Monday, January 12, 2009

Following Bill Gross

"William H. Gross has buying power few can match. The founder of money manager Pimco in Newport Beach, Calif. oversees $790 billion, most of it invested in fixed income. But now there's a new bully on the block: Uncle Sam. ... In the past year, the 64-year-old King of Bonds has bought $100 billion of preferred shares and senior debt of financial companies receiving taxpayer loans. His bet is that the government will throw good money after bad rather than let them fail. ... With stocks down 40% this year, he predicts Americans will shift from risk to thrift for at least a generation. ... Gross' theory is that the government will arrange to get itself paid back and that his investors can safely travel on the government's coattails. ... There is no chance, Gross says, that the U.S. will let AIG walk away without paying [$200 billion] back. ... 'No government coming to the rescue [like this] would allow us to go back to the prior stasis.' Expect, he says, a 'lower standard of living, a threat to the dollar as a reserve currency and a decline in U.S. hegemony'," my emphasis, Bernard Condon at Forbes, 12 January 2009.

With "good money [thrown] after bad", AIG paying Uncle Sam and an end "to the dollar as a reserve currency", why own bonds? How will AIG pay Unc? Unc will print the paper, and AIG will give the printed paper back.


Anonymous said...

Why own bonds?

You give ol' Gross a heart attack with that question IA...

Can you imagine if GrossMan liquidated all those funds and bought gold? How much an ounce?

Or the same question for any asset... GrossMan is the market... he positions his fund then tells everyone so then they follow-on his trade... zee market moves up...

I'm ten years old and even I know that!

Printfaster said...

There is only one reason to own bonds: Because you think that the Fed will convert them into zero maturity notes -- dollars.

It is all about shortening the yield curve.

There is not enough cash around to pay down the debt issued. Simple. We are talking about a monumental short squeeze on the dollar if taxes were used to pay the debt.

The only alternative is to convert long term debt into short term debt to reduce the interest costs. Loading interest costs onto the federal debt would make it unmanageable. Clinton was the first to shorten the yield curve to help balance the budget by not issuing 30s at the end of his administration.

So, holding debt is not that bad an idea, knowing full well the government will buy you out at a premium.

Apres moi, le deluge.

Anonymous said...

That premium could wind up negative if the dollar declines 20 to 30% or more over the next year.