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

[Demeter]

1. 1929, Part 2, here we come!

It won't stop, because, when FDR and Pecora stopped it, they whinged and wiggled and shook it all loose again, so they could play their little cons and scams all over again on a new generation.

You can't stop criminals, unless you STOP them! Nothing else will make any difference.

[bread_and_roses]

2. +++++++++++++ (n/t)

[Demeter]

3. Hi there, stranger! Long time, no see!

Hope your holidays are happy, and that the New Year is a better one, for us all!

[bread_and_roses]

6. thanks, Demeter - & to you - & Marmar & all too

I lurk. I occasionally fire off a one-liner. I scan the LBN & as often as I can SMW ... hoping for better times, but like for most of us down here in the 99%, things just keep getting harder. Story on Alternet I didn't read yet, but headline says it all:

Americans So Broke They Can’t Take Their Kids to Movies This Holiday Season

http://www.alternet.org/economy/americans-so-broke-they-cant-take-their-kids-movies-holiday-season

[Odin2005]

5. This is what we Marxists have been saying for ages.

Social Democracy didn't solve the problem, it was just a temporary band-aid that saved the Capitalists from themselves. The internal contradictions of Capitalism meant that the problem came crawling back.

[StoneCarver]

4. Bill Gross knows what he's talking about

If I recall correctly he predicted the last crash in 2008 when he was at PIMCO. This worries me. Thanks for posting it. I'll wait for more info.
Take care,
Stonecarver

[Mad-in-Mo]

7. K&R

I'm interested in the discussion about this. I have little to add, except that my family and I are in the 99% and we definitely struggle each month with the rising costs of everything (except gasoline I guess).

[roamer65]

8. First up will be a good ol' sovereign debt default.

Venezuela is the first one in line.

Venezuelan credit default swaps have gone parabolic and the country is searching for cash wherever it can be had.

But hey, I'm saving 30 cents a gallon!!!!