It's All Coming To An End, Bill Gross Warns

[marmar]

from Zero Hedge:



Say what you want about Bill Gross, but the legendary bond investor is absolutely spot on in the following paragraph from his latest, December, investment outlook:

How could they? How could policymakers have allowed so much debt to be created in the first place, and then failed to regulate their own system accordingly? How could they have thought that money printing and debt creation could create wealth instead of just more and more debt? How could fiscal authorities have stood by and attempted to balance budgets as opposed to borrowing cheaply and investing the proceeds in infrastructure and innovation? It has been a nursery rhyme experience for sure, but more than likely without a fairytale ending.

.....(snip).....

But each of these central bankers is trying to achieve the same basic objective: Solve a debt crisis by creating more debt. Can it be done? A few years ago, I wrote that this uncommonsensical feat could be accomplished, but with a number of caveats: 1) Initial conditions must not be onerous; 2) Both monetary and fiscal policies must be coordinated and lead to acceptable structural growth rates; and 3) Private investors must continue to participate in the capital market charade that such policies produced.

Let me explain each of these three caveats in turn.

1. By initial conditions, I am referring to existing structural headwinds that would thwart the successful rejuvenation of old normal, nominal growth rates. Certainly a country’s current debt/GDP ratio factors enormously into the oddsmaking for success. It is difficult, for instance, to imagine Japan getting out of its quagmire of debt by simply creating more of it and buying 100% or more of the new and current supply. Similarly, Greece (which has already suffered several restructurings) as well as neighboring Euroland peripherals begin the healing process well behind the debt/GDP eight ball. But there are other significant initial conditions – structural headwinds – that my version of the “New Normal” envisioned as early as 2009: aging demographics, technology/the race (rage) against the machine, and the ongoing reversal of globalization, are all growth-stunting factors to consider. Economist and former Treasury Secretary Larry Summers has labeled this “Secular Stagnation” and rightly so, but it is just another way to describe the New Normal and its deleterious effect on future growth.
Monetary and fiscal policies must work side by side; they must be stimulative as opposed to being counterproductive. It makes little sense, for instance, for Euroland to be running a tight fiscal policy resembling the balanced budget mandate of Germany, while at the same time initiating quantitative easing and negative interest rate monetary policies. The same holds true for the Bank of Japan’s massive monetary stimulus on the one hand, and Japan’s raising of its consumption tax on the other. One could even apply that complaint to the U.S. with its fiscally restrictive rebalancing of its budget deficit from 10% to 3% over the past five years. If not for fracking, Uncle Sam might be labeled the Old Man in the Shoe for not knowing what to do. In fact, in the U.S., as elsewhere, there has been little focus on public investment and infrastructure spending. It’s been all monetary policy, all of the time, with most of the positives flowing over to markets as opposed to the real economy. The debt currently being created is not promoting real growth and solving a debt crisis – it is being used by corporations to repurchase shares and accentuate the growing inequality between the very rich and the middle class.

2. Keeping private investors playing the “game” in our financial markets even though they smack of a pyramid scheme might seem like a no-brainer. “Where else can they go” has been and continues to be the commonsensical refrain. Not sure, but perhaps Google Maps can show the way. But on the fringe and at the margin, there are alternatives to negative interest rates or artificially low cap rates, or escalating P/E ratios based on historically high profit margins. And even if investors must buy something, they don’t necessarily have to buy it in their own or any specific country. If 3-year German government bonds yield -.05%, then how about a 3-year Brazilian government bond at 12.5%? At the moment the negative yielding German bond gets the market’s vote, but you must see the point. Creating more debt with artificially low yields leads to currency wars and exchange rate volatilities that distort global capitalism. Solving a debt crisis by creating more debt cannot cure the disease if higher volatility distorts the historical flow of markets and associated commerce.

3. And of course economic theory might suggest that artificially low interest rates gradually but inevitably lead not to more consumption and real growth, but to more savings in order to meet future liabilities such as education, health care, and eventual retirement. If a household needs $250,000 for any or all of these future commitments, it will be twice as hard to meet them with 5-year Treasurys at 1.5% instead of 3%.

