“Would someone kindly translate this into english and advise?”
One of the smartest bond guys in the world has sold all US treasury bonds in the mutual funds he manages. His funds are, I think, the largest fixed income (bond) funds in the world. I believe his bond funds have held more in US Treasuries than any other bond fund in the world. US Treasury Bonds are how Zero finances the federal deficit.
If I interpret that move correctly, he thinks that the price of US Treasuries is going to fall. That means he thinks interest rates in the US are going up a lot. He has reached this conclusion for one of two reasons: (1) He thinks the Fed will not do a quantative easing 3 QE3; or (2) He thinks the fed will soon lose control of US interest rates no matter how much quantative easing it does.
Probable consequences if he is correct: An enormously increased federal deficit as interest carrying cost goes up. Dollar increases in value. Stock market falls a lot. Economy, already weak, slows down a lot. China is really pissed off because, other than the Federal Reserve Board, they are the largest holder of US Treasuries. Possible deflationary spiral as debts that are collateralized by US Treasuries and other fixed income default. Probable sovereign default by other countries as world interest rates increase in response to higher US rates and marginal countries cannot refinance the monies they already owe.
My question is... if you have PIMCO bonds in your 401k, should you just leave them alone since Gross has made this move to protect them? Or should you transfer those bonds into money markets?
I assume you misspoke. The Dollar will not increase in value as the federal deficit goes up even more. It will decrease in value because the fed will have to print more dollars to keep paying the debt.
I simply cannot see your argument for deflation. The money supply will have to drop for deflation to occur. But what the dickens do I know? Not much!
Thanks for explaining. You said “China is really pissed off because, other than the Federal Reserve Board, they are the largest holder of US Treasuries.” Do you think that this is a precursor to Beck’s prediction:
“Glenn Beck – 15 Days of Economic Collapse
Day 1 of Glenn Beck’s scenario begins with China announcing that they will no longer buy U.S. Treasury bonds. This is not such a far fetched idea, as they have certainly slowed their rate of bond purchases and have voiced public criticism of Ben Bernanke’s announcement this week of a second round of quantitative easing.
Day 2 and 3 focuses on Wall Street which gets ’spooked’ by China’s announcement. The volume of stock sales is ultra low as rumors of instability abound. By Day 5, the world begins to react. Markets in Asia drop 10%. The American and European markets also decline a like amount. The European Central Bank reacts quickly, raising interest rates to attract capital as investors seek a ‘flight to safety’.
Day 7 of Glenn Beck’s scenario has the U.S. stock markets closed while the Federal Reserve Board holds an emergency meeting. Needless to say the government is certainly participating in decisions during the next 48 hours. With some vague pledge of ‘a plan’, the markets reopen on Day 8. They may even rally a bit, gaining 500 points or so. On Day 9, things seem to be stable.
Day 10 and the U.S. Dollar loses 10-15% of it’s value! The Fed’s quantitative easing has pushed a sudden burst of inflation as global banks try to divest themselves of the reserves of dollars. How possible is this? Again, following Bernanke’s statements on Wednesday, financial leaders in China, South Korea and Thailand have already said this week that they will act together, in concert, to protect themselves from a devalued dollar.
Day 11, the Fed meets again. On Day 12, in Beck’s scenario, the Fed decides to follow the Euro Bank’s move of increasing interest rates. Far from securing stability and confidence, the sudden change in direction by the Fed has the opposite affect.
Day 13, Lucky 13 — GLOBAL MELTDOWN! All of the world’s market begin to crash as confidence in ‘The System’ goes out the window. It’s every man (and lady) for themselves! The value of all paper securities, be they mortgages, stocks bonds, currency, is questionable. The markets go into total free-fall, losing perhaps 20% or more in a single day.
On Day 14 of Glenn Beck’s scenario, the IMF (International Monetary Fund) and the G20 financial leaders meet. In a televised, joint announcement, they announce an emergency plan to restructure all ’sovereign debt’, the debt held by each nation. Perhaps even a new currency or basket of currencies for global trade to replace the U.S. dollar. The beginning of the New World Order.
On Day 15, the public begins to panic. In the past two weeks, the value of their currency has declined some 20% or more. The cost of food, oil, etc, has jumped. Bank runs are televised as people get whatever cash they can and buy whatever is available from the shelves of grocery stores. The entire nation is behaving as if a hurricane is approaching. ‘The System’ is utterly swamped.
Glenn Beck’s scenario for economic collapse is not all that far fetched. In polls taken earlier this year, more than 70% of Americans believe that things could get much worse. That another economic collapse could happen. As I wrote earlier today, a high-ranking finance official from China, Xia Bin, warned yesterday that the Federal Reserves plan for a second round of quantitative easing would not work and could lead to another collapse. Both of Glenn’s guests, authors Damon Vickers and Brad Thorn agree that the scenario is a very possible one. Beck said that during the course of researching his latest book, “BROKE”, some of the 30+ economists he talked with think that even 15 days may be optimistic. A sudden crash could happen in 3 days from an event such as China ending it’s purchase of U.S. bonds.”
http://www.rightpundits.com/?p=7626
Thank you for this very interesting explanation. Is any of this intentional or is this a system that is just out of control due to the use of incorrect financial principles?