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Pimco's Gross calls for US govt to bail out bonds, housing
Most New Zealanders don't know about the investment gurus that the rest of the world listens to.
Our 'gurus' are the likes of Ron Brierley or Graeme Hart, although we rarely hear their pearls of widom. We simply watch what they do and applaud from the sidelines.
However, in America, there are at least two 'investment gurus' that people follow closely. Warren Buffett is a legend who now attracts tens of thousands of acolytes to his annual meeting in Omaha Nebraska. The other 'guru' is Bill Gross, who runs PIMCO, the world's biggest bond fund manager.
When he talks about interest rates and bond markets the whole of the world's professional investors and many of the world's amateur bond investors sit up and listen.
|
| He has just issued his latest newsletter that says some extraordinary things. Gross has basically said the US bond markets are about to go into a death spiral of debt reduction, asset sales, asset revaluations and liquidations that would make the Depression look like a picnic. |
He has made the extraordinary plea for the US Government to essentially step up and bail out Fannie Mae and Freddie Mac to rescue the bond market. He says the government should also subsidise house purchases to ensure a collapse in the housing market doesn't worsen the situation.
Here's the core of his argument.
As the chart (above) demonstrates, there have been prior periods when this trio (stocks, bonds, houses) has not done well and the U.S. economy has hardly blinked. However, the current year-over-year decline of over 10% has never really been witnessed since the Great Depression. That, in and of itself, is a potential red flag. Yet a 10% aggregate asset price decline does more than make us all 10% less wealthy. Because many of these assets are leveraged and margined, the more they decline, the more frequent and frenzied the margin calls, and if the additional cash flow is not provided, not only an asset liquidation but a debt liquidation follows. It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse. In the housing market for instance, it is one thing to observe a 15% national decline in home prices.
It is much more serious however, when margin calls in the form of monthly mortgage payments (many of which are in-creasing due to adjustable or option-related contractual provisions) lead to foreclosures, which in turn cause a debt liquidation. The bank in this case, takes possession of the home and dumps it back on the market, lowering the price even further, which leads to more foreclosures, which leads to"¦.
Related Topics
This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage.
And the private market, in its attempt to anticipate a bear market bottom and snap up "bargains," has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for "they are all underwater." We, as well as our SWF (Sovereign Wealth Fund) and central bank counterparts, are reluctant to make additional commitments.
Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning. There may be a Jim Cramer bull market somewhere, but it's primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices.
New balance sheets? Is this now some Deloitte & Touche metaphor? Hardly. What I mean, what our blackboard and our Investment Committee point out is that to ultimately stop this asset/debt deflation, a fresh and substantial new source of buying power is required. This became all too obvious as the Treasury's attempt to entice additional capital into Freddie and Fannie came up empty. Yet this same dilemma is and will continue to confront all highly levered institutions in the throes of asset liquidation. Without a new balance sheet, their only resort is to sell assets, which in many cases leads to further price declines, or ultimately debt liquidation/default.
A Depression-era bank robber named Willie Sutton once said that the reason he robbed banks was because "that's where the money is." Illegal for sure, but close to an 800 SAT score for logic if you were in the business of stealing other people's money. And now, while some will compare current government bailouts to Slick Willie, citing moral hazard, near criminal regulatory neglect, and further bailouts for Wall Street and the rich, common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury "“ not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA (Federal Housing Authority) and other government institutions. A 21st century housing-related version of the RTC (the Resolution Trust Corportion was set up after the US Savings and Loan crisis of the 1980s to buy the assets of failed financial institutions) such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.
The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it "knows something"¦knows something," it is time for the Treasury to do likewise.
This is seriously worrying from someone who is very careful with what he says.
Remember New Zealand has borrowed at least an extra NZ$85 billion from foreign (debt) investors in the last 7 years to pay for a frenzy of home buying, property investing and general consumption. At least NZ$83 billion of our total foreign debt of NZ$219.4 billion is on terms of 90 days or less. We receive payments of about NZ$13-15 billion for exports of goods and services every 90 day.
If a global debt death spiral start that forces liquidation of assets to repay debt, that will wash onto our shores.
Gross' piece will spark a massive debate in the United States. We will watch with interest. In the meantime we should be paying back our debt as fast as we can and keeping interest rates high to ensure we continue saving rather than spending.
