* * *
“Central bankers have fostered a casino like atmosphere where savers/investors are presented with a Hobson’s Choice, or perhaps a more damaging Sophie’s Choice of participating (or not) in markets previously beyond prior imagination. Investors/savers are now scrappin’ like mongrel dogs for tidbits of return at the zero bound. This cannot end well.”
In one of his starkest warnings about the endgame of existing unorthodox, monetary policy, in his latest letter titled “Doubling Down”, Bill Gross repeats a familiar tune, warning that “our financial markets have become a Vegas/Macau/Monte Carlo casino, wagering that an unlimited supply of credit generated by central banks can successfully reflate global economies and reinvigorate nominal GDP growth to lower but acceptable norms in today’s highly levered world.”
… soon. And the entire financial system will collapse.
We were surprised to hear none other than legendary bond investor Bill Gross, who made billions going long bonds, admit to Bloomberg’s Erik Schatzker last night that he is starting to short credit, “a position that he said runs contrary to his instincts and training as an investor.”
The reason why Gross, who called the Bund blow up last year with uncanny precision, is turning bearish on an asset classes that Mario Draghi is directly supporting – and as such Gross is fighting at least on Central Bank – is peculiar: he thinks the time of central bank dominance is almost over. Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund, said he is moving to sell credit risk and insurance on market volatility rather than buying long-term debt, because he believes a day of reckoning will come when central banks will no longer be able to prop up asset prices and investors will withdraw from markets.
What’s so remarkable about the following clip from a Bloomberg interview with iconic bond fund manager Bill Gross isn’t so much that he warned about a looming systemic implosion, but how much he struggled to actually say it out loud despite clearly wanting to.
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– It’s All Coming To An End, Bill Gross Warns (ZeroHedge, Dec 4, 2014):
Say what you want about Bill Gross, but the legendary bond investor is absolutely spot on in the following paragraph from his latest, December, investment outlook:
How could they? How could policymakers have allowed so much debt to be created in the first place, and then failed to regulate their own system accordingly? How could they have thought that money printing and debt creation could create wealth instead of just more and more debt? How could fiscal authorities have stood by and attempted to balance budgets as opposed to borrowing cheaply and investing the proceeds in infrastructure and innovation? It has been a nursery rhyme experience for sure, but more than likely without a fairytale ending.
Here is the full letter (link):
– Pimco Paid Gross, El-Erian Over Half A Billion Dollars In 2013 Bonuses (ZeroHedge, Nov 14, 2014):
And a stunner just out of of Bloomberg:
PIMCO PAID GROSS $290 MILLION BONUS FOR 2013, DOCUMENT SHOWS
PIMCO PAID FORMER CEO EL-ERIAN ABOUT $230 MLN BONUS IN 2013
More from the source:
Pacific Investment Management Co. paid its former Chief Investment Officer Bill Gross a bonus of about $290 million in 2013, a year in which his Total Return Fund trailed a majority of peers, according to documents provided to Bloomberg View by someone with knowledge of Pimco’s bonus policies.
– PIMCO Liquidations Begin; And So Does The Retaliation: All Bill Gross Tweets Deleted (ZeroHedge, Sep 29, 2014):
The last few days have been hectic for PIMCO executives. As we already noted, expectations of outflows persist and today’s open in CDS markets suggested major concerns among market participants that PIMCO redemptions would force selling through an illiquid market. Sure enough, Bloomberg reports that PIMCO’s Total Return Fund ETF was behind the auction of more than $170m of Fannie Mae CMBS on Friday (and more BWICs were seen today). As one trader noted, “you’re going to sell your most liquid stuff first.” Additionally, PIMCO has seen fit to delete all Bill Gross’ tweets… so here are the last six months for the record.
As Bloomberg reports, the PIMCO liquidations have begun…
– Gross To Have Final Laugh? Whopping Two-Thirds Of PIMCO’s Flagship Fund May Be Withdrawn (ZeroHedge, Sep 29, 2014):
The reason why the first article we wrote on Friday after news hit that PIMCO co-founder was shockingly leaving the firm on Friday, was listing the massive bond fund’s biggest holdings, was because it was only a matter of time: it, being of course, the massive redemptions that would follow Gross’ departure by people that his 30+ tenure at the bond fund made very rich, and who couldn’t care less about a brief central planning-inspired flame out. After all Gross isn’t the first person who has lost the plotline due to the Fed’s manipulation of every market.
