The biggest bond fund manager on the planet likely had a bad day today and judging by his comments during the following Bloomberg TV interview, he is not too impressed with the current Fed head, who is "driving in a fog," or the front-runner to fill Ben's shoes, Yellen "is a Siamese twin in terms of policy... [preferring someone] who would emphasize Main Street as well as Wall Street - which has been the emphasis for the past three or four years." The mistake the Fed is making, Gross explains, "is blaming lower growth on fiscal austerity and expects towards the end of the year once that is gone, all of the sudden the economy will be growing at 3%," or more simply the error of their policy-making ways is "to think that is a cyclical as opposed to a structural problem in terms of our economy." The bottom-line is that Gross sees less Taper (due to disinflation) and warns "those who are selling treasuries in anticipation that the Fed will ease out of the market might be disappointed."
We have discussed the idea of a VaR shock (driven by Abe/Kuroda's loss of control) a number of times recently but as Saxo's Steen Jakobsen fears, reality is about to hit as the marginal cost of capital normalizes. The world, so far, has been kept in artificial equilibrium by the way quantitative easing (QE) and fiscal policies bring support and endless liquidity to the 20 percent of the economy that mostly comprises large and already profitable companies and banks with good credit and good political access. The premise for supporting these companies is based on the non-existent wealth effect which unfairly culminates in supporting the haves to the detriment of the have-nots. However, as Jakobsen notes below, things are rapidly changing; the recent increase in yields has happened despite no real improvement in the underlying data. The the next few days are potential major game changers – the bloated VaRs will make people hedge and over hedge, and the normalization process of rising risk premiums and higher real rates (higher yield plus lower inflation) will lead to more selling off of those trades that have "worked so far"... and increase volatility in their own right.
"While we are not likely to see a repeat of that type of [30Y bond] bull market any time soon, we also do not believe we are at the beginning of a bear market for bonds."
"We are concerned by the growing downside of zero-based money and QE policies – among them a worrisome distortion in asset pricing, the misallocation of capital and ultimately a dis-incentivizing of risk taking by corporations and investors."
"We believe caution is warranted not just for fixed income investors, but for investors in all risk assets; avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors"
Gross: Fed’s “Deep Throat” stops delevering for now. Markets await main man next week. Hilsenrath’s focus on policy rate VERY interesting.
— PIMCO (@PIMCO) June 14, 2013
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?
Bill Gross To Ben Bernanke: "It's Your Policies That Are Now Part Of The Problem Rather Than The Solution"Submitted by Tyler Durden on 06/04/2013 06:38 -0400
On practically every day of the past four years, we have said that it was the Fed's own policies that are causing the ever-deeper systemic weakness in the US (and now global with all central banks going "all in") economy, which in turn forces the Fed to intervene even more aggressively in an attempt to counteract, in turn generating ever more economic weakness, leading to even more intervention, which is why every incremental episode of QE is larger and longer, and why the economic baseline is ever lower in the most perverse feedback loop of the New Normal. Now, it is once again Bill Gross to catch up to Zero Hedge and conclude just this in his latest monthly letter: "It’s been five years Mr. Chairman and the real economy has not once over a 12-month period of time grown faster than 2.5%. Perhaps, in addition to a fiscally confused Washington, it’s your policies that may be now part of the problem rather than the solution. Perhaps the beating heart is pumping anemic, even destructively leukemic blood through the system. Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution." Which is why there simply is no way out as long as Bernanke stays in.
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