Five Things You Need to Know: Pimco's Gross Lets the Freak Out
Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:
The Freak is Out . . . The Revelations Playbook . . . You Never Know What Water You Will Drink . . . Feeding the Beast, the Rise of Alan Greenspan . . . Where Did It All Go Wrong?
The Freak is Out
There comes a point in every junkie's descent when the tentative restraint of self-consciousness and self-image loosens up just enough to let the freak out. For most of us, once that line is crossed there's no going back, ever. Naturally, no one knows when that moment will arrive. Indeed, the unpredictability of it is what lends the trip down the chute from recreational abuser to full-on foaming-at-the-mouth dope fiend its delusional aura of impossibility; the conviction that It Just Won't Happen to Me. For Bill Gross, that moment came today.
It's conventional journalistic wisdom that you can't go off half-cocked calling the managing director of the world's largest bond fund, in this case the Pacific Investment Management Company, a metaphorical junkie and freak without some kind of substantiation and context. In the old days, people were beaten and thrown in jail for far less.
But this is The Age of Self-Evidence. Waist-deep as we are in facts based on theories disseminated by Washington D.C. Federal agencies and weird anti-truths assembled from half-baked rumors and innuendo bubbling up from Wall Street, what's a little more kindling on the fire going to hurt? In the metaphorical land of the blind, the one-eyed man is king.
This is the kind of story that would ordinarily require the marshaling of all available resources and legitimate reporting skills, but there's little time for that now. The Managing Director of Pacific Investment Management Company, PIMCO, just called for the government to start buying financial assets. The freak is out.
The Revelations Playbook
"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," Gross wrote today on his firm's Web site. "[A] 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," he added.
If that kind of talk seems terrifying, it's probably because it is taken almost verbatim from the book of Revelations, an increasingly popular source book for Federal Reserve lackeys and financial types these days. It's hard to blame them. If I was doomed to work in the Federal Reserve, or if I managed the world's largest bond fund, I'd be scared too.
You Never Know What Water You Will Drink
"You never know what water you will drink."
- Ancient Chibchan aphorism
A good fix is hard to come by these days. Supply of credit is in absolute and total lock-down mode. The usual dealers are frozen in both place and time. Hell, they have their own vicious back monkeys to deal with. And that's a lesson worth keeping in mind. When the Ponzi scheme's scaffolding begins to finally shake loose and gyrate, it's every man for himself.
It is under such dire circumstances that the social order begins to disintegrate and people find themselves doing things they previously would have thought unimaginable; drinking nail polish remover, sniffing airplane glue, tying a bag filled with fresh spray paint over your head. Hence, the Ancient Chibchan aphorism: "You never know what water you will drink." Only a fool would tromp recklessly on Chibchan wisdom. Or an ignoramus. These days it's hard to tell the difference between the two, and normally safer to quietly tiptoe around the situation when someone like Gross lets the freak slip out. But the stakes have been raised to a point where we all have something on the line now. It's like watching someone stuff hundred dollar bills into a crooked slot machine and then waking up to the realization that that someone is you.
Feeding the Beast, the Rise of Alan Greenspan
No one sets out with the intention of becoming a toothless meth head. That's the kind of thing that slowly creeps up on you while you're busy feeding the beast, working to keep it far down deep inside and well-hidden.
The United States managed to feed its own beast for two full decades with only a handful of behavioral lapses. The main supply was operated out of a Washington D.C. quasi-public, bureaucratic branch office of the United States Federal Reserve, then headed up by Alan Greenspan, a former disciple of Ayn Rand with a rumored-to-be fake doctorate degree from NYU.
That a Randian Objectivist would suddenly find himself at the helm of largest credit creation machine in the world is as implausible as it is horrifying. Make no mistake, I'm no fan of Rand's Objectivism. Apart from being badly written, her philosophy, such that it is, flaps angrily in the wind, rootless, mistaking mere success at something for heroism.
Then again, from that standpoint alone, Greenspan's tenure as the chief supplier was remarkably heroic. We are now, stem to stern, the most deeply indebted society in the history of the world. While credit appetites ran huge during Greenspan's years at the Fed, it was his willingness to shower the Street with a seemingly endless supply of it that both enabled and reinforced excessive.... no, EGREGIOUS risk taking... even while soothingly spouting off econo-gibberish before politicians in Washington and on national TV. That's something only a fake doctor could get away with.
Perhaps most incredible is Greenspan's sheer durability. Even in retirement, he remains the Fountainhead, and it was this source that likely pushed Gross over the edge.
You can't make up that kind of storyline.
Where Did It All Go Wrong?
