PIMCO’s Bill Gross: ‘No Way Out’ of Debt Trap, US Living Standards Doomed to Fall

Debt, debt and more mounting debt is plaguing countries around the globe.

In the U.S., states across the country face a collective $125 billion shortfall for fiscal 2012, while Congress is facing a budget gap nearly 10 times that size.

PIMCO founder Bill Gross — one of the world’s largest mutual funds managers, who focuses mostly on bonds — has previously said that if the United States were a corporation, no one in their right mind would lend us money. For the last decade, we’ve been “relying on the kindness of strangers” to help cover our debts, he tells Aaron Task in the accompanying clip.

By “strangers” he is referring to our foreign counterparts, like China for example. Basically, for years Americans have spent their hard-earned dollars on less-expensive Chinese made goods. With great gratitude, China turned around and used all those dollars to buy up U.S. Treasuries and other dollar-denominated assets.

But now after years of reckless spending, America’s debt level is nearing a breaking point and can no longer rely on foreign capital as a last resort.  “When a country reaches a certain debt level, confidence in that country’s ability to repay that debt becomes jeopardized,” says Gross, citing the work of Ken Rogoff and Carmen Reinhart in This Time Is Different.

Read morePIMCO’s Bill Gross: ‘No Way Out’ of Debt Trap, US Living Standards Doomed to Fall

PIMCO’s Bill Gross Asks The $64,000 Question: ‘Who Will Buy Treasuries When The Fed Doesn’t?’ His Answer: ‘I Don’t Know’; Gross Is Getting Out Of Risk

After serving as the inspiration for the Chairsatan’s latest appellation with his February missive, Bill Gross now goes for the jugular with the $64,000 question: with “nearly 70% of the annualized issuance since the beginning of QE II has been purchased by the Fed, with the balance absorbed by those old standbys – the Chinese, Japanese and other reserve surplus sovereigns.

Basically, the recent game plan is as simple as the Ohio State Buckeyes’ “three yards and a cloud of dust” in the 1960s. When applied to the Treasury market it translates to this: The Treasury issues bonds and the Fed buys them. What could be simpler, and who’s to worry? This Sammy Scheme as I’ve described it in recent Outlooks is as foolproof as Ponzi and Madoff until… until… well, until it isn’t. Because like at the end of a typical chain letter, the legitimate corollary question is – Who will buy Treasuries when the Fed doesn’t?” Bingo, we have a winner.

This is precisely the issue that Zero Hedge has been exposing over the past 6 months, and is the reason why the Fed is now locked in a QEasing corner from which there is no exit. To his credit, Gross attempts to provide an answer: “Someone will buy them, and we at PIMCO may even be among them.

The question really is at what yield and what are the price repercussions if the adjustments are significant… What I would point out is that Treasury yields are perhaps 150 basis points or 1½% too low when viewed on a historical context and when compared with expected nominal GDP growth of 5%.”

And the stunner: “Bond yields and stock prices are resting on an artificial foundation of QE II credit that may or may not lead to a successful private market handoff and stability in currency and financial markets. 15% gratuities may lie ahead, but more than likely there is a negative two-bit or even eight-bit tip lying on the investment table. Like I did 45 years ago, PIMCO’s not sticking around to see the waitress’s reaction.” Translation: Pimco just issued a “sell” rating on everything.

Full article here: ZeroHedge

PIMCO’s Bill Gross: UK a ‘must to avoid’ as its debt lies ‘on bed of nitroglycerine’

Highly recommended:

PIMCO’S Bill Gross: ‘Let’s Get Fisical’ (… or why the US will not make it.)

Related articles:

Britain Faces New Souvereign Debt Crisis As PIMCO Pulls Out

Bank of England’s ‘nerves’ to be tested as inflation jumps most on record in December


Bill Gross deals blow to government with warning to his investors that Britain’s debt makes it a ‘must to avoid’

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The government’s hopes of claiming credit for reviving the British economy suffered a severe blow today when the world’s biggest buyers of bonds warned that the UK was a “must to avoid” for his investors as its debt was “resting on a bed of nitroglycerine”.