16 Comments
Good stuff Bernard you do
Good stuff Bernard you do well to get this information out to the public.
Whilst agreeing with much of what Gross says one has to ask the question - how can the Treasury come to the rescue when technically the US govt is in hock up to its eyeballs? Imagine transferring yet more debt to the US govt balance sheet as all these extra liabilities are taken on board. That would require selling trillions of dollars of new T-bills.
Fire up the printing presses...
Fire up the printing presses...
It's amazing what you can do when you have the power to tax and print money...
cheers
Bernard
Bernard - a very interesting
Bernard - a very interesting article. It seems to me that the USA is turning into a Socialist state. It bailed out Bear Sterns by lending JP Morgan the money to buy it and insuring it against any losses. It has lent out hundreds of billions to Trading and Investment banks at very low interest rates, in the latter case the first time the Fed has done this since the 1930's. Now Bill Gross, a classic free markets campaigner, is suggesting a huge bailout. Interestingly Russia is now emerging as one of the leading lights in private enterprise. It sure is a strange world at present.
if he is such a
if he is such a guru, why is he a bonds fund manager? Surely he should have been swapping them for something real (like gold) over the past few years if he thinks he is correct. The guy is after a handout, pure and simple.
Bernard, I see your angle
Bernard, I see your angle on keeping interest rates high (to encourage savings) but I doubt that this will work in practice. NZers have consistently had some of the highest savings rates in the world available to them, but have one of the worst savings records. By comparison, the biggest creditor nations (Japan, China etc.) have pathetic deposit rates. Wouldn't high interest rates just send us to the wall?
The guest writer at Daily
The guest writer at Daily Reckoning says :
"Unfortunately, that is the good news. The bad news is that if real-estate prices were to replicate the Great Depression (as would surely occur in the case that hedging instruments of Fannie and Freddie were to catastrophically fail due to counterparty failure - and given the absurdly low risk premiums on credit-default swaps at the height of the bubble, such an event cannot be considered unlikely) the Case-Shiller Index tells us that the loss to the taxpayers could exceed $2.5 trillion dollars."
http://www.dailyreckoning.com/
Oh great!! So you can
Oh great!! So you can have a "frenzy of house buying" and responsible actions by central bankers??
The central bankers are the ones who have been doing their jobs ***for us*** ???
What kind of world do we live in??????
Most of NZ believes the
Most of NZ believes the worst of the recession is behind us and that we are heading for better times. This includes John Key who believes he is going to be able to afford tax cuts without wholesale cuts in government spending. Our export demand will fall for non essential goods and NZ will suffer even with a collapsing exchange rate.
The economy is extremely reliant on the global economy and a failing U.s is going to hit NZ hard. How this message is conveyed to the mass population is beyond me. When retailers offer 48 months no interest no payments hoiw does that work?
Sorry Folks, I accidently hit
Sorry Folks,
I accidently hit the Submit button before I had completed. Wil post again when finished.
Mish Shedlock has some great
Mish Shedlock has some great comments on this:
http://globaleconomicanalysis.blogspot.com/2008/09/bill-gross-wants-trea...
It’s a little long, but
It's a little long, but it explains this Gross's actions fully.
I am afraid if anyone on this blog has bothered to read a word I have ever said, or any links to historical evidence from their own mouths, you would now know exactly what option this man is putting to the world. Through a process of Credit Creation and Debt Manipulation the Central Banking Network now has most nations entrapped in its web. 97% of the worlds money supply is now loaned from them at interest, never leaving the Electronic Transfer System, including 97% of our own(NZ) money supply. The most alarming thing is, thanks to one of the greatest scams in history, they began with nothing but fresh-air to back their side of the contract. A nations money supply now begins as an injection of Central Bankers Created Credit. Every Dollar simply written into the computer of the Central Banking Network system then loaned at interest to nations as what they term Powered Money. Along with every Created Credit Dollar loaned, comes into creation a Government Bond or Treasury Bill, depending on the term of the loan, which is a contract that the Created Credit will be repaid, phoney principal and interest, out of the future taxes of the nation. There are currently worldwide a minimum $45 trillion worth of Government Bonds in existence today and on average over 50% of most nations taxes now go to servicing foreign debt. The only institutes with the power to bring into creation Government Bonds to be on sold on the secondary Bond Markets, are the privately owned Central Banks.
