Biggest Bond Fund Dumps U.S. Debt

NATIONAL REVIEW ONLINE ^ | March 09, 2011 | Kevin D. Williamson

[neverdem]

So, the guy behind the world’s largest bond fund is dumping U.S. government debt.

Got your attention yet?

Bill Gross of Pacific Investment Management Co. (PIMCO) is no great fan of  U.S. government debt to start with: His fund also zeroed out its holdings of Uncle Sam’s IOUs back in 2009, but had added some back into the portfolio. No more. He’s not buying what Washington is selling, and he’s urging others to dump U.S. bonds, too. Bloomberg reports:

Gross in his February commentary urged investors to reduce holdings of Treasuries and U.K. gilts and buy higher-returning securities such as debt from emerging-market nations. “Old-fashioned gilts and Treasury bonds may need to be ‘exorcised’ from model portfolios and replaced with more attractive alternatives both from a risk and a reward standpoint,” Gross wrote.

So, what’s wrong with U.S. government debt? With deficits running at insane levels but interest rates still low, the risk-reward ratio is out of whack, even compared to “emerging-market” countries — read: those Third World regimes whose farcical finances we used to regard with a mixture of scorn and pity, until we began emulating them. All the money-printing down at the Fed is taking a toll:

Gains in so-called headline inflation matter more for the U.S. economy than Fed Chairman Ben S. Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“Bernanke tends to think this doesn’t matter — at least in terms of headline versus the core — we do,” Gross said.

What this means, of course, is pressure on the U.S. government to offer higher interest rates on its bonds. Gross says that the rates need to go up about 1.5 percent to reflect market realities. And market realities, ignored for the past few years, are going to start reasserting themselves as “quantitative easing” ends and the Fed stops buying U.S. debt that the markets don’t want.

As things stand, interest on the debt (at about 6 percent of all federal spending) is equal to about one-third of all discretionary spending combined (about 19 percent of the budget). Current forecasts have debt-service costs alone amounting to nearly $1 trillion by 2020, consuming 20 percent of all federal tax revenues. That’s a vicious circle: Bigger deficits add to the total debt, which drives up the cost of debt service, which creates bigger deficits, shampoo, rinse, repeat, and wake up in Argentina circa 1999–2002.

Which gets us back, as usual, toward the one inevitable, undeniable fact of American life at this moment: The major entitlement programs — Social Security, Medicare, Medicaid — other “mandatory” spending, national defense, and interest on the debt make up more than 80 percent of federal spending. Everything else put together accounts for less than $1 in $5 of government outlays. Assuming we don’t default on our national debt, interest on the debt is the one spending item that is truly off the table. Even if we cut national-defense spending to zero, that would only get us just over halfway toward eliminating the trillion-dollar deficit headed our way in 2012. (We aren’t cutting national-defense spending to zero.) Meaning that major reform of the entitlement programs is not optional. It is do or die.

Bernanke & Co. have baked inflation into this cake, and catastrophic state and local finances mean that Washington really can’t pass off its spending schemes onto the governors, mayors, and state legislatures.

You may think the Ryan Roadmap looks harsh and disruptive. But we simply must start dealing with these things right now, while we have some resources, some options, and some time. It will be much more harsh and disruptive to try to deal with these things after the fiscal crisis is upon us, when inflation is skyrocketing, unemployment is through the roof, and the markets start demanding a very high premium to finance the debt of Washington, the states, and the cities, if indeed investors are willing to do so at all.

We are in an extraordinarily dangerous period, one that calls for real leadership in Washington, where the geniuses in charge are currently locked in a death struggle over whether to cut nothing or next to nothing.

NPR? Foreign aid? Food stamps? That isn’t going to do it. The fact that we’re even having a discussion about whether we have to federally subsidize experimental opera companies in Topeka suggests that the message has not quite hit home. Maybe when the Social Security checks stop coming, Americans will notice. Which is to say, when it’s too late.

To be clear, PIMCO in and of itself is not disastrous — it is just a mile marker on the road to Fiscal Armageddon. But it is one worth noting.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

[neverdem]

Remember Gary U. S. Bonds? Gary changed his first name to Dump. Will the boys and girls in Congress please wake up?

[Lazlo in PA]

I understand Gross’s position here, but I don’t trust him. All through the years this guy comes up with concepts that are from a different playbook. I would like to know his real intent. Last year he was calling for nationalization of mortgages to boost housing sales even though rates were in the toilet already.

