Pimco’s Bill Gross Says Treasury Market Is Overvalued

This is just one more bubble and the dollar will be bad toilet paper very soon.

Related article: Interview: Peter Schiff still grim on future


Dec. 10 (Bloomberg) — Bill Gross, manager of the world’s biggest bond fund, said the U.S. Treasury market is overvalued, with sectors such as bills taking on “bubble” like characteristics.

“Treasuries have some bubble characteristics, certainly the Treasury bill does,” Pacific Investment Management Co.’s Gross said in a Bloomberg Television interview from Newport Beach, California. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.”

The Treasury sold $30 billion of four-week bills yesterday through an auction at zero percent, while three-month bill rates turned negative for the first time since the U.S. began selling the debt in 1929.

Gross expects the Federal Reserve to cut its target rate to 0.5 percent when policy makers meet next week and will likely signal that interest rates will remain low for a “considerable” period of time.

“There’s some risk” for the dollar to weaken, said Gross. “Certainly the government and the Fed cannot continue to talk about trillions of dollars of expansion of the Fed’s balance sheet without the risk of the dollar going south. It is fair to say other economies are doing much the same thing. The dollar doesn’t have to go south if all the economies reflate at the same time.”

Gross’ Total Return Fund lost 2.1 percent in the three months through Sept. 30, compared with a 0.49 percent slump by the benchmark it uses to measure performance, according to Pimco’s Web site. Mortgage securities and investment-grade corporate debt accounted for 93 percent of its holdings.

Pimco, a unit of Munich-based Allianz SE, has about $790 billion in assets under management.

To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.

Last Updated: December 10, 2008 14:44 EST
By Kathleen Hays and Michael J. Moore

Source: Bloomberg

1 thought on “Pimco’s Bill Gross Says Treasury Market Is Overvalued”

  1. Ahlgren Predicts Dollar Failure and Collapse of U.S. Treasuries Bubble

    Markets and Investing
    December 27, 2008 — 9:51 AM

    In his award-winning, critically acclaimed novel Discipline (Greenleaf Book Group Press, 2007), Paco Ahlgren predicts a Soviet-style breakup of the United States, resulting from the simultaneous collapse of equity markets, the failure of the dollar, and its ultimate replacement by competing private global currencies.

    I read a pre-release copy of Discipline in late 2006, and I enjoyed many aspects of the book — most notably the way the author subtly weaves everything from subatomic physics, to drug-abuse, to finance, to eastern philosophy into a heart-pounding thriller. But I also remember chuckling at the preposterousness of the failure of the dollar and the demise of the Unites States.

    I’m not laughing anymore.

    Mr. Ahlgren is a senior analyst at The Copernican, LLC, and counts himself as a proud proponent of the “Austrian School” of economics. Recently, I was able to catch up with him in Austin, Texas for a conversation about his book, and the chilling events he predicted which seem to be unfolding around us.

    TB: Although you published Discipline in mid-2007, you actually finished the first draft in early 2001, is that right?

    PA: Yes.

    TB: And did that version contain the dollar-failure scenario for which Discipline has gained so much attention lately?

    PA: It did.

    TB: But the book is fiction. Did you know your predictions were going to be so accurate?

    PA: I’ve been elbow-deep in economics for two decades now, and if you read the work of Hayek, Mises, or Murray Rothbard, among so many others — and you really get it — it’s hard not to see how the dollar is in a long-term decay. The United States is essentially broke.

    TB: So you knew, when you wrote it, that you were seeing the future. That is, after all, a big part of Discipline…

    PA: [Laughs] Look, first of all, the dollar hasn’t totally failed yet. I mean, we have a long way to go — this is a long-term process. Maybe the Fed and the Treasury can work some magic and fix it all, like they have in the past, but I obviously don’t think so this time.

    But the other important part of this is that Discipline is supposed to be a thriller that introduces people to some fairly complex topics they might otherwise ignore. It’s supposed to educate them to the possibility that their government is corrupt, and that their currency is almost certainly headed for failure. I could have written non-fiction piece, but Discipline is for the masses. It’s supposed to be something that reveals to as many people as possible what is going on. So the “thriller” aspect shouldn’t be compared to the predictive, philosophical/economic aspect. Discipline, as a story, is just a vehicle.

    TB: And are people getting that?

    PA: I think so. Unfortunately, I’m also getting some pretty crazy feedback from the fringe — people who believe that the characters are real.

    TB: Are they?

    PA: [Smiles]

    TB: The dollar had a pretty good rally for about five or six months, the last half of 2008. Were you worried that you might have made a mistake about its direction?

    PA: No. The recent rally in the dollar — which I believe has turned, by the way — was caused by massive deleveraging. I mean, every single asset-class collapsed this year as companies and individuals scrambled to reduce debt and raise cash. The only thing that didn’t seem to go down was Treasuries. People were parking their dollars, looking for safety — which is so counter-intuitive if you think about it.

    TB: Treasuries have had quite a year.

    PA: Sure, but the party’s over. I know a lot of people who got burned shorting them this year. I even thought about shorting them in the spring, but I didn’t. Despite the inflationary environment earlier this year, I had a funny feeling everything was going to fall apart. I also knew the Fed would mislabel the collapse as deflationary, and that they’d drop their target, although I didn’t think we’d go to zero. So I held out.

    TB: Did you eventually short Treasuries?

    PA: After the last Fed move, I did.

    TB: Did you use futures, or ETFs?

    PA: I used TBT — the Proshares ultra short ETF. It’s double-leveraged, and I want a lot of bang. I just hope the timing is right.

    TB: As crazy as it sounds, some people are actually arguing that there is some more upside in the long end of the curve — especially if the Fed keeps buying.

    PA: I know. Believe me, I’ve seen the arguments. The future looks absolutely bleak. Short term rates went negative! How much more upside can there possibly be in Treasuries — even on the long end of the curve? This bubble is more ridiculous than the oil bubble; at least oil isn’t bound by zero interest rates! I mean, I was looking at oil at about $135 and thinking, “I should be shorting the hell out of this.” But there was this little voice inside my head saying, “The upside is infinite, at least theoretically.”

    But the upside to Treasuries is not unlimited. I guess you could make the argument that, as the long end of the yield curve gets lower, its relationship to price is asymptotic, but that’s just academic. Even if the Fed does start buying the long end, how are they going to sustain the policy? Nobody has the firepower to drive long-term yields much lower. The Fed is talking about it, but I just think they’re trying to get a reaction. I don’t think they’re really going to do it. I think they’re much more interested in targeting mortgage-backed securities — to tackle the housing crisis directly — because the wide belief is that there can be no turnaround without stabilizing housing.

    TB: Still, the historical low yield for the 10-year is something like 1.5%. Using that as a barometer, it could still go a lot lower, right?

    PA: I don’t think so, because our situation is so different now than it was when the yield went that low. Back then, relatively few foreigners held our debt.

    There are so many factors at play here. Let’s say the Fed makes good on its threat to buy the long end, to hold rates steady at these levels — or even bring them down further. How are they going to do that? They’re going to have to print dollars, and that’s just inflationary. I don’t care what kind of spin the Keynesians try to put on it. It’s inflationary. We’re getting into a situation where our government is printing currency and then loaning it to itself. It’s just laughable.

    A lot of the TARP money went to institutions that dumped them into Treasuries, but how long will that last? How long are managers going to accept these absurd rates of return from a bankrupt government? And how long are they going to perceive Treasuries as safe? The U.S. has pledged $8.5 trillion to bailouts — more than all other programs and wars in our history, in real dollars, combined! We’ve gone from being the biggest creditor nation to the biggest debtor nation on earth. We’re consuming everything, and we’re not making anything! We’re a nation of spoiled rich kids who sit around and watch television all day. How long do you think the rest of the world is going to continue to lend us money?

    TB: A lot of people would say that sounds almost conspiratorial!

    PA: [Laughs]. Yeah, well I might have said that a year ago too — about everything from the failure of Bear Stearns to Lehman Brothers, to the nationalization of AIG, Indymac, and Freddie and Fannie. By now though, it’s not conspiratorial. It’s just math.

    The government is printing dollars, and it’s nationalizing everything. And try to remember that I’m not getting my research from fringe websites whose members bury guns and potable water. I’m getting my information from places like Bill Gross over at PIMCO, Bloomberg, CNBC, and even the Fed and the Treasury. This stuff is really happening, and some very smart people are noticing. Credit markets are frozen. Investment real estate is dead. Consumers can’t consume anymore. Where’s the long-term growth going to come from?

    Look, the Chinese are sitting on $1.6 trillion in Treasuries. Do you think they’re going to be willing to lend to us indefinitely, considering how irresponsible we’ve been with our money? And especially at these rates? On top of all that, Treasury prices are sitting at historical highs. It wouldn’t surprise me if the Chinese started selling our debt to fund their own initiatives, like the $600 billion stimulus they announced not long ago.

    TB: So the Fed may be buying Treasuries, and the Chinese are going to be selling them?

    PA: Assuming the Fed is that stupid, and they really do attack the long end of the curve, I could actually see something like that happen — if it isn’t happening already. If I was in the Chinese finance ministry, I wouldn’t be able to find much downside to selling Treasuries at these peak historical levels. It would give them cash, and essentially set them up as the world’s strongest economy — if not now, then very soon.

    In the meantime, the Fed won’t be able to hold the long end of the yield curve down. They’ll be printing money, causing inflation, and the world will be getting hit with the simultaneous sale of foreign holdings of Treasuries, along with a massive flood of new Treasuries from the U.S. government, which needs to borrow as much as possible to pay for all the programs it’s planning. It’s such a mess.

    And it’s not just the Chinese. It’s the Saudis, and the Japanese, and a whole list of people who probably won’t be buying new Treasuries — and may very well dump the ones they already have.

    TB: But if the Chinese help with the destruction of the U.S. economy by selling Treasuries, aren’t they just shooting themselves in the foot? Don’t they need to export to us?

    PA: I don’t think so — not so much anymore. The Chinese are getting a very strong middle-class. They are likely getting to the point where they can consume a lot of what they make, and that’s a strong place to be. I’m not saying it isn’t going to be hard for them too. Everyone’s going to suffer. But I think the Chinese selling Treasuries now would mitigate their pain.

    It makes a lot of sense, actually. To be honest, I can’t think of a reason why they wouldn’t. There may be a reason, but I haven’t thought of it. This situation reminds me of the transfer of economic power from the British Empire to the United states a century ago. Now we’re losing it to China. They have a strong work ethic, tons of resources, an inexhaustible labor supply. Why do they need us, anymore than we needed the failing British Empire when we took the reins?

    TB: Okay, now that we’re in the midst of the collapse — that is, the thing you predicted — what do you see going forward?

    PA: A lot of people are saying things like, “If Obama cuts spending, and reels in the deficit, and cuts taxes, we can get back on track.” I don’t even bother thinking about stuff like that, because there isn’t one person in Washington — except Ron Paul — who wants to cut spending right now. In my mind, we’re going down this road no matter what. The American people have borrowed insanely and used the proceeds to consume massively. We’re going to have to go through a lot of pain, and when it’s over, we’ll see what happens.

    TB: And what do you think might happen?

    PA: It’s hard to say. Maybe people will demand a return to sound money and rugged individualism, but I tend to doubt it. Spoiled brats look for handouts and paternalism, and politicians facilitate that process. Washington will keep promising more and more, and we’ll probably move ever-closer to a completely socialist state. At some point, Texas, or New Hampshire, or somebody else will say enough is enough and get out.

    TB: Like in your book.

    PA: Yep.

    TB: And the United States response?

    PA: I don’t know. This isn’t 1861. Can people from Iowa point guns at people from Texas and pull the trigger? That’s going to be an interesting moment. I hope it doesn’t come to that, but unless something changes, it just can’t last. The Roman Empire crumbled because of fiscal irresponsibility. So did the British Empire. So did the Soviets. People think we’re immune, but just take a look around you.

    And there are other things to think about. Texas could probably aim a nuke at Washington, D.C. pretty easily. The thought terrifies me, but it would almost certainly result in a stalemate. Also, the predication here is that the U.S. is totally broke, and already fighting several wars. Will it be able to fund another war against separatists? Probably not. And even if they try, it won’t be popular at all.

    And, of course, I can’t think of anyone on earth who would relish fighting a war against Texans. [Laughs]

    TB: Okay, even if it’s as bad as you say, why can’t we just spend our way out of it, just like we did during the Great Depression?

    PA: For several reasons. First, we got out of the Depression by issuing debt, which was bad enough. But this time, we’re going into it with massive debt. Also, during the Depression, our debt was absorbed domestically, almost exclusively. Today, our debt is held by foreigners to a very large extent, and our ability to get out of this mess will be dictated not only by how much they continue to lend to us — which I believe won’t be much — but also by what they ultimately do with the debt they currently hold. I think they’re going to sell it, driving interest rates higher, and killing the dollar.

    No matter what happens, inflation is the logical conclusion. And I can tell you that the United States is not going to be able to borrow domestically, exclusively. That’s just not in the cards, and I hope nobody is delusional enough to think it is.

    Look, in order to get out of the inflation caused the last time we tried this — in the ’70s and ’80s — we had to drive interest rates above 20%. We were lucky it worked. How many times can we use that trick before it doesn’t work? Think about the Weimar Republic or any of the countless other nations that have experienced hyper-inflation.

    Our biggest enemy right now is our inability to accept our vulnerability. We believe we are entitled to everything, without producing much of anything. We’re fighting multiple wars around the globe. We’re hated — or at best, not respected — by a large part of the globe. Social Security is bankrupt, along with Medicare and Medicaid. The government has its fingers in everything. Look at our debt, our GDP, and our trade deficit. No, it’s very different this time.

    TB: So what are you doing to prepare?

    PA: Well, like I said, I’m short Treasuries. I’m also watching commodity prices carefully — especially oil.

    TB: Why oil?

    PA: I’m actually bullish on oil if it pulls back to $20 or $25. The problem with oil is that, unlike gold, it has such a huge practical aspect to it. Gold is nothing more than a store of value. It has almost no industrial application, so its supply isn’t affected as much, cyclically. Oil, however, is tied directly to economic activity, so I think we’re going to need to see a little bit of a turnaround before it increases in price. But I think it will go higher.

    TB: To previous levels?

    PA: I don’t think so — not for a long time. That had nothing to do with supply and demand. That was a mania. But if it gets to $25, it’s going to be oversold, and I think it will have a lot of upside at that point.

    TB: So what about gold?

    PA: I like it, but it’s all about timing right now, and I don’t think gold is oversold. Of course it didn’t make a bubble like oil did, so its retreat wasn’t as pronounced. Shorting Treasuries is a no-brainer, and probably buying oil and gold right now would be smart. But my biggest concern is timing. What’s the saying? “Markets can stay irrational a lot longer than you can stay solvent?” Actually, I think Keynes said that. I guess he was good for something. [Laughs]

    TB: That brings up a good point. A lot of people are talking about how the Fed, through this new use of so-called quantitative easing, could hold down rates for an extremely long time. One very scary example is Japan, whose interest rates have been almost zero for many years. Could that happen here?

    PA: I don’t think so. First of all, Japan was using QE at a time when people could borrow in Japan, and reinvest elsewhere — like the U.S. — at much higher rates, with almost no risk. So that put a lot of pressure on rates in Japan, and it caused massive mal-investment in the rest of the world. In fact, I’d say that Japan — this little island that has been printing incomprehensible amounts of currency — has a great deal of culpability for the bubble that got us where we are now. I have a lot of doubts about their future too.

    But I’ve already made the case that I don’t believe the Fed and Treasury will be able to maintain this shell game for long. Japan was a creditor nation with a huge savings rate. People had no problem lending to them — even though their credit rating slipped.

    The U.S., on the other hand, has no savings at all to speak of. If the Fed’s objective is to create inflation — and by its own admission, that’s exactly what it intends to do — I don’t think they’re going to have any trouble at all, unlike Japan. In fact, I think it’s imminent, it’s coming soon, and when it does come, it’s going to be hell to stop — if it can be stopped at all.

    Treasuries are going to collapse, and anyone stupid enough to have bought the 10-year, or even worse, the 30-year, at recent levels is going to see massive capital losses. It’s going to cause absurd liquidations, and yields are going to skyrocket. It’s going to happen fast, and it’s going to be just as scary as the collapse in equities we just went through.

    Probably the most frightening aspect of it, though, is that so many people pulled money out of stocks and put them into Treasuries for safety. Now they’re going to lose most of that too. It’s going to damage U.S. credibility immensely. I don’t see how the government will ever get it back.

    TB: You’ve mentioned Rothbard, Mises, and Hayek. Are there any contemporary figures you’re paying attention to right now?

    PA: Oh yes. I absolutely love Peter Schiff. I think he’s brilliant, and his track record speaks for itself. I also Love Jimmy Rodgers. I’ve been following his career for years. I constantly scour YouTube for any interviews I can find from these two.

    Jimmy Rodgers cracks me up. Some of the things he says are priceless. I’d give anything to follow his lead and move to Singapore, but unfortunately circumstances are going to keep me in Texas for a while.

    TB: Mr. Ahlgren, thank you very much for your time. It has been a pleasure speaking with you.

    PA: Likewise, and thank you.


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