Most nations, including ours, have for a long period of time now had a permanent drip feed of this Central Bank Created Credit. Our dealings with these people are conducted by the NZ Debt Management Office, an institute imposed upon us as part of our refinancing package from the Central Banks when we were liquidated, again, as a nation in 1984. Our provisions were $2.5 billion per annum, those provisions were recently lifted to allow $6 billion if needed. This Central Bank Created Credit is then spent into circulation by the Governments of the day as Social Services. Another source of what is termed Powered Money, comes from the way in which commercial banks are able to write mortgages into existence as keyboard account entries in a computer without putting anything up as consideration for their side of the contract. Yet another is Credit Card Created Credit.
These Powered Money sources are then expanded even more as further Created Credit when once spent into circulation by the initial borrower, they find there way into a Deposit Taking Institute such as Registered Commercial Banks, Insurance Companies and Non Registered Finance Companies. Under international regulations handed down by the controlling body of the Central Banking Network-The Bank Of International Settlements(BIS) governing Deposit Taking Institutes worldwide, including NZ, when this Powered Money finds its way into the Deposit Taking Institutes, under what is called Fractional Prudential Capital Adequacy Requirements, every Dollar they take in is able to be held as Capital Reserve, then expanded by ten times as even more Created Credit relent back into the system at interest.
The end result of this is that imminently the Real Sector repeatedly gets loaned more Created Credit by the Financial Sector, than it can collectively physically extract the means of repayment from the nations/worlds natural resources, pushing them into a commercial war in which it is predetermined a very few have any chance of surviving, this is essentially the Business Cycle. Currently in most nations, if it were not for the taxpayers funds being poured in to prop the Commercial Banking Sectors on a nightly basis, they would have gone the same way as our Deposit Taking Finance Companies, for exactly the same reasons. The privately owned Central Banks at the centre of this scam are holding debt to the heads of nations like a gun, telling them to keep paying the bankers ransom, or let their financial systems implode into chaos, thus their society implode into chaos.
So, I am not sure if this chap Gross is a Bond issuer or just a heavy investor in the modern day slave trade that is the secondary bond market, but either way what he to is doing is backing up the hidden threats of the Central Bankers, because if the financial system collapses, the people stop paying the Bankers Ransom that adds two times to the cost of living for the Real Sector, the Bonds he holds are going to be worthless.
It all sounds depressing(pun intended) but the answer lies in Social Credit as fully implemented in Canada 1935-74 and partially put in place in NZ in the same period.
I put it to you that it is the only viable humane answer that will ever see the human animal use his advantage of reason to have learned behaviours of common decency overcome our self destructive animal instincts.
Roger J Kerr, regular contributor to this blog and one of three current members of the New Zealand Debt Management Advisory Board might like to fill in anything I might have missed, Or John Key who spent 1999-2001 on the foreign exchange committe of the Federal Reserve Bank of New York, the largest of the privately owned central banks of the US, or the Cabinet Executive of the Labour Party who know of this, but have not had the economic intellect to stop it, feel free to jump in.
But they wont, as this is their little nuclear secret that none of them will use against each other, because if the wider public found out all of their parts in this disgrace, they would all be gone by lunchtime.
Cheers
Iain
Well that US jobs report
Well that US jobs report was indeed dire: unemployment jumped from 5.7% to 6.1%.
http://www.marketwatch.com/news/story/jobless-rate-soars-unexpectedly-61...
Clearly the jokers who cook the GDP figures have not yet been given the job of monitoring unemployment.
I think this US$ rally may run out of steam.
Hi Andy, (Read at bottom
Hi Andy,
(Read at bottom how Government first tried to supply incorrect definition of employed then back tracked and once again international regulation is given as the excuse.)
