FedUpUSA

Archive for the ‘PIMCO’ Category

It is not often you see bond managers openly embrace Ponzi schemes, but that is exactly what Bill Gross did in his post Run Turkey, Run.

There’s another important day next week and it rather coincidentally occurs on Wednesday – the day after Election Day – when either the Donkeys or the Elephants will be celebrating a return to power and the continuation of partisan bickering no matter who is in charge. Wednesday is the day when the Fed will announce a renewed commitment to Quantitative Easing – a polite form disguise for “writing checks.” The market will be interested in the amount (perhaps as much as an initial $500 billion) as well as the targeted objective (perhaps a muddied version of “2% inflation or bust!”). The announcement, however, has been well telegraphed and the market’s reaction is likely to be subdued. More important will be the answer to the long-term question of “will it work?” and perhaps its associated twin “will it create a bond market bubble?”

The Fed’s second round of QE, therefore, more closely resembles an attempted hypodermic straight to the economy’s heart than its mood elevator counterpart of 2009. If QEII cannot reflate capital markets, if it can’t produce 2% inflation and an assumed reduction of unemployment rates back towards historical levels, then it will be a long, painful slog back to prosperity. Perhaps, as a vocal contingent suggests, our paper-based foundation of wealth deserves to be buried, making a fresh start from admittedly lower levels. The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adrenaline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.

We at PIMCO join with Ben Bernanke in this diagnosis, but we will tell you, as perhaps he cannot, that the outcome is by no means certain. We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QEII asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole. Just ask Japan.

Ben Bernanke, however, will try – it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do, and as he proceeds, the dual questions of “will it work” and “will it create a bond market bubble” will be answered. We at PIMCO are not sure.

Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants, be they financial asset classes more adaptable to inflation such as stocks or commodities, or perhaps the average American on Main Street who might benefit from a hoped-for rise in job growth or simply a boost in nominal wages, however deceptive the illusion. Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever. Sovereign countries have always implicitly acknowledged that the existing debt would never be paid off because they would “grow” their way out of the apparent predicament, allowing future’s prosperity to continually pay for today’s finance.

Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead.

The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin. It is a Sammy scheme – you and I, and the politicians that we elect every two years – deserve all the blame.

A Sammy scheme is temporarily, but not ultimately, a bondholder’s friend. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead-end where those prices can no longer go up. Having arrived at its destination, the market then offers near 0% returns and a picking of the creditor’s pocket via inflation and negative real interest rates. A similar fate, by the way, awaits stockholders, although their ability to adjust somewhat to rising inflation prevents such a startling conclusion. Last month I outlined the case for low asset returns in almost all categories, in part due to the end of the 30-year bull market in interest rates, a trend accentuated by QEII in which 2- and 3-year Treasury yields approach the 0% bound. Anyone for 1.10% 5-year Treasuries? Well, the Fed will buy them, but then what, and how will PIMCO tell the 500 billion investor dollars in the Total Return strategy and our equally valued 750 billion dollars of other assets that the Thanksgiving Day axe has finally arrived?

We will tell them this. Certain Turkeys receive a Thanksgiving pardon or they just run faster than others! We intend PIMCO to be one of the chosen gobblers. We haven’t been around for 35+ years and not figured out a way to avoid the November axe. We are a survivor and our clients are not going to be Turkeys on a platter.

Grossly Arrogant

Gross openly endorses Bernanke’s admitted Ponzi scheme because “to be honest, all he can do”.

Excuse me for asking but why does the Fed have to do anything? Better yet, why can’t the Fed and politicians admit the truth. The truth is there is no easy way out of this mess, and it is beyond foolish to attempt Ponzi schemes because there is nothing else to try.

Please remember that Ponzi schemes must collapse by definition. Yet Bill Gross arrogantly believes PIMCO can avoid such a collapse even though he also thinks the bond bull market is over. Yes, PIMCO has a great track record over the years, but making money in bond bull markets is a lot different than making money in bond bear markets and collapsing Ponzi schemes.