.....(snip).....

Markets are reaching the point of low return and diminishing liquidity. Investors may want to begin to take some chips off the table: raise asset quality, reduce duration, and prepare for at least a halt of asset appreciation engineered upon a false central bank premise of artificial yields, QE and the trickling down of faux wealth to the working class. If the nursery rhyme theme is apropos to the future, as well as the past, investors should remember that while “Jack and Jill went up the hill,” that “Jack fell down, broke his crown, and Jill came tumbling after.” ................(more)

The complete piece is at: http://www.zerohedge.com/news/2014-12-04/its-all-coming-end-bill-gross-warns

[Snarkoleptic]

1. watch for an inverted bond yield curve as this is the strongest predictor of

An impening recession (or worse). Such inversions are currently 7 for 7 in prediciting a major downturn in the 7-15 month time horizon.

[Blue_Tires]

2. Forgive me, please break this down for laymen?

I typically don't pay attention to shady outlets like ZeroHedge, but I'm guessing this is important is marmar posted it...

[jtuck004]

12. Along with other things, we have a financial crisis brought on by a criminal conspiracy

of the banks and their lapdogs, from mortgage brokers to politicians, in an effort to gain unjust profits from the people in the United States. In the aftermath assets which had been pumped up to unbelievable levels worked beyond their wildest dreams, while 10 million families were thrown into the street in foreclosure, tens of millions had their jobs disappeared or had them replaced with much lower paying jobs, and today millions are underwater with their loans, owing more than their homes are worth, and waiting for interest rates - which we are keeping down artificially - rise, whereupon millions more will more into foreclosure.

The answer by this administration, and most of the world (this is a global debt problem), has been to make the banks wealthier than they ever have been in the history of the United States, because "making them healthy would be good for all of us" we were told. In the process some public relations efforts were made to help voters believe that they would be helped, but virtually all the effort and money flowed to the banks. Leaving nothing much for the people except some public relations schemes like HARP, which have done little or nothing. (They try to say it has, but E. Warren just put a pin in that balloon with her remarks to the had of the FHFA, here.

(It is this plan, to pump up the banks on the backs of working Americans by denying them the opportunities that government could provide by investing in them, that is detailed in Stress Test, Timothy "Killer" Geithner's book. You can watch the interview with Jon Stewart in which he tells Killer that the administration went to hell and back for the banks, but not for the people. Killer tries to spin it differently, but the audience, voters, laughs AT his face.)

Basically, then, you have a whole country full of assets that are not worth what the numbers on the books say, and an administration whose plan is to pump enough taxpayer dollars into the banks to make sure they are able to walk away from their criminal pursuits with huge profits.

Except that it is all a farce, pumped up fake values, hidden by more and more debt. Can you juggle it forever? This administration, just like the banks, knows this is unsustainable, but appear to think they can run the clock out and have it crash - which will bring great tragedy to more of this country - on someone else's watch. It is a house of cards.

Over 10 million people have moved into poverty during this plan, (more than a few died from the stress), 5 million people lost their homes, and many of the foreclosed homes have been bought up in large blocks by investors, turning some 7 million people into renters. since 2008. A rule was even passed by those who make the rules for accountants, (you can google it) to value real estate and other assets at the farcical paper value instead of what they would actually sell for - to keep the mirage intact.About 30-50 million have dropped down into near poverty, and one in four of those are kids with not enough to eat - something we are going to pay heavily for in the future. Tens of millions have now moved into being part of the "working poor", their jobs so bad they may qualify for food stamps. As bad as this is today though, when this comes apart, and it will - it has to - it will make all this look much better in retrospect.

Gross says this is a house of cards, and it is near time for them to fall.

[Blue_Tires]

14. ok...i understand a bit better..

How does this effect the economies on other continents?

[dixiegrrrrl]

24. How does this effect the economies on other continents?

Same way..