The intervention by Bill Gross, co-founder of California-based fund managers Pimco, came on the day official figures confirmed that Britain had emerged from the deepest recession since the 1930s – but only by the narrowest of margins.

The economy grew by 0.1% in the final three months of last year, much weaker than even the most cautious expectations in Westminster and the City. The unexpectedly sluggish performance prompted Alastair Darling to warn that Britain could yet fall back into recession, telling the Guardian “there will be hiccups along the way”.

Read morePIMCO’s Bill Gross: UK a ‘must to avoid’ as its debt lies ‘on bed of nitroglycerine’

PIMCO’S Bill Gross: ‘Let’s Get Fisical’ (… or why the US will not make it.)

On Thursday I had posted Bloomberg’s summary on the monthly investment outlook by PIMCO’s Bill Gross:

PIMCO’s Bill Gross warns on risks of US deficit: ‘Our government doesn’t work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people.’

But that summary missed a lot of important points.

Here is just one excerpt as a starter:

“Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. …”

If that doesn’t bother you, then I do not know what will. The Federal Reserve is creating money out of thin air like there is no tomorrow and the bad news is that that is exactly what the elite that controls the US government and the Federal Reserve has planned for America:

In the next two years (or just a little more than that) we will see hyperinflation in the US, people in America will become desperately poor and the Greatest Depression will turn the US into a Third World country.

(In 2009 Bill Gross was named the world’s 32nd most powerful man by Forbes.)

Now here is the full article by Bill Gross, ‘The King of Bonds’ (Must-Read!):


Let’s Get Fisical

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Quixotic journeys often make for great literature, but by definition are rarely productive. I am, after all, referring to windmills here – not their 21st century creation, but their 17th century chasing. Futility, not productivity, was the ultimate fate of Cervantes’ man from La Mancha. So it is with hesitation, although quixotic obsession, that I plunge headlong into a discussion of American politics, healthcare legislation, resultant budget deficits and – finally – their potential effect on financial markets. There will be windmills aplenty in the next few pages and not much good can come of these opinions or my tilting in their direction. Still, I mount my steed, lance in hand, and ride forward.

Question: What has become of the American nation? Conceived with the vision of liberty and justice for all, we have descended in the clutches of corporate and other special interests to a second world state defined by K Street instead of Independence Square. Our government doesn’t work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people. Washington consistently stoops to legislate 10,000-page perversions of healthcare, regulatory reform, defense, and budgetary mandates overflowing with earmarks that serve a monied minority as opposed to an all-too-silent majority. You don’t have to be Don Quixote to believe that legislators – and Presidents – often do not work for the benefit of their constituents: A recent NBC News/Wall Street Journal poll reported that over 65% of Americans trust their government to do the right thing “only some of the time” and a stunning 19% said “never.” What most politicians apparently are working for is to perpetuate their power – first via district gerrymandering, and then second by around-the-clock campaigning financed by special interest groups. If, by chance, they’re ever voted out of office, they have a home just down the street – at K Street – with six-figure incomes as a starting wage.

What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return. The fact is that American citizens have never been as divorced from their representatives – and if that description fits the Democratic Congress now in control – then it applies to Republicans as well – past and present. So you watch Fox, or is it MSNBC? O’Reilly or Olbermann? It doesn’t matter. You’re just being conned into rooting for a team that basically runs the same plays called by lookalike coaches on different sidelines. A “ballot box” pox on all their houses – Senators, Representatives and Presidents alike. There has been no change, there will be no change, until we the American people decide to publicly finance all national and local elections and ban the writing of even a $1 check for our favorite candidates. Undemocratic? Hardly. Get on the internet, use Facebook, YouTube, or Twitter to campaign for your choice. That’s the new democracy. When special interests, even singular citizens write a check, it represents a perversion of democracy not the exercise of the First Amendment. Any chance that any of this will happen? Not one ghost of a chance. Forward Don Quixote, the windmills are in sight.