– Bill Gross Quits PIMCO, Which He Co-Founded, Joining Janus (ZeroHedge, Sep 26, 2014):
After co-founding PIMCO in 1971, Bill Gross has called it quits…
- *WILLIAM H. GROSS JOINS JANUS CAPITAL
- *JANUS:GROSS TO START MANAGING FUND,RELATED STRATEGIES OCT.6,’14
“I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization,” said Mr. Gross.
Janus stock is +20% on the news. 40% now!)
– “You Can’t Fire Me, I Quit” – PIMCO Was Preparing To Fire Gross (ZeroHedge, Sep 26, 2014):
With more than $65 billion pulled from PIMCO’s funds since May 2013, Bill Gross’ firm had been struggling amid spotty performance and it seems, according to The Wall Street Journal, PIMCO (not Allianz) was set to fire the 70-year old bond king this weekend. It seems clear that Mr. Gross move was pre-emptive as sources cite his “increasingly erratic behavior” and ultimatums as factors in the move. Assumptions about Mohamed El-Erian returning to run the company have been denied. Some have estimated PIMCO could see a further 10-30% in fund outflows on the back of Mr. Gross’ departure.
… a well-paid blogger.
– Mohamed El-Erian Quits Pimco, Becomes A Blogger (ZeroHedge, April 14, 2014):
We realize the future for blogging was bright, but this bright? Moments ago, Bloomberg View, Bloomberg’s in house blogging operation, announced that El-Erian had joined it as a columnist. And just like that Mohamed has his own unedited venue in which to spill all the dirt on his former employer.
Bloomberg View today announced that Mohamed A. El-Erian is joining the opinion and analysis site as a daily columnist covering economic developments, policy and financial markets.
“Mohamed is one of the world’s most highly-regarded financial and economic observers – and he’s also a wonderful writer” said David Shipley, the senior executive editor of Bloomberg View. “We’re thrilled that he’s going to be sharing his insights with our readers on a daily basis.”
– America’s Bubble Economy Is Going To Become An Economic Black Hole (Economic Collapse, May 22, 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. You can see this when you step back and take a longer-term view of things. Over the past decade, we have added more than 10 trillion dollars to the national debt. But most Americans have shown very little concern as the balance on our national credit card has soared from 6 trillion dollars to nearly 17 trillion dollars. Meanwhile, Wall Street has been transformed into the biggest casino on the planet, and much of the new money that the Federal Reserve has been recklessly printing up has gone into stocks. But the Dow does not keep setting new records because the underlying economic fundamentals are good. Rather, the reckless euphoria that we are seeing in the financial markets right now reminds me very much of 1929. Margin debt is absolutely soaring, and every time that happens a crash rapidly follows. But this time when a crash happens it could very well be unlike anything that we have ever seen before. The top 25 U.S. banks have more than 212 trillion dollars of exposure to derivatives combined, and when that house of cards comes crashing down there is no way that anyone will be able to prop it back up. After all, U.S. GDP for an entire year is only a bit more than 15 trillion dollars.
But most Americans are only focused on the short-term because the mainstream media is only focused on the short-term. Things are good this week and things were good last week, so there is nothing to worry about, right?
–The Entire Economy Is a Ponzi Scheme (ZeroHedge, April 13, 2013):
Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky, the Wall Street Journal and many others say that our entire economy is a Ponzi scheme.
Former Reagan budget director David Stockman just agreed:
YouTube Added: 10.04.2013
So did a top Russian con artist and mathematician.
Even the New York Times’ business page asked, “Was [the] whole economy a Ponzi scheme?”
In fact – as we’ve noted for 4 years (and here and here) – the banking system is entirely insolvent. And so are most countries. The whole notion of one country bailing out another country is a farce at this point. The whole system is insolvent.
As we noted last year:
Back in April 2012, in “How The Fed’s Visible Hand Is Forcing Corporate Cash Mismanagement” we first explained how despite its best intentions (to boost the Russell 2000 to new all time highs, a goal it achieved), the Fed’s now constant intervention in capital markets has achieved one thing when it comes to the real economy: an unprecedented capital mismanagemenet, where as a result of ZIRP, corporate executives will always opt for short-term, low IRR, myopic cash allocation decisions such as dividend, buyback and, sometimes, M&A, seeking to satisfy shareholders and ignoring real long-term growth opportunities such as R&D spending, efficiency improvements, capital reinvestment, retention and hiring of employees, and generally all those things that determine success for anyone whose investment horizon is longer than the nearest lockup gate. Today, one calendar year later, none other than Bill Gross, in his first investment letter of 2013, admits we were correct: “Zero-bound interest rates, QE maneuvering, and “essentially costless” check writing destroy financial business models and stunt investment decisions which offer increasingly lower ROIs and ROEs. Purchases of “paper” shares as opposed to investments in tangible productive investment assets become the likely preferred corporate choice.”