In the Eurozone, you have the European Central Bank, which is doing to Euro zone countries what our central bank here ( The Fed) is doing to our states.
Already the "pigs" ( Portugal, Italy, Greece and Spain) plus Ireland have been suffering under the "austerity" imposed by the Global bankers.
We are also experiencing austerity, tho in different words.
Essentially the IMF and the World Bank have selected hand picked people to run the countries that are in debt, then sold off those countries' resources;
water, electricity, manufacturing, houses, farms, etc.
And the gold, of course.
No different from what the mob used to do to businesses that owed it money, a process called "breaking out". Get the company ( state/country) in debt to you, then when they can't pay, take over the business, steal everything in sight, run up huge bills and finally, when all is gone, torch the store for the insurance.

China just bought Smithfield Farms, a giant pork company here. Rich foreigners are buying up tons of real estate here.

It is happening all over the globe.
and the cracks are beginning to show.

[jtuck004]

28. We are all intertwined - they hold our assets, they hold ours,

money is invested internationally for greater profits, and we are a net importer, so a lot of jobs that would be here are overseas. The buildings they used to be in are gone or decrepit, and a lot of people would have to be re-trained to work on what we are doing now. A lot of the worthless assets that fell out over the past few years weren't fixed, they were just re-financed, so they are just as shaking going forward as they were then. As well, trillions are being held overseas to avoid taxes.

We live in the United States. The wealthy, the banks, their lapdog politicians and supporters live in the world, and they use that difference to take advantage of people.

We are pretending things are going to come back if we just float everything long enough. It's not, and it will get people killed pretending otherwise, people who are the most vulnerable.

The people we are propping up with our lives are the wealthy. A group just in past few weeks did a paper noting that the 85 richest people in the world make about $500,000 a minute. This is who we are supporting. If we being in invest money in working people the deficit will begin to rise and the wealthy will be hurt, but it would give people a way out. That isn't the plan.

There was a book one time about biology, The Web of Life, by Storer, I think. He talked about how everything was connected. Our financial system is set up the same way.

[LiberalArkie]

17. I think we will know next year. The Republicans knew what was coming down

since they only wanted third string people in the presidential races. They did not want to win in 2009 because they knew what was about to but loose. McCain/Palin good grief. If the Democrats and Republicans have losers win the primaries then I think it is time to start that garden and get the money into safe places like the mattresses and fruit jars in the back yard.

[jtuck004]

29. Shouldn't wait to start the garden. It's harder than it looks when it isn't just a hobby. <G> n/t

[magical thyme]

34. agreed. the gardening should be well underway.

I wouldn't be putting much money into jars. What spare cash I have goes into increasing insulation in my old house. I don't let much cash accumulate.

[happyslug]

18. In fact it is quite simple

The Government has to spend money (Stimulus) in addition to the Federal Reserve (and other Central Banks) expanding how much money is in the economy. The Federal Stimulus MUST be greater then the Expanding amount of money.

Remember the following rules of Economics:

1. People earning less then Median Income tend to SPEND any money they have while people who earn more then Median Income (around $45,000 in the US today) tend to put such money into "savings".

2. It is SPENDING not savings that drive an economy.

3. "Savings" includes paying down debt, i.e paying down Credit Cards in today's society.

4. The most cost effective way to boost an economy is to give money to the lowest income people. They will NOT save any of it and spend ALL of it.

5. Exchanges that boost an economy are those exchanges that lead to other exchanges. Thus someone buying a Sandwich, leads to someone buying bread, which leads to someone making flour to be made into bread, which leads to someone buying wheat to be made into flour, which leads to someone buying wheat seed to plant. That is five transaction (six if you include giving the first person the money to buy the sandwich). On the other hand, if you give the same money to buy the Sandwich to someone who is NOT hungary and puts the money in a bank, you barely have two transactions, one to the person who then puts the money into the bank.

6. The economy is boosted by increasing the number of transactions NOT increasing how much mediums of exchange your have (i.e. SPENDING money drives the economy NOT money by itself).

7. Any TAX on spending reduces any affect of any stimulus program for its take money from people who would spend it and gives it to the Government and the banks. Thus sales taxes (added value taxes and other taxes based on Consumption) hurts the general economy.