[TruthConquers]

Here is a link to MISH, who is a deflationist:
I’m not sure if I agree with all of MISH’s views.

Six Reasons to Fade Bill Gross:
http://globaleconomicanalysis.blogspot.com/2011/03/pimco-dumps-all-remaining-treasuries-in.html

I just don’t trust Bill Gross anymore than Buffet, or Bennie and the InkJets.

[BenKenobi]

Great. Glad to see other deflationistas around. :)

[TruthConquers]

I am not sure what I am. I read both sides.
But I do still read Mish, it lets me think for myself instead of following whoever. I do think another deflationary crash is in the future, the big question is ...When?

[BenKenobi]

That’s why I paid off all my debts, and I’m almost completely in USD.

Too much of a crapshoot to be worrying about the when. I’d rather be prepared.

[upchuck]

Thanks for posting the entire article and preserving the links.

TheBernanke is insane.

[kittymyrib]

Bill Gross used to appear regularly on CNBC. I’ll bet he’s not welcome in that “I LOVE OBAMA” club after this.

[ModelBreaker]

“I understand Gross’s position here, but I don’t trust him. All through the years this guy comes up with concepts that are from a different playbook. I would like to know his real intent. Last year he was calling for nationalization of mortgages to boost housing sales even though rates were in the toilet already.”

His bond funds have consistently outperformed others. He’s putting his money and reputation where his mouth is—he’s not just spouting off on CNN.

He may be right or wrong. I’m betting he’s right. I just increased my investment in PTTRX.

[SkyPilot]

We are in an extraordinarily dangerous period, one that calls for real leadership in Washington, where the geniuses in charge are currently locked in a death struggle over whether to cut nothing or next to nothing. NPR? Foreign aid? Food stamps? That isn’t going to do it.

We have to cut Social Security, Medicare, and Medicaid. Real cuts - and people will be angry. But the options are:

1. Small Greek style protests and venting of anger....or

2. Real riots when the whole shebang explodes because the politicians kept pretending the ship wasn't sinking

He is correct in that cutting "food stamps" alone won't help that much, but what he is forgetting is that the Democrats have divided up Welfare Spending into about 150 different programs so that it can't be counted as one. For every $1.00 we spend on Social Security, we spend $0.70 cents on Welfare (food stamps, electronic benefit cash payouts, unemployment checks, Section 8 housing, and every other liberal give away program).

If the whistling through the graveyard DC crowd does not act very soon, I give us less than 2 years before the US economy absolutely collapses. Less than that if China announces they will no long purchase US bonds.

[Lazlo in PA]

So you are in favor of nationalizing mortgages to make a fast buck? How many more bad mortgages would we have today if he Gov’t got in this any further than it already is with Fanny and Freddie? Interest rates were already nothing. This was a foolish idea and why I used it to explain my distrust of his motives.

I like that Gross is out there to make money. I don’t mind if he does well for his investors. But to come in at random times pushing destructive ideas is not good for the country and he should be ridiculed when necessary, if necessary.

[ModelBreaker]

“But to come in at random times pushing destructive ideas is not good for the country and he should be ridiculed when necessary, if necessary.”

I don’t disagree that bad ideas are bad ideas. But imho, this is a good one. Gross is right about T-Bills and he’s right about the reason for the problem. It’s not that what he’s saying is novel. You can read it every day on FR. But it takes courage for someone with his prominence to say our emperor has no clothes—especially when the emperor and his sidekicks are vengeful SOB’s who will retaliate against members of the ruling class who go rogue. And this is emphatically going rogue.

[Lazlo in PA]

Gross is right here for the near future. It is just a taste for victory that we argue about.

[familyop]

A scare from opinion writers about the Fed halting its bond buying at the beginning of summer won't bring oil prices down much or for long. But it will make employees of government and big corporations very afraid of spending for fear of huge layoffs.

As for Bill Gross, he sees too much risk in bonds, as many others do. The "safety" is in commodities exporters (not from Bill but others). The "risk" is in a government entering a sovereign debt crisis.

"No Way Out" of Debt Trap, Gross Says: U.S. Living Standards Doomed to Fall Yahoo/Finance ^ | 3/9/11 | Stacy Curtin

Excerpt:
“There is really no way out of this trap and this conundrum at this point,” says Gross. From an investment perspective his advice is to stay clear of “bonds in dollar denominated terms” and to be “wary of higher interest rates going forward.”

These are risky times.

Former Goldman Analyst Charles Nenner: A "Major War" Is Coming At The End Of 2012