Distressed as I am about the state of American democracy, a rational money manager cannot afford to get mad or “just get even” when it comes to investing clients’ money. Still, like pilots politely advertise at the end of most flights, “We know you have a choice of airlines and we thank you for flying ‘United’.” Global investment managers likewise have a choice of sovereign credits and risk assets where stable inflation and fiscal conservatism are available. If 2008 was the year of financial crisis and 2009 the year of healing via monetary and fiscal stimulus packages, then 2010 appears likely to be the year of “exit strategies,” during which investors should consider economic fundamentals and asset markets that will soon be priced in a world less dominated by the government sector. If, in 2009, PIMCO recommended shaking hands with the government, we now ponder “which” government, and caution that the days of carefree check writing leading to debt issuance without limit or interest rate consequences may be numbered for all countries.

Read morePIMCO’S Bill Gross: ‘Let’s Get Fisical’ (… or why the US will not make it.)

PIMCO’s Bill Gross warns on risks of US deficit: ‘Our government doesn’t work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people.’

Wake up America!

Peter Schiff on Fast Money: ‘America is broke’; ‘The Fed created a currency crisis’; ‘Dollar to collapse 50-70% or more’

US: Public Pensions Face $2 Trillion Deficit

U.S. Avoids Technical Default By Three Days



Gross warns on risks of US deficit

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Bill Gross

Jan. 7 (Financial Times) – Bill Gross, the influential bond fund manager who is one of the world’s biggest investors in sovereign debt, said it was unlikely that the US economy was strong enough for the government to “gracefully exit” stimulus spending programmes or that private investors would be capable of absorbing the balance in deficit funding.

In a monthly investment outlook Mr Gross, managing director and a founder of Pimco, which has $940bn under management, commented on US healthcare legislation, the resulting budget deficits and the potential impact on financial markets.

The four-page commentary, entitled “Let’s Get Fisical”, included a scathing attack on the workings of the US political system. He urged the American people to use social networking sites like Twitter to have their voices heard over individual political donors.

“Our government doesn’t work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people,” said Mr Gross. “When special interests, even singular citizens, write a cheque, it represents a perversion of democracy, not the exercise of the First Amendment.”

In highlighting that just $500m spent in healthcare lobbying by labour, insurance, “big pharma” and related corporate interests would generate a $50bn-$100bn annual return, he said, “What amazes me most of all is that politicians can be bought so cheaply.”

Mr Gross said that while he was “distressed” at the state of US democracy, a rational money manager could not afford to “get mad” when it comes to investing clients’ money. Global investment managers have a choice of sovereign credits where “stable inflation and fiscal conservation are available”, he said.

Read morePIMCO’s Bill Gross warns on risks of US deficit: ‘Our government doesn’t work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people.’

Britain Faces New Souvereign Debt Crisis As PIMCO Pulls Out

See also:

Pimco move to sell gilts raises spectre of a UK sovereign debt crisis (Telegraph)

Gordon Brown accused of “fantasy” over public debt as changes tack (Times)


britain-faces-new-souvereign-debt-crisis
Pimco’s decision to sell UK gilts this year will be seen as a financial vote of no-confidence in the Government’s handling of the economy.

FEARS that Gordon Brown has left Britain on the brink of ­bankruptcy intensified last night as investors withdrew from backing the Treasury’s soaring debt.

US-based investment group Pimco, one of the world’s leading bond houses, said it will sell its UK government gilts this year.

It will be a hammer blow to the Treasury’s attempt to raise up to £200billion of government borrowing amid the deficit crisis.

The embarrassment is all the more acute because the younger brother of Cabinet minister Ed Balls is overseeing the gilt sale.