8. Income taxes, if concentrated on those making twice as much as Median Income removes excess money from savings (i.e. Income Tax HELP the economy, but only if applied to people with high income i.e. making more then $100,000 a year). Income Taxes are the best check on inflation for it removes excess money from the economy.

9. Money is for ease of transaction, money by itself has NO economic value. What gives money its value is its ability as a medium of exchange. It is the EXCHANGES that drive an economy not Money. Thus increasing the money supply (what the Central Banks have been doing) can NOT by itself drive the economy.

In even simply terms, if you want the economy to boom, increase economic exchanges. The best way to increase economic transactions is to give money to the poor AND not tax them. Giving money to the rich HURTS the economy.

The problem since 2008 (and you can trace it back to Reagan) has been a refusal to want to increase money going to people earning less then $50,000 a year (And even worse, refusing to increase money going to those people earning less then $20,000 a year).

In the years before Reagan, the US had developed an economic safety net for itself by making sure those making less then median income saw an increase in their share of the economy. From the 1930s till Reagan, the Rich became Richer BUT their share of the total economic pie became smaller because the other 99% of the population became richer at a greater percentage rates then the rich were getting richer. This increase almost only occurs during a Revolution where society is turns on its head and the rich are killed off (The American Revolution was NOT this type of Revolution, but the subsequent French Revolution tended to that direction. In the US we rarely executed people who supported the Crown and then only for crimes they actually did. On the other hand In the Reign of Terror the French were killing them left and right and if you actually did a crime was unimportant for the crime was being rich and society needed to reduce the number of rich people).

The Russian and Chinese Revolution saw further example of the rich being killed off and their wealth spread out among other people (Concentration of Wealth has return to both countries, but that is another story). I bring these examples up, for it was the US that saw a similar trend, but over a longer time period, with greater effect and no blood shed. The Rich became poorer if looked at percentage of wealth the rich had, and the poor richer on the same basis.

This changed under Reagan. All of the increase in Productivity since Reagan has gone to the 1%. Worse, the bottom 50% has seen their share of the economic pie DROP since Reagan. The Economy only "boomed" since Reagan do to Credit Card usage. Credit Cards use by the poor was unheard of prior to Reagan, then it quickly caught on. People became use to paying with debt items that was used up before the debt was paid off. This increase in debt is what kept the Economy going since Reagan. In 2008 we finally saw where this increase in debt was heading for, but the crisis was over everyone return to the same policies.

Debt has increased so much since Reagan, that it is now becoming hard for people to manage that debt. i.e. they do NOT have the income to pay such debt DOWN, thus it gets "Rolled over" over and over again. If something stops people from making those payments, the number of roll overs drop and defaults increase. That what happened in 2008 (the high price of gasoline that year contributed to that crisis), people had increase costs (high gasoline prices and other increases) but no increase in income so that they could no longer pay on their debts. They defaulted in droves.

Thus Debt is how we have driven the economy out of every recession since Reagan, but it is NO longer an option (The Federal Reserve would increase the money supply in such recessions and the banks would hand out more and more Credit Cards. thus driving the economy). Thus the increase in the money supply in previous recessions, lead to an increase in debt among the 99%, that lead to increase spending that drove the economy out of the recession. With the 99% no longer capable of increasing debt, debt can NOT be used to drive the economy out of the Recession.

In the days before Student Loans and Credit Cards, recessions were addressed by stimulus packages that increase spending aimed at the bottom 50% of the population. These programs were very successful for it provided money to those people who would spend it. The Central banks would expand the money supply to reflect this increase spending. The Central Banks are increasing the Money Supply and hope that is sufficient, but even the Federal Reserve had slowly come to the conclusion we need increase SPENDING in addition to increase amount of money. The Banks are using their ability to borrow from the Federal Reserve to expand how much money they have on hand, but have found few who can borrow the money to spend.

