Friday, October 14, 2011


Please find a recent article from the FT regarding Bill Gross' odd and powerfully negative direction call to short treasuries, and his reversal to fall in love with Treasuries now that the long bond is 200 bps lower in yield (price is 30% higher!).

I sometimes have a friend that lets me listen to conference calls that he is invited to attend and strangely enough, the other day I was invited to listen to Bill Gross speak this morning about his firm's performance and his outlook for the economy and his funds.  Because they (PIMCO) swing such a big stick (the Total Return Fund) has about $230 Billion under management I like to hear what they are saying because every once in  awhile you can get a nice tidbit about where he really thinks the market is going.  While you must always be wary that Bill Gross will talk his book and try to push the market with his "knowledge sharing" I think he does have great insight.

Very quickly, I did like the way that Gross owned how he missed the bond call, but essentially blamed this on this notion that he was anticipating a global recovery and that this would drive rates higher.  Now he feels like our "new normal" will be a 2% global growth and 2% inflation so this depressed level cannot or will not usher in higher interest rates.  Perhaps this is correct, but I think much of his change of heart has to do with getting whacked and under performing almost all of the other funds in his category and rather than try to beat the market in any significant way, we'll see Pimco try to index even more so they will not stray far away from their benchmark in any way.  At the end of the day that is what I always hate about the mutual fund industry, they only care about the index that they are measured against, not a gain or loss on a cash basis.  I for one believe that Gross' call on US treasuries wasn't all based on an improving world economy, it was a call based on the collapse of solid financial management in the states.  The problem with these trades (as we have seen) is that it may take a decade to see the problem actually manifest itself and then another several years of public political and financial leadership "fixes" before the real implosion happens.  If anything, Gross is just way early on this trade (I can relate).

Last, one very important item was shared during the call which made the droning worth it.  Mr. Gross stated that the Eurozone leadership will talk and talk and they won't really be focused on getting the correct things done.  He did say that we should listen to them and take note of what they were saying, but most importantly Gross said that we need to keep our eyes watching the yield on Spanish and Italian bonds.  No matter what is said, if these yields continue to push higher we will know that the real issues are not addressed and that the problems were still lingering and no solution had been found. 

The reason that Gross is onto something here is simple.  Both Spain and Italy (or Greece for that matter) cannot afford to keep their respective debt ponzi schemes going with interest rates as high as these.  It is like using  a credit card to live on while you are out of work, it may provide some liquidity and keep you in your apartment for a while, but finally the crushing high interest rates and the inability to keep up with your bills will cause your financial "system" to collapse.  In the same way, Italy and Spain cannot afford rates in the 5% or 6% area and their plate spinning will suddenly end if these rates continue for an extended period of time.

So, with that great information, I present to you the charts for Spanish and Italian 10 year bonds.  I would submit that there has been lots of talking and no solution as testified by the climbing yields on these lovely sovereign debt offerings.  Can I interest you in some?

We see a move off of the highs but still within striking distance.

I'd say that Italy is destined to revisit recent highs and then it is to infinity and beyond!

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at