The US employment figures would be even more alarming if they are as rigged as our(NZ) employment figures are. Since we were liquidated by the Central Bankers subsidiary development bank -The International Monetary Fund(IMF)- in 1984 and have been controlled by their imposed Economic Structural Adjustment Program administered by Treasury and NZDMO, prior to 1984 you had to have worked 30 hours of paid employment in a week to be deemed employed.Since 1984 you only have to have worked for 1 hour of paid employment in the week that the Household Quarterly Survey is conducted to be deemed to be employed. A far more accurate figure of jobs duress is the underemployed figure, those that have one or more jobs, but are seeking more work to reach a level of financial dignity. You will have also noticed the rise of the temporary employment agency, that charge people out at $30 dollars, pay them $12.50 and provide absolutely no job security.
Bogus employment statistics
- On the 8th November 2004 I sent an e-mail to Steve Maharay, the then Minister for Social Development and Employment, asking him what the minimum number of hours you have to have worked in a week to be deemed to be employed?
-On the 3rd December I received a reply from Steve Maharey;
Dear Iain
Thank you for your e-mail 8th November 2004 concerning the definition of employment.
-For benefit purposes section 3 of the Social Securities Act 1064 defines "employment" as paid employment.
-The Social Security Act also defines full employment and part-time work as;
Full employment or part-time, in relation to any person, means-
(a)employment under contract or service or apprenticeship which requires the person to work, whether on time or piece rates, no less than an average of 30 hours each week; or
(b)self-employment of the person in any business, profession, trade, manufacture, or
undertaking carried on for pecuniary profit for no less than an average of 30 hours each week; or
(c)employment of the person for any number of hours which is regarded as full-time employment for the purposes of any award, agreement, or contract relating to that employment.
part-time work[...]means work that averages not less than 15 hours a week when calculated over the preceding 3 months...
(a)under a contract of service, whether on time or piece rates ; or
(b)as a self-employed person in any business, profession, trade, manufacture, or undertaking.
I trust this has been helpful.
Yours sincerely
Steve Maharay
Minister for Social Development and Employment.
-To which I replied 3rd December 2004;
Hi
Thanks for replying to my question.
What I am really wishing to know is, what is the minimum number of hours a person would of had to of worked, in any fashion deemed to be work, before they are deemed able to be presented to the public in government statistics, as employed.
Is it as per the statistics methods used on www2.stats.govt.nz which explains -(a)worked for 1 hour or more for pay or profit in the context of an employee/employer relationship or self-employed.
Cheers
Iain
-I then received an e-mail 6th December 2004;
Iain, can I have your postal address so the Minister can respond to the issue you raised.
Margaret Monks
Ministerial Secretary
Office of Hon Steve Maharay
- I then supplied my postal address.
- I then received this letter in the post dated 7th December 2004;
Dear Mr Parker
On behalf of Hon Steve Maharay, Minister for Social Development and Employment, thank you for your letter 3rd December 2004 regarding employment statistics.
-The matter you have raised falls within the portfolio responsibilities of the acting Minister of Statistics. I have therefore referred your letter to Hon DR Michael Cullen for his consideration.
Yours sincerely
Scott Josling
Private Secretary(Social Development)
- I then received a letter by post(not dated) from Michael Cullen;
Dear Mr Parker
Thanks for your e-mail of 3 December, enquiring about employment statistics and the definition of an employed person.
-In short, the answer to your question is yes, it is as per the definition on Statistics New Zealand's website.
-New Zealand's official employment counts are sourced from Statistics New Zealand's quarterly Household Labour Force Survey. In this survey, a person is deemed to be employed if they worked for 1 hour or more, for pay or profit, in the context of an employee / employer relationship, or self-employed.
-This definition is used as the measurement of employment because it aligns with the standard definitions of the International Labour Organisation.
I hope this response is helpful.
Yours sincerely
Hon Michael Cullen
Acting Minister of Statistics
My understanding was that Gross
My understanding was that Gross took a punt on fannie and freddie but its gone belly up and now wants a govt handout before shareholders realise the scale of losses.
Well since its the weekend
Well since its the weekend it must be time for the FDIC in the US to close another bank.
And indeed it is (a $2Billion Nevada bank that is):
http://www.lvrj.com/breaking_news/27939119.html
Hi Andrewj, Want to know
Hi Andrewj,
Want to know the complete history and facts of the Central Bank created Fannie and Freddie, check this out, I guarantee all will find it the most informative;
http://www.webofdebt.com:80/articles/take_a_load_off_fannie.php
Cheers
Iain