Fed’s Morning After Pill

The morning after the election the Fed will at long last announce exactly what its QE policy will be. Allegedly the Fed picked that date so as to not interfere in the election, yet the result has been massive speculation in stocks and commodities with economic pundits tossing around ever-increasing QE targets up to $4 trillion dollars.

In hindsight, the Fed’s self-induced guessing game was arguably more election manipulative than if it had done whatever it was going to do in advance. Whether on purpose or not, I suggest the Fed got more bang for the buck by encouraging speculation about what it would or would not do.

Sell the News?

Several weeks ago I suggested it might be a sell the news reaction. Instead, the runup in commodities and equities has been so massive it would not surprise me one bit to see a massive selloff before the news is even announced.

How can anything under $4 trillion not be priced in by now?

Liquidity Traps and Black Holes

For more on liquidity traps please consider Liquidity Traps, Falling Velocity, Commodity Hoarding, and Bernanke’s Misguided Tinkering

Fore more on black holes in which intelligent thoughts struggle to escape, please read Bill Gross’ mind.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Oh Mr. President and Congress (El-Erian)

Posted by Karl Denninger

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

Fears that Britain may be heading for its first sovereign debt crisis since the 1970s hit a new intensity after Pimco, the world’s biggest bond house, declared that it is starting to sell off its holdings of gilts.

By Angela Monaghan and Edmund Conway

The American investment group said it will be a net seller of UK Government bonds this year, at the very point when the Bank of England brings its £200bn programme of purchases to and end and the Treasury attempts to raise unprecedented sums through the capital markets.

The move is doubly embarrassing for the Government because the head of Pimco’s European investment team is Andrew Balls, brother of Schools Secretary Ed Balls, who is mastering the Government’s re-election strategy. The move will be seen as a financial vote of no-confidence in the Government’s handling of the economy.

Paul McCulley, a managing director at Pimco, said: “We are currently cutting back in the US and UK because… supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines.”

The yield on the benchmark 10-year gilt has leapt from below 3pc to above 4pc in the past year amid concerns about the Government’s capacity to bring its budget back under control, and worries about the coming end of quantitative easing (QE), under which the Bank has been buying massive numbers of gilts. However, UK equities staged a strong start to the year, with the FTSE 100 up 87.46 points to a 16-month high of 5500.34.

The Pimco switch was described by Mike Amey, its portfolio manager in London, as “a significant policy statement”.

“Those areas of the bond market that have had greatest support from central banks will be most vulnerable as that support comes to an end,” he added. Few economists expect the Bank, whose monthly meeting begins tomorrow, to extend the QE scheme beyond February, meaning the private sector will soon be solely responsible for demand for government debt. The gilts market has also been supported by new liquidity rules, which have seen banks buy large gilt holdings to bolster their balance sheets. These purchases, too, are seen as one-off, again implying a sudden drop in demand in the coming months.

Although the QE scheme has had its detractors, it has kept gilt yields down and helped prevent the flow of money in the economy from dropping into “depression territory”, according to economists. Figures from the Bank yesterday showed a welcome 0.3pc rise in the holdings of broad money, M4, by non-financial companies, in November, indicating that the radical policy of pumping cash directly into banks’ balance sheets may now be yielding effects.

Some accuse the Government of failing to lay out extensive enough plans on how to bring the budget deficit back under control, with the major ratings agencies threatening to downgrade the UK’s credit rating unless the next Government provides more ambitious plans for budget reduction. In what was seen as the starting gun for the pre-election battle, Labour yesterday published a document accusing the Conservatives of hiding the full details of its tax and spending plans from the public, sparking a war of words between the parties.

Carnage Continues: PHK (Who Smells Smoke?)

Posted by Karl Denninger

The “rumor on the street” at the time of the dump in PHK a few days ago was claimed to be a “fat-fingered” trade.

Uh huh.

Let me guess.  We’ve had three fat-fingered days in a row, right?  The first one which was an honest mistake, and now two days of follow-up which were also honest fat-finger mistakes?

Pretty impressive to lose all of the gains since October – in three days.

Of course this isn’t being discussed on CNBS, nor the real reason for it, nor is anyone calling out those who disseminated the “claim” that this was a “fat-finger” mistake originally.