It is this that should be the focus of economists, and not what the level of the S&P is, as it is no longer indicative of any underlying market fundamentals, but merely how large, in nominal terms, the global balance sheet is. And as long as the impact of peak central-planning on “business models” is ignored, there can be no hope of economic stabilization, let alone improvement. All this and much more, especially his admissions that yes, it is flow, and not stock, that dominates the Fed market impact (think great white shark – must always be moving), if not calculus, in Bill Gross’ latest letter.
In the last few years gold and silver bottomed out around Christmas.
– Gold – It’s Time (ZeroHedge, Dec 12, 2012):
Authored by Lee Quaintance and Paul Brodsky of QBAMCO,
Gold bugs can’t understand how the public can be so unaware, how highly intelligent policy makers can be so immoral, and how the mainstream media can be so incurious. We can’t understand why more men and women in the investment business haven’t joined some of the more successful ones that have come around to precious metals and have taken substantial positions in them for their funds and personal accounts. The list of high profile independent-minded investors that have come out of the proverbial closet is impressive and growing: Kyle Bass, John Paulson, David Einhorn, George Soros, Bill Gross and Paul Singer, to name only a few.
FT: ‘Wages Have To Be Slashed By 30-40% In the UK’
YouTube Added: 04.12.2012
In this episode, Max Keiser and Stacy Herbert investigate the black hole of debt sucking in our economies, jobs and wealth like strings of spaghetti past the economic event horizon. In the second half, Max Keiser talks to Ned Naylor-Leyland of Cheviot Asset Management about the fishy smoke signals blowing at the LBMA regarding silver contracts and about the debate between inflation, deflation, hyperinflation actually being a debate about the final denouement of paper currencies. Ned also reveals that BBC’s flagship programme, Panorama, had interviewed him and Andrew Maguire about silver manipulation and yet have never aired the episode.
– Deep Sunday Morning Thoughts From Bill Gross (ZeroHedge, Nov 11, 2012):
Just because Jack Handey never got to manage $1+ trillion in debt…
– Bill Gross Preemptively Summarizes Today’s Election Result In 22 Words (ZeroHedge, Nov 6, 2012):
Presented without comment – adding anything to this concise summation of the state of the union is superfluous…
– Bill Gross: “Ours Is A Country Of The SuperPAC, By The SuperPAC, And For The SuperPAC” (ZeroHedge, Nov 1, 2012):
Curious why we dedicate precious virtual real estate to periodically bring to you the “billionaires behind the best presidents money can buy“? Bill Gross explains why?
Time To Vote, from PIMCO’s Bill GrossSo I pulled out my magic lamp that for some reason works only every October 22nd, and rubbed until the Genie appeared in his red and white checkered cloak with a 10-inch diameter Flavor Flav clock hanging ceremoniously around his neck. Being a rather forward, although not disrespectful Genie, he immediately said, “Mr. G, instead of the yield on the 10-year Treasury, perhaps this year you should wish to know who is going to win the Presidential election?” After some thought I replied, “Nah, I need some breaking news, Mr. Genie, something that will make a difference, something that will shock the world, like when does the iPhone 6 come out?” Obama/Romney, Romney/Obama – the most important election of our lifetime? Fact is they’re all the same – bought and paid for with the same money. Ours is a country of the SuperPAC, by the SuperPAC, and for the SuperPAC. The “people” are merely election-day pawns, pulling a Democratic or Republican lever that will deliver the same results every four years. “Change you can believe in?” I bought that one hook, line and sinker in 2008 during the last vestige of my disappearing middle age optimism. We got a more intelligent President, but we hardly got change. Healthcare dominated by corporate interests – what’s new? Financial regulation dominated by Wall Street – what’s new? Continuing pointless foreign wars – what’s new?I’ll tell you what isn’t new. Our two-party system continues to play ping pong with the American people, and the electorate is that white little ball going back and forth over the net. This side’s better – no, that one looks best. Elephants/Donkeys, Donkeys/Elephants. Perhaps the most farcical aspect of it all is that the choice between the two seems to occupy most of our time. Instead of digging in and digging out of this mess on a community level, we sit in front of our flat screens and watch endless debates about red and blue state theologies or listen to demagogues like Rush Limbaugh or his ex-cable counterpart Keith Olbermann. To express my discontent, Genie, along with my continuing patriotism, I’ve created a modern-day version of our Pledge of Allegiance. Place your hand over your clock and recite after me:
– Bill Gross Warns “Very Likely’ Central Banks Will Cause 1987-Like Crash (ZeroHedge, Oct 19, 2012):
What takes other Political Journalism majors (and CTRL-C/V minors) pages and pages of verbose essays full of acronyms and meaningless gibberish to refute, Bill Gross asserts in less than 140 characters.