For Gross we can only speculate on where it all went wrong. And my guess is somewhere between Greenspan and Dow 5,000.
Gross predicts Dow 5,000
September 6, 2002 (CNN/Money)
The manager of the world's biggest bond mutual fund predicts the Dow Jones industrial average could fall another 40 percent to 5,000 because the stock market remains stubbornly expensive despite a more than two-year decline.
The point here is not that Gross was Wrong. Or maybe Early. Or any of the other useless hindsight that passes for pseudo-analysis. The point is that, for ordinary Americans, the Dow at 5,000 is an outright national disaster, and in 2002, when Gross was making his dire predictions for the Dow, the nation was moving toward hunkering down behind the closed doors of their then affordably mortgaged and yet-to-be-foreclosed homes, many likely even cashing out any stock they owned in exchange for stakes in PIMCO-run bond funds.
By June of 2003, Greenspan's Federal Reserve bludgeoned savers and basically enacted mandatory real estate speculation by taking short-term interest rates down to 1%. Dow 5,000 subsided... but you can only keep the beast hidden for so long before it leaps out and causes all manner of hysteria and mayhem. It's too much for decent, hard-working people to bear.
So today, as Gross nervously writes about the need for the government to support assets, the Dow is a mind-numbing 50% higher than where it was when Dow 5,000 was feared. That raises the obvious question, Why now? To the average American, the wheelings and dealings of the world's largest bond fund manager are as inscrutable as a dolphin's bark. Still, we can't help but wonder why now? Why did the freak slip out at this particular moment in time? Why not back in 2002? The answer is that, because then, it was only stocks plunging. Today, everything is plunging... at the same time.
Despite delusions of permanent inflation, asset prices are deflating across the board. For the first time since the Great Depression, stock, bond and real estate prices are deflating at an unimaginable pace, down 10% year-over-year.
Gross wrote today, "[T]he more [these leveraged assets] 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." Good lord, if that's not enough to let the freak out, nothing is.
The junkie's dilemma, whether we're talking about crystal meth, heroin or cheap credit, is that the spiral of addiction inevitably overwhelms any reasonable judgment about what constitutes a "cure." That is precisely why a junkie can never be relied upon to offer up an honest, sensible path to good health. No matter what treatment or plan is offered, the only goal is to get the supply to the beast... at all costs. Today, Gross let the freak out. And the plan is simply to open up the government's balance sheet to the beast... at all costs.
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The same PIMCO that sold 4.3 billion of auction backed securities and would not buy them back when the auctions failed.
Just google Pimco auction back securities and
read the May 1 Bloomberg.com article
No worries, this is just the sort of thing we have George WWW III for... all he has to do is declare a "war on economy" and 10's of trillions of dollars/month will be printed to overcome the adversaries. Why we can maintain all [justifiable] fronts; the war on terr, the Rushkies, Iran, N. Korea, Afghanistan, Iraq, the middle class, corporate taxes, Democrats [in general], the media, and falling home valuations. Let's see, that is very roughly $10 Trillion/month, no problem. These missions will be accomplished within 2 years. Alan, can you get those printing presses fir'd up again?
I am surprised Sparky left out war on drugs....:-)
I think I understand what asset liquidation means.
What does "debt liquidation" mean?
Now for the ugly part. What are our choices here ? Dow 5,000, 4,000, 3,000 ? Massive default ? The End of Credit ? or, in extremis, the government bailout. I'd almost rather see a suspension of 'mark to market' than any of the options presented above.
What course of action causes the least damage ??
jackbooted federales shoving your head into the toilet.
the bleating of the goats.
letting the freak out.
and that's just the last month or so.
you're tapped into the muse, my man, a direct IV. awesome imagery.
There was an article on Bloomberg today on the same subject. I sent the author an (so I thought) innocuous comment concerning Gross's self-serving blather and got an unbelievable response. I do believe that there are otherwise knowledgeable people who think he has put forth a sound, workable idea. To quote the Mogambo,
we are freakin' doomed.
That's our economy right now.
By lowering interest rates and creating massive debts, the Fed and the government have basically tried to enslave people from now until eternity by manipulating promises out of them through easy credit and massive marketing.
The problems are A: People don't live that long, and B: In order to pay those promises off, people have to have access to resources such as energy, food, and jobs making things that provide additional value for future generations to pay promises, rather than working simply to burn up resources (service economy). Not to mention the load on the promises that comes from sick people eating horrible cheap food and breathing fumes from cheap plastics.
I'll do my part to help as a citizen of the world.
Important investing tip to China and any foreign investors : US Dollars haven't backed by gold since Nixon. In fact, both he and Checkers are now in the big central bank in the sky. Thanks for the actual goods and materials you've sent since then. Feel free to have a bond fire with paper (I mean dollars) we've sent back to you. Maybe you can make some paper boats or something before torching them to get maximal value out of them.
Oh, unless you're leveraged. In that case you're totally screwed, and it Sucks To Be You. But that's what you get for having been a greedy bastich.
The traditional ratio of silver to gold is 15 or 16 to 1. Depending on the current ratio between them buy one or the other with surplus fiat money unless there is an investment with a reasonable risk-reward ration that is reasonably safe. Right now everyone is looking for one and there aren't any to be had. So people are playing musical chairs.
So why did gold and silver drop recently. The paper markets are very much related to credit availability for margin/leverage. Lots of folks (hedge funds) got caught long PM's and short dollars. When Trichet unexpectedly cut rates, the dollar rose and short ran for cover, selling long positions elsewhere. Moreover, markets are wringing out excess due to over-levering as credit contracts.
Thanks for a good laugh. It's been a long time since I've seen "the freak". The comparison couldn't be more accurate. It's like a big bust in a small town - after a few days everyone starts Freakin'.
Deflation turns the tables on that scenario; most hurt are those at the top of the inflationary pyramid. People like Bill Gross, for example. Otherwise, all deflation does is RESTORE the balance and allow the free market forces to rule.
That is why the Fed, and Gross, and just about every other leader of Wall Street financial institutions and power centers fear deflation above all other things. That is why the Fed has attempted to FORCE a hyperinflationary spiral to circumvent the effects of a deflationary debt liquidation, even at the cost of the present currency. So what if the dollar collapses. They will simply "revalue" it at a mythical number in the best case, and in the worst case they'll make new papers called dollars and redistribute those.
That deflation is (temporarily) winning is a testament to the strength of what is left of capitalism and free market forces in this country. It sounds easy on paper to operate a fiat currency monopoly, but a lot of things have to be constantly balanced to avoid being overturned in a deflationary coup.
The Federal Reserve doesn't fight inflation. It IS inflation. It's sole task is to create just enough inflation to enrich the finanical elite, essentially taxing any "profits" we may make, while affecting an "inflation fighting" posture in order to sedate the masses and prevent bread riots.
Deflation is nothing to fear. Why should it be? Who doesn't want lower prices? It's ridiculous on the face of it, and a tragedy that such an obviously ridiculous lie could come to be accepted as a core economic truth and GOVERNING PRINCIPLE of this Federal Reserve. And make no mistake, it IS a governing principle of the Bernanke Fed, which is precisely why he is leading that organization. Bernanke has time and time again stated he will do everything in his power to stop deflation.
I don't want deflation (in general) except for the correction to what is now going on. I also don't want perpetual inflation. How do we attain this? By creating a feedback mechanism that reflects the overhead of the System of systems. Instead of all the underhanded back door deals like the Fed makes to try and push the rope of credit, a direct consumption tax should be implemented on everything that is sold. Inflation is enabled by the inflated desires of people to acquire more than they really need, whereby they make promises they can't keep to people they don't know. All value (money or otherwise) comes from the desires of people for things vs. their ability to create something to trade for those things. Real value comes from real needs (food, shelter, water, etc) vs. Real sustainable production (farming, solar collection, recyclable mined materials, and the real value-added services of these roots).
A high population/civilization system demands high levels of overhead on those real production resources but also allows high levels of manipulation of desires (marketing). Therefore, the feedback needs to control the desires at the source of implementation in order to be truly useful. That means that the consumption of goods should reflect the costs of the Systems. All government activity should be reflected in the cost of goods. That way, people can make an immediate decision whether they need something enough to finance another war, and inflation/deflation can be regulated simply by changing the rate of a single tax.
Imagine starting a company and not having to do tax law.....
College tuition goes down.
Medical bills go down
Realestate taxes go down.
I am not leveraged. Bring it on. Its payback time, all the debtors who prospered at the expense of the savers need to pay it back. I won't be satisfied until a good house costs $35,000, the doctor charges $15 and four years of college costs about $12,000 total.
Deflation, whoo, whoo!!!
You are being disingenuous ? Lower prices are desirable IF you're buying - not if you're selling. We all do both to function as economic units. If you work for pay, that work is what you are selling. Does a lower wage sound attractive to you ?
Also, in the Deflation is nothing to fear line... cash is KING, yes ? SO productive investment is less and less likely to happen, absent truly outstanding expected returns; sub-optimal growth is predictable.
The heroes in Rand's novels were those who adhered to their code of ethics based on individuality and who persevered against collectivist mentalities. I found her works on philosophy to be well presented and most criticisms that I have heard expressed dealt with the tone of her writings. In any case, she wrote in English much better than I write in Russian.
Herds have a way of stampeding off cliffs – collectivist herds just do it best.
I guess it really comes down to who you think should be rewarded...
those with debts or those with savings.
And in anticipation of your response that we all have both...
that simply isn't so and when you consider the ratio of debt to savings the differences between people's finances becomes even more dramatic and pervasive.
Yes, we all share in our nation's debt but again the disparity in the degree to which we have benefited in the run up of this debt is all over the map.
It is like saying that a large percentage of U.S. debt is owed to 'ourselves'. Actually its only owed to those few that own the debt.
For us unwashed masses, our only benefit under inflation seems to be that we get to pay back this debt with a little less toil and sweat all the while seeing our buying power diminish in tandem. Actually, to be truthful, our children and grandchildren will get to pay for the last 50 years of our over-consumption...so I guess its win/win huh?
The word that seems to have been missing from our vocabulary over recent decades is 'consequences'. Well, I think we are about to, at long last, receive an education.
Given my knowledge of history I would have to bet that the lesson will be taught through inflation and revolution rather than deflation and decency but it would be nice if, just this once, we could rise above our collective greed and do the right thing.
Gee, wasn't ED DEVLIN of PIMCO critical of the Montreal Accord in Canada when they thought they get buy the non-bank ABCP cheap???
PIMCO is now a four letter word here in Canada.
Fair enough, in theory. I'd hate to try to convince the average wage-earner of the premise. Especially since this exchange you propose would not happen as neatly as it is put here; a sloppy set of price signals might settle in the way proposed - but it might not. That said, it stands to reason that the hardest bargainer wins the renegotiating game - and I'm not SOB enough to play that way. More's the pity.
I'm also unsettled by the realization that, while consumer prices are typically considered as a 'market basket' of goods, each of which would more-or-less drop by 30 percent (per example), my wage hit of 20 percent is a unitary event. Depending on what, in the basket, drops by 10, and what drops by 50 (say), it might not do me much justice.
But, when all is said and done, I would bet on forced inflation, to give the central banks the precious illusion of control.
Thanks for the reply, it is appreciated.
There are certainly some nuts in the Objectivist movement, but I admire the basic principles. A good overview, for those interested:
http://en.wikipedia.org/wiki/Ayn_Rand
Why not, for example, do some math and figure out whether we, as a society, can afford to backstop every real estate transaction for the last 10 years, in addition to paying entitlements we can't afford and paying for the services the government is actually supposed to provide? If Fannie and Freddie are actually insolvent, then what is the impact of 3 more years of massive defaults in the Alt-A and Option ARM markets? What happens to the Treasury market? Where does this all lead from a dollars and cents economic standpoint?
I'd like to rant too, so I'm going to rant at the people ranting about the situation we are in who actually have the knowledge, skills and forum to do and say something about it.
It is pretty clear that our entire banking community is run by a bunch of lemmings who ran after each other to "make hay while the sun shines" without any moral apprehension about where they were going. First step, criminalize the folks at the top for their Enron behavior. Start with the Countrywide CEO, and keep going. Include the chief execs of Fannie and Freddie. Sweep up some of the accounting firms that did the audits too. Sure, its merely punitive, but it will also help prevent a quick reccurance of the behavior that led us here.
Next, start letting banks fail at a much higher rate. This will allow real estate prices to fall much faster and deeper in the areas where it needs to happen. All the REO property will hit the market auction-style, and create a downdraft of prices. You have to amputate the gangrenous tissue if you want to save the body. The sooner the doomed properties are liquidated the sooner investors can take over them and redevelop them into viable communities again. The alternative is to let the neighborhoods where most of the defaults are happening become gang-infested societal sores.
Next, take government out of the mortgage business so that well-meaning but vote-buying congressmen don't force the Fannie's and Freddies of the future to take Alt-A, Option ARM and subprime paper in the future in an attempt to increase homeownership among their low income constituencies.
Next, institute policies that encourage the great urban concentrations to disburse. If real estate prices on the east and west coasts, and in all the sunny migratory destinations for ex-coasters, don't deflate significantly, we will eventually see further migration. In my view, it is healthy for the urban masses to move out into the hinterlands. For one thing, it would help keep real estate prices from launching into inflationary spirals, and for another it would help our society by reducing the tendencies of people to become harsh, jealous and greedy when placed in too close proximity.
I'm no expert, and you are Mr. Depew, so why don't you use your education, experience and obvious intelligence to move the ball down the field? At least I tried.