Thus we need a massive spending stimulus program, but the American People have elected an anti-spending Congress. This recession will linger till after the next election and maybe the American People will wake up and elect people who are willing to spend money.

[dixiegrrrrl]

25. St. Ronnie has been trickling down on us for decades now

and we are facing ruin.

[ChisolmTrailDem]

26. It's a massive scheme by the richest people who control the levers of power to further enrich

themselves while impoverishing the rest of the population.

It will crash at some point. There is no stopping it. And when it crashes, we will be begging for the status quo of today.

[Quantess]

3. Interesting.

[AverageJoe90]

4. I'm going to have to take a HUGE grain of salt with this.

Mainly because there have been so many FAILED predictions of catastrophe over the past few years, that it's not even funny.

If there *is* a real potential for a short-term major recession, it may lie when the Chinese economic bubble finally implodes, and that may be as soon as 5 years from now. But you're not going to hear THAT from Billy Gross, I suspect, or any of these other libertarian outfits for that matter.

[happyslug]

19. I do not think they will be any massive downturn...

The problem with the economy is that it is NOT booming and Congress will NOT do what is needed to give a kick start to the economy.

People forget FDR did not really get the US out of the Great Depression, the Democratic Congress did and did it by spending money. FDR vetoed various Spending Bills (he even Veto the Bill providing early payment of the Bonus Army money, a vote that was overridden by Congress).

We now have a right wing Congress that will REFUSE to spend any money and thus the economy will just linger along till we elect a Congress of actually spending money. It is so bad that the new Chair of the Federal Reserve has all but said a HUGE Stimulus package is needed. The Fed, through its control of the Currency can NOT do it alone. Congress has to decide to spend, but it does not look like it will.

[KingCharlemagne]

5. I have a difficult time slogging through the meanderings of Tyler Durden (editor

of ZeroHedge) and often find myself wondering what the point is of all his verbiage, beyond vague dark conspiratorial mutterings and Austrian school of economics tomfoolery.

To put matters bluntly: what is the point here?

[MaggieD]

6. Don't buy bonds

Which is a no brainer and has been for years. But the guy writing it is addicted to feeling important and brilliant.

[Mojorabbit]

32. Does he also mean municipal bonds?

I was looking into them for perhaps a better rate of gain.

[LondonReign2]

41. That's a bingo

Don't buy bonds. That's the sum of it.

I disagree with the doomsayers about the economy in the short to intermediate term. And, as the economy continues it slow ascent, at some point QE will end and interest rates will click up. And bonds will sink.

[Fumesucker]

11. Tyler Durden is the main character in Fight Club

It's a nom de plume that gets put on everyone who writes at ZeroHedge.

I don't read it myself but I know someone who does, of course he didn't know who Tyler Durden is either.

[KingCharlemagne]

21. I learned something new today. And here I thought this 'Tyler Durden' fellow was simply in love

with the sound of his own voice!

I had no idea that byline was stuck on different individual's contributions, so thanks for that.

[madfloridian]

22. Aha, I just remembered DU's own Tyler Durden.

Seems like years ago. Took me a while to catch on and just not get pulled in. I'm pretty naive in such economic issues, that's why I never write about them.

[JaneyVee]

16. You MUST see Fight Club.

[sendero]

35. I think his point...

.... ( and I agree with him occasionally but not usually, especially because of the fact that he can't see that it's his libertarian archetype, the uber-moral high achiever (a Randian fallacy) that has led us to this sorry state)...

his point is that there will be, whether a month from now, a year from now or a decade from now, a crash in which some small corner of this house of cards unexpectedly fails and brings the whole thing down.

What does that mean exactly? Well depends on who you ask but the most common expectation is for a deflationary period that leads to, rather rapidly, hyperinflation as the central banks expand their printing even more.

[DanTex]

7. The same Bill Gross who lost his job by being dead wrong, predicting inflation and losing investors'

money by investing based on his wrong predictions over the last 5 years? This is the guy we're supposed to be listening to?

[truebrit71]

31. Yup. And don't forget his massive bonuses....

... even if his predictions never panned out...