Yeah.

This is high-yield debt by the way.  A PIMCO fund on top of it.  Closed end, and yes, it does trade at a rather insane premium to NAV, but closed-end funds have a habit of doing that.

But gee, here we are in the New Year, the selling continues at ridiculous volumes compared to the historical average, and in a market where the DOW is up 160 points this issue is down another 5% today.

Who’s whistling past the grave here?  If there’s a problem with the constituents in this fund then one has to ask if this is an “isolated incident” or whether it implies some really ugly things around the corner in the credit markets.

If you remember we had “little signals” like this back in 2007 – just before everything went totally to hell.  Anyone remember this?

That’s from 2007.  There were a few “signals” in this fund during that year…. and of course we all know what came next.

If this is fund-specific then why is it showing up in DPO too – erasing all the gains back to JULY?

Uh huh.  A 25% decline in less than 5 days eh?

I’ll go out on a limb here a bit: The “fat finger” claim IS A LIE and there’s something nasty brewing here that, as is the usual practice, has been leaked to certain “privileged” players in the market.

You’re welcome to believe this won’t infest and reflect into the broader marketplace.  I believe, as has been the pattern over the last several years, one ignores signals like this at considerable peril.

You, the ordinary trader and investor, will never be “cut in” on the deal and given the opportunity to get out before the curtains are on fire and people start succumbing to the smoke, and those who both leaked whatever inside information there is and who traded on it will not go to prison for doing so.

Nor will the “mainstream media” investigate this and report on it.  Not on CNBC, not on Bloomberg, not in the Wall Street Journal, NOWHERE.

Your only defense is to look for signals like this and get damn defensive when you see them – right or wrong – because someone who has more information than you do certain as the sun rising in the eastern sky is doing exactly that.

Uhhhhh… Ok, Keep Buying Fools

Posted by Karl Denninger

 Following up on the earlier ticker….  (above)

Could the next black/green/dark gray swan be so obvious that it has avoided everyone? Well, except for the deputy governor of the Bank of China, who just gave the world a startling reminder of economics 101, when he said that it is “getting harder for governments to buy United States Treasuries because
the US’s shrinking current-account gap is reducing the supply of dollars
overseas.” Oops.

The funny thing about natural (and economic) systems: they can only be pushed so far before they snap back to default state. With the entire world embarking on an unprecedented spree of domestic bubble blowing to mask the collapse in global GDP, everyone forgot to trade. Zero Hedge has long emphasized that the drop in world trade can only sustain for so long before it brings the current destabilized system back to some form of equilibrium. Because with every country intent on merely printing more of its own currency, whether it is to build bridges or to make the stock of electronic book fads trade at 100x earnings, said countries ran out of non-domestic cash. Alas, this is most critical for the United States, now that Treasury monetization is over, as the US needs to constantly find foreign buyers of its debt to fund unsustainable deficits. Foreign buyers who have US dollars. And according to Shanghai Daily, this could be a big, big problem.

Here is what the BOC’s Zhu Min said earlier:

“The United States cannot force foreign governments to increase their
holdings of Treasuries,” Zhu said, according to an audio recording of
his remarks. “Double the holdings? It is definitely impossible.”

“The
US current account deficit is falling as residents’ savings increase,
so its trade turnover is falling, which means the US is supplying fewer
dollars to the rest of the world,” he added. “The world does not have
so much money to buy more US Treasuries.”

In a nutshell, in printing trillions of assorted securities, the Treasury has soaked up the world’s dollars, which due to US banks not lending, is sitting and collecting dust in the form of bank excess reserves. These excess reserves can not be used to buy Treasuries and MBS as that would be literal monetization (as opposed to the figurative one which is what QE has been). And the world is running out of dollars with which to buy Treasuries.

Does this mean that the “world” will be forced to buy dollars, and thus spike the value of the greenback? Not necessarily:

In a discussion on the global role of the dollar, Zhu told an academic
audience that it was inevitable that the dollar would continue to fall
in value because Washington continued to issue more Treasuries to
finance its deficit spending.