press conference on additional monetary easing. Fed officials will not close the door but are also unlikely to provide a clear hint of further action. Our forecast of additional easing hinges not on what Fed officials say this week, but on our expectation of continued weakness in the economic data." Of course it is possible that the Fed is merely staying true to its recent creed of being honest and transparent and telegraphing policy from miles away. And is thus forced until the market is actually driven by actual macro data instead of who buys how many gizmos using student loans. Or not. Because when in doubt, always ask i) what would Goldman Sachs sell and ii) what would PIMCO buy. The two are rarely both wrong at the same time.

The ECB has found its hands tied: if it continues to monetize aggressively, inflation will surge and Germany will either leave the Euro or at the very least make life very, very difficult for the ECB and those EU members asking for bailouts.

After all, doing this would score MAJOR political points for both Merkel and Weidmann who have both come under fire for revelations that the Bundesbank has in fact put Germany on the hook for over €2 trillion via various back-door deals.

Japanese Finance Minister said an IMF funding increase to USD 400bln is "coming into sight", and that he expects the BRIC nations to offer funds to the IMF at the appropriate time. The finance minister sees funding figures to be released as early as tomorrow. (Sources) The IMF looks set to reach or pass that target, with USD 320bln secured yesterday and many of the largest emerging economies still to contribute. ECB’s Knot and EU’s Rehn have said IMF commitments may have to be up to USD 500bln, and expects China to boost resources.  Brazil’s finance minister has said his country is still not ready to give numbers on their IMF contribution. The Indian finance minister has said he will take time to provide an answer to the funding question for the IMF. China also remains undecided on an increased IMF contribution.

Low trade volume is sucking the fuel from the global economy

The trend continues: as has pointed out here every month for the past five months, Pimco's Bill Gross continues to layer into the "NEW QE" trade, only this time he is making it more clear than ever that he is certain that the Fed will have no choice but to monetize Mortgage Backed Securities. Indeed, in March the firm added another 100 bps in its MBS exposure, bringing the total to 54% of total, or a record $134 billion of the fund's $253 billion in AUM. And while before Gross would buy MBS and TSYs pari passu, that is no longer the case. In fact in March, Gross dumped the most Treasurys since February 2011, cutting his net exposure from 38% to 32%, and likely is in part or whole responsible for the big bond dump in the middle of March, now long forgotten (that or he merely piggybacked on the negative sentiment: April holdings will be indicative of that). Other notable shifts: Gross continues to sell European sovereign exposure, with Non-US Development holdings down to 6%, the lowest since April 2011, and surprisingly even cutting Investment Grade holdings to just 14%, the lowest since October 2008: is Gross smelling a bond bubble (in both IG and HY) and is getting out while the getting is good? Sure looks like it.

I continue to see articles in the media claiming that Europe’s problems are solved. Either the folks writing these articles can’t do simple math, or they don’t bother actually reading any of the political news coming out of Europe.