Bill Gross: “There Will Be Haircuts”
by Tyler Durden
The highlights from Bill Gross’ monthly outlook letter: “The past decade has proved that houses were merely homes and not ATM machines. They were not “good as money.” Likewise, the Fed’s modern day liquid wealth creations such as bonds and stocks may suffer a similar fate at a future bubbled price whether it be 1.50% for a 10-year Treasury or Dow 16,000…. if there are no spending cuts or asset price write-offs, then it’s hard to see how deficits and outstanding debt as a percentage of GDP can ever be reduced…. Current policies come with a cost even as they act to magically float asset prices higher, making many of them to appear “good as money”.
And the take away: “PIMCO’s advice is to continue to participate in an obviously central-bank-generated bubble but to gradually reduce risk positions in 2013 and perhaps beyond. While this Outlook has indeed claimed that Treasuries are money good but not “good money,” they are better than the alternative (cash) as long as central banks and dollar reserve countries (China, Japan) continue to participate….a bond and equity investor can choose to play with historically high risk to principal or quit the game and earn nothing.”
Said otherwise: continue to frontrun the Fed, but one finger on the sell button. The problem with at strategy is that everyone is doing it. And for a glaring example of what happens when everyone hits the sell button at the same time, see what happened to stocks last week following the hacked AP twitter account – that’s what a bidless market, if only for a few seconds, looks like. Now extend those “few seconds” indefinitely.