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Labour’s Ed Balls’ younger brother Andrew is overseeing the Pimco pullout

As head of Pimco’s European investment team, Andrew Balls is spearheading the exit from investment in the Government.

The Tories seized on the announcement as evidence that Mr Brown’s soaring borrowing is threatening the UK with the worst debt crisis since the 1970s.

Shadow Chief Secretary Philip Hammond said: “This announcement by the world’s biggest bond house is a damning verdict on Gordon Brown’s handling of the economy and raises yet more questions about where the ­Government is going to borrow the £178billion it needs over the next 12 months.

“To restore confidence to the bond markets, keep mortgages down and get the economy growing, Britain needs a credible plan to get the deficit down.

“Instead we have a Prime ­Minister and Chancellor at loggerheads over tax and spending. We can’t go on like this.” Concern has been growing in the City and on international money markets at the unprecedented scale of the British ­government’s debt crisis. The Treasury is on course to ­borrow £178billion this year and the national debt is tipped to reach a colossal £1.5trillion for the first time in our history.

Read moreBritain Faces New Souvereign Debt Crisis As PIMCO Pulls Out

Pimco: Dollar to Weaken as Reserve Status Erodes

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File photo of U.S. one dollar bills. Photographer: Daniel Acker/Bloomberg New

Aug. 19 (Bloomberg) — Pacific Investment Management Co., the world’s biggest manager of bond funds, said the dollar will weaken as the U.S. pumps “massive” amounts of money into the economy.

The dollar will drop the most against emerging-market counterparts, Curtis A. Mewbourne, a Pimco portfolio manager, wrote in a report on the company’s Web site. The greenback is losing its status as the world’s reserve currency, he said.

“Investors should consider whether it makes sense to take advantage of any periods of U.S. dollar strength to diversify their currency exposure,” Mewbourne wrote in his August Emerging Markets Watch report. “The massive amounts of U.S. dollar liquidity produced in response to the crisis” have helped reduce demand for the currency, he wrote.

The Dollar Index, which tracks the greenback against a basket of currencies, touched 78.823 today, the lowest this week. It has fallen 12 percent from this year’s high in March as U.S. authorities pledged $12.8 trillion to combat the recession. China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves.

“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” Mewbourne wrote.

Read morePimco: Dollar to Weaken as Reserve Status Erodes

US Will Eventually Lose Its AAA Credit Rating: Bill Gross

Geithner Pledges to Cut Deficit Amid Rating Concern

May 21 (Bloomberg) — Treasury Secretary Timothy Geithner said the Obama administration is committed to reducing the federal budget deficit after concerns rose that the U.S. debt rating may eventually be threatened with a downgrade.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television. He added that the target is reducing the gap to 3 percent of gross domestic product or smaller, from a projected 12.9 percent this year.

The dollar, Treasuries and American stocks slumped today on concern about the U.S. government’s debt rating. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

Benchmark 10-year Treasury yields jumped 17 basis points to 3.37 percent at 4:53 p.m. in New York. The Standard & Poor’s 500 Stock Index fell 1.7 percent to 888.33, and the dollar tumbled 0.8 percent to $1.3890 per euro.

Gross’s Warning

Gross said in an interview today on Bloomberg Television that while a U.S. sovereign rating cut is “certainly nothing that’s going to happen overnight,” financial markets are “beginning to anticipate the possibility.”

Britain saw its own AAA rating endangered earlier today when Standard & Poor’s lowered its outlook on the nation’s grade to “negative” from “stable,” citing a debt level approaching 100 percent of U.K. GDP.

It’s “critically important” to bring down the American deficit, Geithner said.