– The Scary Math Behind The Mechanics Of QE3, And Why Bernanke’s Hands May Be Tied (ZeroHedge, Sep 7, 2012):
When it comes to the NEW QE, everyone has an opinion, and most seem to believe that the NEW QE will come next week, now that the US economy added “just” 96,000 people (but, but, the unemployment rate ‘fell’). Certainly, and far more importantly, if the most recent FOMC minutes are any guide, the Fed shares this view. Sadly, as so often happens, most, and this includes the FOMC’s various voting members, have once again made up their minds without actually evaluating the limitations posed by simple math. After all it is far easier to form an opinion, and actually think about the underlying facts later. The math, for those who actually have looked at the numbers behind the scenes, is scary (in UBS’ words, not ours).Here is the math.
As part of its Operation Twist, the Fed is buying long-term bonds, and selling short-term (0-3 years) bonds. As we reported in April, the biggest limitation for the Fed is that it is rapidly running out of short-term bonds to sell. There is a fix to this: the Fed will simply have to sell longer dated bonds from its SOMA portfolio, first up to 5 years, then 7, and so on. Of course, this will also force the Fed to extend its ZIRP language by an appropriate amount of time, through 2017, then 2019, and so on (which also means all bets that the Fed will hike any time in the next 5 years will be immediately null and void, and one can position accordingly in the Eurodollar space).
This move, however, will simply permit the Fed to extend Twist 2 beyond its year-end maturity. As a reminder, the primary role of Twist, aside from that stated one which is to keep the curve as flat as possible (i.e., boost housing which as we showed yesterday is not working, as refis have plunged recently despite record low mortgage rates), is to absorb virtually all the long-end supply: after all, it is all about the funding of the US $1 trillion+ annual budget deficit.
Said otherwise, when it comes to the 10-30 year sector the Fed is already monetizing all new issuance. This is part of the entire flow argument which we have been discussing for the past 6 months, and why we, correctly, say that Operation Twist is really QE 3 and QE 3.5 (for the recent extension of Twist). So far so good.
Here comes the important part.
Three weeks ago we presented a video courtesy of Stone McCarthy which showed a timelapse of the “takeover” of the Fed as the primary holder of public debt. For those short on time, here is how the Fed’s holdings portfolio looked like then…
The shaded region is important for two reasons: this is where the Fed will be buying new bonds as part of any new QE Large Scale Asset Purchase program, and it tells us all there is to know about how big and how effective QE3 (really 4) will be. The bottom line, as calculated by UBS’ Michael Schumacher and confirmed by anyone with access to the detail behind the Fed’s SOMA holdings, which incidentally just hit a record 116 months two months ahead of Twist 2 schedule, is that “the Fed owns all but $650 billion of 10-30 year nominal Treasuries.” Also as pointed out above, Twist 2, aka QE 3.5 is already absorbing all of the long end supply. And herein lies the rub. To quote UBS: “Taking out, say, $300 billion in long-end Treasuries almost certainly would put tremendous pressure on liquidity in that market….Ploughing ahead with a large, fixed size QE program could cause liquidity to tank.”
In other words, anyone expecting a full blown LSAP focusing only on US Treasurys will very likely be disappointed as the Fed will certainly realize, quite soon we hope, that it has only $650 billion in total 10 year + bonds available in the entire private market!
Well, perhaps the Fed will just monetize MBS, as Bill Gross has been betting on for nearly a year now. It could do that… but when once factors in “math“, the results are once again quite startling. Quote UBS again: