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It's Over: PIMCO's Bill Gross Declares That The 30-Year Bull Run In Bonds Is Coming To An End
Business Insider ^ | 10/28/2010 | Gregory White

Posted on 10/27/2010 8:56:49 AM PDT by WebFocus

Bill Gross of PIMCO has attacked quantitative easing as a "Ponzi Scheme," and charged the American public and our politicians, not Ben Bernanke, with fault.

Gross writes:

"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."

While Gross isn't sure if QE 2 will work due to our liquidity trap predicament, he is sure who to blame for getting us into this mess. Gross targets the politics of the country at large.

Gross writes:

"Each party has shown it can add hundreds of billions of dollars to the national debt with little to show for it or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home. This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath."

(Excerpt) Read more at businessinsider.com ...


TOPICS: Business/Economy; Culture/Society; News/Current Events
KEYWORDS: billgross; bonds; pimco; treasuries

1 posted on 10/27/2010 8:56:51 AM PDT by WebFocus
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To: WebFocus

I’m not returning to the markets until I see some action towards the rule of law.
The criminals are still in charge and I don’t trust them.


2 posted on 10/27/2010 8:58:35 AM PDT by griswold3 (Nov 2 is not just an election, it's a restraining order)
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To: WebFocus

LOL! Boy that was a gutsy call. (sarc) The TIPs have a negative yield.


3 posted on 10/27/2010 9:03:14 AM PDT by Frantzie (Imam Ob*m* & Democrats support the VICTORY MOSQUE & TV supports Imam)
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To: griswold3

You are better off then buying ETFs for foreign markets or international funds.

There is no rule of law in America. Just idiots watching TV and being brainwashed 24x7.

Don’t expect there to be a rule of law in America again.


4 posted on 10/27/2010 9:05:21 AM PDT by Frantzie (Imam Ob*m* & Democrats support the VICTORY MOSQUE & TV supports Imam)
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To: WebFocus

As I recall, this @sshat was all-in for Obama in 08


5 posted on 10/27/2010 9:08:00 AM PDT by PGR88
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To: Frantzie
“LOL! Boy that was a gutsy call. (sarc) The TIPs have a negative yield.”

People will not be prepared when interest rates move, and we get back to the mean.
They will go much higher than average for awhile to get us back to the mean rate historically.
Maybe similar to what home prices have done.

6 posted on 10/27/2010 9:10:43 AM PDT by HereInTheHeartland (Vote Like Obama is on the Ballot)
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To: PGR88
...or move our military from one country to the next chasing phantoms instead of focusing on more serious problems back home.

Doesn't this comment tell you where this guy is coming from?

7 posted on 10/27/2010 9:11:52 AM PDT by JohnG45
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To: HereInTheHeartland

Since the 2008 Crash, investors worldwide have generally shunned equities in favor of the perceived safety of the bond market. Nowhere is this more apparent that in the retail investor market, where investors have pulled money from stock based mutual funds for 23 weeks in a row, while they’re on pace to pile some $300 billion into bond funds this year (on the heels of a record $350 billion in bond fund inflows from last year).

This trend in the retail investor market is largely based on fear of stocks (two bubble and subsequent Crashes in ten years will do that) and demographics (the aging boomer population, now punished by a Federal Reserve hell-bent on keeping interest rates at zero, is ravenous for income to help them move into their delayed retirement).

On the surface, this sounds pretty good. After all, stocks haven’t returned anything in ten years. In fact, adjusted for inflation, they’ve LOST money over that time. Plus bonds DO offer the appeal of definite income compared to stocks ,which often don’t pay ANY dividend or can experience large dividend cuts due to management screw ups or phony accounting coming home to roost.

However, the numbers don’t lie, we are most assuredly in a bond bubble. According to data compiled by Bloomberg and the Washington-based Investment Company Institute, investors have put almost as much money into bond funds in the two years ended June 2010 ($480 billion) as they did in equity mutual funds at the height of the Tech bubble from 1999-2000 ($496 billion).

And the insanity is literally across the board.

Treasuries are trading at levels not seen since the depth of the 2008 Crisis. We just had a TIPS auction close at a negative yield for the first time in history, meaning investors are willing to LOSE money just to park it with bonds that supposedly adjust for inflation (TIPS adjust based on the CPI which is nowhere near the REAL rate of inflation... see tomorrow’s essay for more on this), and US corporations have ALREADY issued $217 billion in junk bonds this year, even HIGHER than last year’s RECORD.

In plain terms, we’ve got a bond bubble of epic proportions on our hands. And if you think a stock market crash is something to behold, wait until the bond bubble bursts.

Remember, we’ve been in a bond bull market for well over 30 years. And while stocks have experienced at least three Crashes during that time (1987, 2000, and 2008), bonds have generally done nothing but go up over that period.

Because of this, there is an entire generation of professional traders/ analysts/ fund managers who have never invested during a bear market in bonds. These folks have made their entire professional careers investing with the basic understanding that debt is cheap and bonds overall move higher.

Can you imagine what kind of impact a bond market collapse (and higher interest rates) would have on these folks? Their trading programs and algorithms were created decades AFTER the last bear market in bonds ended. They are totally unprepared for this.


8 posted on 10/27/2010 9:15:26 AM PDT by WebFocus
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To: PGR88
As I recall, this @sshat was all-in for Obama in 08

As was Warren Buffett...

9 posted on 10/27/2010 9:17:03 AM PDT by April Lexington (Study the Constitution so you know what they are taking away!)
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To: Frantzie

Hey, who do you think will win Dancing With The Stars?

;)


10 posted on 10/27/2010 9:17:23 AM PDT by RobRoy (The US Today: Revelation 18:4)
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To: Frantzie
The TIPs have a negative yield.

Speaking of TIPs, I've got a question: What if the gov't lies about the inflation rate...?

11 posted on 10/27/2010 9:22:20 AM PDT by mewzilla (Still voteless in NY-29. Over 400 roll call votes missed and counting...)
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To: RobRoy

ROFL

“Hey, who do you think will win Dancing With The Stars?”

After gleaning much on a serious financial thread, I ran into your gem of a comment! LOL


12 posted on 10/27/2010 9:23:02 AM PDT by SanFranDan
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To: WebFocus
he is sure who to blame for getting us into this mess. Gross targets the politics of the country at large.

Wow, that's naming names, boyo!

What a useless analyst. The firetrucks start arriving, and he finally gets around to pulling the TIPS fire alarm.

How much you wanna bet this dork is a Democrat supporter?


Frowning takes 68 muscles.
Smiling takes 6.
Pulling this trigger takes 2.
I'm lazy.

13 posted on 10/27/2010 9:26:39 AM PDT by The Comedian (Don't run. You'll just die tired.)
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To: SanFranDan

Yeah, when you see who I was responding too...

It sums it up for me. I haven’t had TV since 1997 and it has really allowed me to see this stuff in a way that most Americans don’t. It is why I say I see the world today as an equivalent of August of 1939. It’s actually very obvious.


14 posted on 10/27/2010 9:37:49 AM PDT by RobRoy (The US Today: Revelation 18:4)
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To: Frantzie

I am really trying to change my investment choicess in my T Rowe Price 401k before I cash it out. I’m all in with bonds and want to shift to commodities. But there is no such choice. All of the choices are some form of stocks, bonds, or a mix.

If I can’t get into commodities, I really need to just cash the thing out.


15 posted on 10/27/2010 9:39:34 AM PDT by RobRoy (The US Today: Revelation 18:4)
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To: mewzilla

What do you mean what if? They already do lie about inflation they took the things that you really need to live out of the inflation numbers, things like food.

A Quick Glance At Real World Inflation

http://www.freerepublic.com/focus/f-news/2615232/posts


16 posted on 10/27/2010 9:49:46 AM PDT by FromLori (FromLori)
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To: Frantzie
LOL! Boy that was a gutsy call.

Considering that PIMCO is the biggest private bondholder in the world, yes. He is, in effect, telling people to dump his company's product.

There are much better buys than TIPs, because the U.S. government can't be trusted to keep score. A broad-based commodity ETF with low costs would be good here. Holding euros is no good, as Germany won't carry the rest forever. Yen are a bit better. U.S. stocks and real estate will both get slammed as interest rates rise. If it happens significantly in 2011, when the bulk of the remaining teaser rates get reset, real estate could drop more than 15% more.

Bill Gross has added value for the last 30 years buying bonds for his customers. His business model is now dust. At least he isn't hyping it up until the last sucker is lured in.

17 posted on 10/27/2010 9:53:10 AM PDT by bIlluminati (Don't just hope for change, work for change in 2010.)
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To: FromLori

Yeah, I know. But seriously, why would anyone buy these things, the TIPs, when the gov is deciding what the inflation rate is? Isn’t it in the gov’t’s interest to lie through its teeth, especially since lying doesn’t seem to be a problem for this particular admin? I don’t see the appeal, so what am I missing? :)


18 posted on 10/27/2010 9:53:27 AM PDT by mewzilla (Still voteless in NY-29. Over 400 roll call votes missed and counting...)
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To: bIlluminati

bump.


19 posted on 10/27/2010 10:08:39 AM PDT by Ann Archy (Abortion......the Human Sacrifice to the god of Convenience.)
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To: WebFocus
While Gross isn't sure if QE 2 will work due to our liquidity trap predicament, he is sure who to blame for getting us into this mess. Gross targets the politics of the country at large.

I agree with him 100%. Everyone wants lower taxes, but at the same time this entire country has a pathological aversion to actually cutting government programs that are the biggest contributors to our massive spending problem.

Anyone who runs a political campaign and is honest enough with the voters to tell them that we simply cannot afford Social Security and Medicare would be lucky to get 20% of the vote in any given election.

20 posted on 10/27/2010 10:13:18 AM PDT by Alberta's Child ("Let the Eastern bastards freeze in the dark.")
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To: RobRoy

What does T.Rowe have as far as energy? Actually T. Rowe does have a good one. I think it is New Era Fund. Oil, forest, minerals, precious metals. US and international stocks.

Over 100 years - forest was one of the best asset classes.

New Era’s historical return going back to inception 1-20-1969 (41 years) is 10.6%, which is very good. 10 years 10.5%. This is from their web site.


21 posted on 10/27/2010 10:23:29 AM PDT by Frantzie (Imam Ob*m* & Democrats support the VICTORY MOSQUE & TV supports Imam)
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To: Frantzie

“New Era Fund”

That choice is not offered in my plan. Maybe I need to talk with them directly.


22 posted on 10/27/2010 10:29:16 AM PDT by RobRoy (The US Today: Revelation 18:4)
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To: mewzilla

First thing that comes to my mind is extortion. Why pay the protection money? Because they’ll burn you out if you don’t, and you’re not strong enough to fight back.

That’s a pretty graphic example meant to convey my point that maybe it’s just the best outcome available. If I want the “safety” of Treasuries, at least with TIPs I won’t lose AS MUCH as I could in an inflationary environment.

Just my opinion, I don’t do this for a living.


23 posted on 10/27/2010 10:33:06 AM PDT by Darth Reardon (No offense to drunken sailors)
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To: JohnG45

Without Freedom, Liberty and Security... ther can be no economy. Sometimes these idiots get lost in the numbers.

LLS


24 posted on 10/27/2010 10:45:17 AM PDT by LibLieSlayer (WOLVERINES!)
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To: mewzilla

I wouldn’t buy them I know what your saying I think there is way too much corruption and risk myself. It was explained to me this way about TIPs.

One of the reasons investors are willing to buy TIPS at a negative yield is that TIPS pay a premium when inflation goes up. So if you believe, as these investors must, that inflation will eventually go up over the next 5 years, the current investment at a negative yield could still pay off nicely.

Another thread explains it better..

TIPS most people understand. They’re “Treasury Inflation Protected Securities,” meaning that the Treasury adjusts your principle for inflation.

If you don’t understand how TIPS work in an inflationary environment, google “how TIPS work” and you’ll see a couple of great examples.

OK, but why a negative yield? Why would someone pay a premium for these?

Well, there are two explanations:

1. Investors in these are expecting inflation. That’s simple enough.

2. Investors are expecting inflation or deflation. That’s not so simple. The normal Treasury debt (bill, note or bond) just pays you the coupon based on your principle investment. If there is inflation, that eats into your yield, and if there is deflation, your coupon looks better due to the negative rate of inflation. Remember that the real rate of yield is nominal yield minus the rate of inflation, and if inflation is negative (deflationary), then you have a higher, not lower, real yield.

OK, so TIPS are asymmetric - the Treasury adjusts your principle if there is inflation, but leaves it alone if there is deflation. If you don’t know whether there is going to be inflation or deflation, you’re better off buying TIPS than Treasuries, because now at least you’re protected on the upside, assuming that the CPI captures the inflation. Which isn’t necessarily a safe assumption these days. Investors know right now that the CPI is effectively at rock bottom, and the Fed has openly declared that they’re trying to cause inflation.

So investors bid up the option of being protected from inflation.

http://209.157.64.200/focus/news/2614309/replies?c=1


25 posted on 10/27/2010 10:47:07 AM PDT by FromLori (FromLori)
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To: mewzilla

I wouldn’t buy them I know what your saying I think there is way too much corruption and risk myself. It was explained to me this way about TIPs.

One of the reasons investors are willing to buy TIPS at a negative yield is that TIPS pay a premium when inflation goes up. So if you believe, as these investors must, that inflation will eventually go up over the next 5 years, the current investment at a negative yield could still pay off nicely.

Another thread explains it better..

TIPS most people understand. They’re “Treasury Inflation Protected Securities,” meaning that the Treasury adjusts your principle for inflation.

If you don’t understand how TIPS work in an inflationary environment, google “how TIPS work” and you’ll see a couple of great examples.

OK, but why a negative yield? Why would someone pay a premium for these?

Well, there are two explanations:

1. Investors in these are expecting inflation. That’s simple enough.

2. Investors are expecting inflation or deflation. That’s not so simple. The normal Treasury debt (bill, note or bond) just pays you the coupon based on your principle investment. If there is inflation, that eats into your yield, and if there is deflation, your coupon looks better due to the negative rate of inflation. Remember that the real rate of yield is nominal yield minus the rate of inflation, and if inflation is negative (deflationary), then you have a higher, not lower, real yield.

OK, so TIPS are asymmetric - the Treasury adjusts your principle if there is inflation, but leaves it alone if there is deflation. If you don’t know whether there is going to be inflation or deflation, you’re better off buying TIPS than Treasuries, because now at least you’re protected on the upside, assuming that the CPI captures the inflation. Which isn’t necessarily a safe assumption these days. Investors know right now that the CPI is effectively at rock bottom, and the Fed has openly declared that they’re trying to cause inflation.

So investors bid up the option of being protected from inflation.

http://209.157.64.200/focus/news/2614309/replies?c=1


26 posted on 10/27/2010 10:47:24 AM PDT by FromLori (FromLori)
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To: RobRoy
Hey, who do you think will win Dancing With The Stars?

The American Idle.

27 posted on 10/27/2010 10:53:45 AM PDT by Smokin' Joe (How often God must weep at humans' folly. Stand fast. God knows what He is doing.)
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To: WebFocus

My money’s on Bristol Palin!

Jets in 2010........


28 posted on 10/27/2010 11:11:14 AM PDT by PSYCHO-FREEP ( Give me Liberty, or give me an M-24A2!)
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To: RobRoy
It is why I say I see the world today as an equivalent of August of 1939

Nah, we're not even up to March of 1938 (Austrian Anschluss).

29 posted on 10/27/2010 11:23:42 AM PDT by glorgau
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To: RobRoy
I am really trying to change my investment choicess in my T Rowe Price 401k before I cash it out. I’m all in with bonds and want to shift to commodities. But there is no such choice. All of the choices are some form of stocks, bonds, or a mix.

I'm in the same exact fix with TRP and unless I retire and get my hands on my 401K to get it out of there, I can see it all going up in a puff of smoke when the next financial market bomb hits. It's like watching a train bear down on me in slow motion and being tied to the tracks with little hope of getting loose in time.

30 posted on 10/27/2010 11:37:56 AM PDT by OB1kNOb (11/02/10 - Liberty or Tyranny?)
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To: OB1kNOb

Anybody have a favorite IRA we can roll this into?


31 posted on 10/27/2010 11:43:36 AM PDT by RobRoy (The US Today: Revelation 18:4)
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