Read moreUS Will Eventually Lose Its AAA Credit Rating: Bill Gross

Fed Calls Consultants to Treat AIG, Stricken Markets

Feb. 6 (Bloomberg) — Every Sunday night, New York bankruptcy lawyer Marshall Huebner spends a 13-hour shift on call as an emergency medical technician. His day job involves work on another sort of rescue: The government’s $152.5 billion bailout of American International Group Inc.

“There’s a stronger parallel than you would think,” Huebner, a partner at Davis Polk & Wardwell, said in an interview. Helping resuscitate the insurance giant takes “a lot of the same qualities that I think stand you in very good stead with emergency medicine — the ability to remain calm in almost any situation, and the ability to assess, triage and treat, even in a crisis.”

Huebner, 41, is part of an army of outside lawyers and consultants the Federal Reserve has called upon to help fight the biggest financial crisis in 70 years. While the central bank won’t disclose how much work it has outsourced, Fed watchers say the institution is relying on Wall Street experts to an unprecedented extent, seeking help from insiders in the very industries where the turmoil originated.

“I don’t think the Fed has seen anything like this,” former New York Fed general counsel and AIG executive Ernest Patrikis said in an interview. “AIG just got so complex in terms of private corporate matters that you just need that outside expertise.” Patrikis is now with the law firm of White & Case in New York.

In addition to hiring consultants, the Fed and the Treasury have retained Wall Street firms to help manage more than $2 trillion in bailout and emergency-loan programs.

Pimco, JPMorgan

Pacific Investment Management Co. runs a $259 billion program to backstop the commercial-paper market. BlackRock Inc., Goldman Sachs Asset Management, Pimco and Wellington Management Co. are managing the Fed’s purchases of up to $500 billion of mortgage-backed securities. JPMorgan Chase & Co. oversees a separate program under which the Fed may lend up to $540 billion to support money market mutual funds.

Morgan Stanley is also advising the Fed on the AIG rescue.

Read moreFed Calls Consultants to Treat AIG, Stricken Markets

Beware the next bubble – bonds

“Even if somebody wants to say we’re going to have low inflation for the next year or two, can anybody really say that [with] this most inflationary monetary policy in the history of this country, that people are going to be able to buy a bond for 30 years and clip a 3-per-cent coupon [and come out ahead]?” Mr. Schiff asks. “Does anybody believe that?”

“I think what we should know by now is that we can’t put any faith in what happens in the short run. Internet stocks went way up. Does that validate anything? No. They collapsed to zero,” says Mr. Schiff. When it comes to U.S. Treasuries, “nobody is intending to hold to maturity. Everybody thinks they’re going to get out the door in time.” That’s the greater fool theory at work, and it’s the very definition of a bubble. Beware, all those who would seek shelter in supposedly ultra-safe bonds.


In the beginning, there was a Nasdaq bubble. When the air went rushing out of it, a housing bubble formed, a symptom of a much larger bubble in credit, which in turn helped inflate (arguably) new bubbles in the emerging markets, in oil, and in other commodities.

Pop, pop, pop, pop. Can there possibly be any bubbles left after Meltdown 2008? Only one, maybe: Government debt. In 2009, it could be swept away, too.

“The bond market’s going to collapse,” warns Peter Schiff, president of Euro Pacific Capital, a brokerage firm based in Connecticut. He’s one of a small number of financial pros who called the plunge in U.S. real estate prices before it happened; now he’s forecasting the same for U.S. Treasuries. “It’s the biggest bubble yet to burst. It is a complete fantasy.”

That’s the sort of cheery New Year’s forecast you might expect from a man nicknamed Dr. Doom. But Mr. Schiff has important company in the bearish camp. Pimco, the Newport Beach, Calif., giant that manages some $800-billion (U.S.) in bonds, has also grown negative on U.S. government debt, especially long-term debt. With 30-year Treasuries yielding barely 3 per cent, the rewards hardly seem worth the risk, Pimco’s managers are saying – unless you believe U.S. inflation will be close to nil over the next three decades. Not too likely.

Read moreBeware the next bubble – bonds