There's no way to sugarcoat the dismal performance of the precious metals in recent months. But a revisitation of the reasons for owning them reveals no cracks in the underlying thesis for doing so. In fact, there are a number of new compelling developments arguing that the long heartbreak for gold and silver holders will soon be over.
A month ago, Bill Gross stirred up a storm in rates with his tweet that the "Bull bond market was dead" which caught us by surprise because just in the preceding month, PIMCO's flagship Total Return Fund raised its allocation to government-related (read TSY) bonds to the highest in three years, with a net exposure of 40% of AUM, or about $117 billion. Of course, the data was backward looking so it was possible that the firm had changed its opinion entirely and in the following two weeks proceeded to purge its TSY holdings. It didn't. In fact, as of the May TRF holdings update, PIMCO's TSY holdings, which many expected to collapse, declined by a whopping... 2% of total from 40% (net of agency and swaps) to 38%. So much for the great Newport Beach rotation.
- Pimco Sees 60% Chance of Global Recession in Five Years (BBG)
- Global Tumult Grips Markets (WSJ)
- NSA Secrecy Prompts a Pushback (WSJ)
- ANA Scraps 787 Dreamliner Flight as Engine Fails to Start (BBG) - one of these days, though, it shall fly
- Kuroda’s April-Was-Enough Message Faces Markets Wanting More (BBG)
- S&P warns top US banks are still ‘too big to fail’ (FT)
- Democracy for $500 per plate (Reuters)
- Iran, the United States and 'the cup of poison' (Reuters)
- Japan grapples with lack of entrepreneurs (FT)
- Greece First Developed Market Cut to Emerging at MSCI (BBG)
- Asia's ticking time bonds; time to cut and run? (Reuters)
- Sony Outduels Microsoft in First PS4-Xbox One Skirmish (BBG)
Gross: Surveillance policy of Bush 42 “puts forward a false choice btw the liberties we cherish & the security we provide.” B. Obama 2007
— PIMCO (@PIMCO) June 9, 2013
The last couple of weeks have been very interesting. Remember that, certain regional differences aside, Japan has, for the past two-plus decades, been the global trendsetter in terms of macroeconomic deterioration and monetary policy. The West has been following Japan each step on the way – usually with a lag of about ten years or so, although it seems to be catching up of late. Now Japan is the first developed nation to go ‘all-in’, to implement a no-holds-barred money-printing regime to (supposedly) ‘stimulate’ the economy. We expect the West to follow soon. In fact, the UK is my prime candidate. Wait for Mr. Carney to start his new job and embrace ‘monetary activism’. Carnenomics anybody? But here is what is so interesting about recent events in Japan. At first, markets did exactly what the central bankers wanted them to do. They went up. But in May things took a remarkable and abrupt turn for the worse. In just eight trading days the Nikkei stock market index collapsed by 15%. And, importantly, all of this started with bonds selling off. Are markets beginning to realize that all these bubbles have to pop sometime and that sometime may as well be now? Are markets beginning to refuse to dance to the tune of the central bankers and their printing presses? Are central bankers losing control?
Some of my first memories of television are of a series called The Rocky and Bullwinkle Show, which was a witty combination of animated cartoons about the exploits of the title characters, Rocket "Rocky" J. Squirrel and Bullwinkle J. Moose and their nemeses, two Pottsylvanian nogoodniks spies, Boris Badenov and Natasha Fatale. The show was filled with current event commentary, political and social satire. The show was also filled with commentary on economic and market conditions that resonated with the parents watching the show while the kids focused on the cartoons. Each show ended with the narrator describing the current cliffhanger with a pair of related titles, usually with a bad pun intended. So let's adapt some of my favorite Rocky and Bullwinkle episode titles to modern day; we might see that there are some political and economic challenges that are timeless, as it appears we have been doing the same thing over and over for decades and expecting different results.
"QE detractors... see something quite different. They see QE as not responding to the collapse in the money multiplier but to some extent causing it. In this account QE – and the flatter yield curves that have resulted from it – has itself broken the monetary transmission mechanism, resulting in central banks pushing ever more liquidity on a limper and limper string. In this view, it is not inflation that’s at risk from QE, but rather, the health of the financial system. In this view, instead of central banks waiting for the money multiplier to rebound to old normal levels before QE is tapered or ended, central banks must taper or end QE first to induce the money multiplier and bank lending to increase."
Gross: What hath Kuroda wrought? JGB yields a bigger influence on Treasuries than tapering potential.
— PIMCO (@PIMCO) May 28, 2013
What is going to happen when the greatest economic bubble in the history of the world pops? The mainstream media never talks about that. They are much too busy covering the latest dogfights in Washington and what Justin Bieber has been up to. And most Americans seem to think that if the Dow keeps setting new all-time highs that everything must be okay. Sadly, that is not the case at all. Right now, the U.S. economy is exhibiting all of the classic symptoms of a bubble economy. What we are witnessing right now is the calm before the storm. Let us hope that it lasts for as long as possible so that we can have more time to prepare. Unfortunately, this bubble of false hope will not last forever. At some point it will end, and then the pain will begin.
We are now used to the daily dispensation of deep twitsight by Pimco's head. Today's installment does not disappoint: in under 140 characters, the bond kind breaks down the now thoroughly dis-proven Efficient Market Hypothesis for the "new normal" in which both alpha and beta are purely functions of virtual central bank printers. However, his view on what happens when said virtual ink runs out (or rather if) is well-known by all at this point. The only question is when.
Gross:Alpha is gr8ly a function of beta &the levered structurs that domin8 credit mkts. No beta? Skinnier alpha ahed 4 unsuspecting investrs
— PIMCO (@PIMCO) May 21, 2013
It is only logical that when one of the smarter people in finance warns that he "sees bubbles everywhere" that he should be roundly ignored by those who have no choice but to dance. Because Bernanke and company are still playing the music with the volume on Max, and if not for POMO there is always FOMO. However, if there is any doubt why this "rally is the most hated ever", here are some insights from the Bond King from an interview with Bloomberg TV earlier today: "We see bubbles everywhere, and that is not to be dramatic and not to suggest they will pop immediately. I just suggested in the bond market with a bubble in treasuries and bubble in narrow credit spreads and high-yield prices, that perhaps there is a significant distortion there. Having said that, it suggests that as long as the FED and Bank of Japan and other Central Banks keep writing checks and do not withdraw, then the bubble can be supported as in blowing bubbles. They are blowing bubbles. When that stops there will be repercussions. It doesn't mean something like 2008 but the potential end of the bull markets everywhere. Not just in the bond market but in the stock market as well and a developing one in the house market as well."
Gross: AP, IRS? Ask not what you can do for your country, ask what your country can do TO you.
— PIMCO (@PIMCO) May 16, 2013
When the head of the world's largest bond fund starts paraphrasing war-time phrases, you know nothing is what it seems...
Gross: Never have investors reached so high in price for so low a return. Never have investors stooped so low for so much risk.
— PIMCO (@PIMCO) May 14, 2013
It seems to us that this can only end one way and the fight on the beaches this time will be between economic reality and central-bank-inspired mass hypnosis.
The Bernanke Chicago speech became little more than a side show Friday. He did say the Fed was keeping a watchful eye on yield risk-taking given ZIRP. He’s a little late to that observation methinks.
Bill Gross Tweets "Bond Bull Market Dead" Even As PIMCO Loads Up On Most Government Bonds In Three YearsSubmitted by Tyler Durden on 05/10/2013 12:08 -0400
The blue line in the chart below? That's the total holdings of Government (cash and derivative) securities of PIMCO's flagship $293 billion Total Return Fund. At a net exposure of 40% of total fund AUM, or roughly $117, PIMCO has not been more bullish on Treasury and Agency securities since July 2010, when Gross was selling into the QE2 Jackson Hole preannouncement panic. If also is the first time since the summer of 2010 that the fund holds substantially more government-related securities than MBS. Why is this notable? Because moments ago, Gross used his now favorite public service distribution medium, twitter, to announced that "The secular 30-yr bull market in bonds likely ended 4/29/2013." Uhm. No.