PIMpCO States The Obvious


PIMpCO States The Obvious

By Karl Denninger

Note well folks: This is called “duh”, or “the second time nobody should be surprised.”

Ramin Toloui, a senior portfolio manager at Pimco, said the European Central Bank’s decision to buy government debt could be backfiring. Instead of encouraging private investors to keep their government debt, the programme might be leading to more sales, he said.

“The risk is that investors are using the ECB as a vehicle to exit their positions,” he said.

I’m puzzled by such a comment, and why he would call this “a risk”.

After all, PIMpCO bought up agency debt (MBS) and Treasuries here in the US in front of The Fed doing the same thing, then sold into the bid. 

Why would anyone expect any different reaction this time around?

If this is “backfiring”, then what did PIMpCO expect out of this “policy”?

The entire point of the ECB’s “intervention” was to allow the banks (in particular) who had irresponsibly bought up debt from a bankrupt government (that could never be paid) to get out of their bad investments at or near “par.”

This can only happen if either Greece’s debt is somehow defaulted (that is, we have a nasty deflationary event somewhere) or the ECB monetizes the debt (which has other nasty implications – not necessarily inflationary, but ugly in any event.)

The ECB’s actions are clear to anyone with more than two firing neurons in their brain, and it had nothing to do with “saving” the Euro.  That act was intended to and focused on saving the European Banks that had purchased debt that had no chance of being paid on the original terms and, since it was alleged “sovereign” and “risk free” they then levered that up to moon.  As such they were not just facing losses, they were facing bankruptcy.

This is precisely the same line of garbage that Bernanke and Friends ran when they started buying Treasuries and Agency Securities.  They did not do this to “stabilize” the dollar or the economy, they did it so that the banks that bought those agencies, including banks outside the United States, would be made whole at taxpayer expense for their purchases of securities from two bankrupt entities – Fannie and Freddie.

There is no difference in the intent of the parties here and there, and nobody should have expected a different result.