[abelenkpe]

8. When?

[padfun]

9. you're living in the reality based world...

guys like you are"in what we call the reality-based community," which is defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality—judiciously, as you will—we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors…and you, all of you, will be left to just study what we do.

"quoted from source in Bush admin 2004"

[sendero]

36. Many people think..

..... this talk was Karl Rove, and if so how funny. How funny to watch him lose his grip right on national TV when his candidate lost. How funny that he has "THE MATH" which turned out to not add up.

Grandiose thinking can propel a lucky person into a good position for a time, but it always eventually bites one in the ass.

[woo me with science]

33. +1

[markpkessinger]

13. Bill Gross has an extraordinary record . . .

. . . of making wrong predictions.

[GummyBearz]

15. Eh...

While I agree with that paragraph, the problem is anyone can see that now. I saw it back in 2007, and invested wisely. Bill Gross didn't.

And after reading probably 100+ Bill Gross interviews over the last decade, my main take away is that he will say ANYTHING if it will help his fund gain a tenth of a percent (granted most money managers would also do the same).

[dixiegrrrrl]

27. You DO know he has left Pimco, don't you? n/t

[GummyBearz]

37. Yes

"Left" is a kind word for it... forced out is more accurate

[WinkyDink]

20. I'm tired of being scared. Not that I shouldn't be, but I hate feeling this way. What would I and

others DO?

[ladyVet]

38. I know nothing about investing, and don't care to know.

My feelings are that you should invest in yourself: learn to fix things, to build things, learn to cook, learn to garden, keep livestock if you can, form a collective with neighbors, family, friends to pool resources and talents.

Get out of debt. Seriously, no debt. Get healthy, if you can. Having to buy medications means you need money. I know some folks can't do this. My father can't. He needs a very expensive drug to live. But you can lose weight and not become diabetic. Or reduce your chances of heart disease. Get your teeth fixed now. Have a spare pair of eyeglasses, or two.

Buy tools, supplies (nails, screws, etc.), stock up on food (oils, spices, alcohol if you use it, things you can't grow easily). Learn to sew, to can, to live without the latest gadgets. Save money, but only in a way that you can access easily: a savings account rather than a stock account. You want to be able to get that money and spend it quickly when the bottom drops out.

During the Great Depression, my mother's family raised cows, chickens and pigs. They put in a big garden, had grapes, fruit trees. They made it through quite well, because they could provide almost everything they needed themselves. They weren't rich in money. Fortunately, those were the days when America still made stuff. My grandfather worked in a textile mill, so he had wages to buy things his family couldn't provide themselves.

The stock market is a Ponzi scheme. It's going to go bust. Today. Tomorrow. Ten years from now. But it will happen. The 1% won't even notice. But we will.

I feel better knowing I'm doing what I can to provide for my family. We are learning skills that will help us, our extended family, our neighbors. Maybe it's easier for me, because I've never had much. Always poor, always struggling to figure things out. So I won't miss much, because I'm not used to much. I do hope I can still access the Internet, though. That I would miss.

[LondonReign2]

43. "I know nothing about investing, and don't care to know."

You make this statement, than claim, "The stock market is a Ponzi scheme. It's going to go bust. Today. Tomorrow. Ten years from now. But it will happen."

How do you make that claim if you know nothing about investing?

You realize the market has never gone bust, not in 1929 and not in 2009, right? "The Market" is nothing but a listing of public companies; if you think The Market is going to go bust, you are saying American companies (as well as the foreign listings) are all going to go broke.

[Mad-in-Mo]

39. I'm also tired of being scared

I've had this on my mind a long time. Not sure what any of us can do to prepare other than to get out of debt and become as self reliant as possible.

I appreciate the discussion on this topic.

[heaven05]

23. Title?

Damn right!!!! Greed and stupidity has it's own dire consequence. The problem is, most people with no stake in this problem are going to suffer, big time.

[blackspade]

30. Bookmarked and K&R.

[xchrom]

40. du rec.

[MrScorpio]

42. Easy fix: Dump the Republicans

What are we waiting for?