Bill Gross: "No QE 3"

The latest soundbite from Bill Gross comes from the Morningstar fund conference, where he again repeated his conviction that there will be no QE3. Reuters reports: "Pimco co-chief investment officer Bill Gross said the Federal Reserve would not be able to start a third round of quantitative easing after the second round expires at the end of this month. The members of the central bank's open market committee are "balanced but divided," Gross, manager of the world's largest bond fund, said on Wednesday in a speech at the Morningstar fund conference. "It will be difficult to initiate a QE3." Instead, the Fed will try to keep interest rates low with its official statements, Gross said.  Gross's fund, the $243 billion Pimco Total Return Fund, has gained 3.24 percent so far this year, trailing 58 percent of similar funds, according to Morningstar data."

It is odd that Bill continues to stick to his guns in light of both the economic deterioration and the market realization that there will need to be a major drop in stocks for further easing. Ironically, Gross should realize that absent more easing, there will be continued transfer of capital from equities into bonds for the time being (thereby further impairing his, yes, short position), and with the world slowing down and global central bank tightening, a global re-recession (deep in the depression that started in December 2007) seems inevitable. The paradox is that absent QE3 to force a capital reallocation out of fixed income into stocks but mostly commodities, PIMCO's TRF will continue to be unprofitable (even more if the fund has a steepener position on as many have speculated). The only wildcard is if there is a tax repatriation holiday which we believe has about a 30-40% chance of passing in temporary lieu of QE3.

Nonetheless, if indeed Gross believes there is no QE3, his increasing UST short position may be precariously positioned. We expect to get an update of the TRF positioning over the next 48 hours. It should prove quite informative on what Gross thinks now (and we completely ignore the discussion of "who will buy US debt" in the absence of the Fed, which is an unresolver quandary we share with Gross).