On October 1, Bill Gross stated U.S. Will Avoid ‘Catastrophic’ Default on Debt, stating the odds of a default are “a million-to-one”.
Is that reality, or is Bill Gross talking his book?
The answer is yes, to both. The odds of default are probably far greater than a million-to-one.
“The Treasury is not going to default on their debt simply because the debt ceiling isn’t going to be raised. There will be other repercussions like slower economic growth. But the Treasury is not going to default.” said Gross.
I strongly agree. I suggest the debt ceiling will be raised by October 17, and probably a lot sooner.
Moderate Republicans will cave in soon. But even if they don’t, there will not be a treasury default.
Where are Treasury Yields Headed?
With default silliness, out of the way, let’s turn our focus on a far more serious question: Where are Treasury Yields Headed?
Reuters reports Pimco’s Gross: Low interest rates may persist for decades
Bill Gross, manager of The Pimco Total Return Fund, said on Wednesday that the global economy may be facing low policy rates for decades.
Gross wrote in his October investment outlook that investors should “bet against” expectations that the federal funds rate – the U.S. Federal Reserve’s benchmark short-term borrowing rate – will rise by one percentage point by late 2015.
“The U.S. (and global economy) may have to get used to financially repressive – and therefore low policy rates – for decades to come,” wrote Gross, a co-founder and co-chief investment officer at Pimco, whose flagship Pimco Total Return Fund has roughly $250 billion in assets.
“Right now the market (and the Fed forecasts) expects fed funds to be 1 percent higher by late 2015 and 1 percent higher still by December 2016. Bet against that,” he wrote in the letter entitled “Survival of the Fittest?“
Gross’s outlook on the level of rates is important because Pimco manages roughly $1.97 trillion and is one of the world’s largest bond managers. Gross and co-Chief Investment Officer and Chief Executive Mohamed El-Erian’s views on Fed actions and global credit also influence other investors because of the firm’s size in the marketplace.
Two Points of Interest
- Gross’s fund had outflows of $5.4 billion in September, marking the fifth straight month of outflows from the fund, Morningstar data showed on Wednesday. While the withdrawals were sizeable, they were the lowest since May.
- Pimco had outflows of $6.5 billion across its U.S. open-end mutual funds last month, marking the fourth straight month of outflows from the funds, according to Morningstar. The outflows marked an improvement from withdrawals of $11 billion in August.
It would be easy to dismiss Gross’ opinion as talking his book. Yet, I believe he is quite accurate. That does not mean I see value in treasuries (I don’t). I see little value anywhere except gold, cash, and Yen-hedged equities.
Of course, one can accuse me of talking my book. But who doesn’t talk their book (except day traders who don’t have a book)?
I would rather be long mid-term treasuries than long equities-in-general or long corporate bonds. I believe both equities and corporate bonds are well into bubble territory.
The pertinent question on equities and corporate bonds is “when does the bubble break?” The pertinent question for treasury investors is the same one as gold investors “what if I am wrong?”
Those in long-term treasuries will get clobbered if rate raise. Those in gold face the risk the bull market is over.
The Case for Gold
I have mentioned the case for gold numerous times: Briefly, sentiment is extremely negative, the Fed is unlikely to hike rates, central banks globally are likely to step on the liquidity spigot at the first sign of trouble, and markets in general do not top until nearly everyone is a believer (housing is a perfect example).
The Case for Treasuries
Amusingly, the case for treasuries is similar. The Fed is highly unlikely to hike and probably will be far slower at tapering than most think. Hyperinflationists are in la-la land with no understanding of debt deflation, demographics, or any other pertinent facts.
Gold vs. Treasuries
Bill Gross stated himself Bull Market in Bonds Is Over.
Yet, the primary upside for treasuries will occur if Bill Gross is wrong (and once again, I do not think he is).
On the other hand, gold and miners can do very well on a substantial rally, even if the top is in (and for reasons stated, I highly doubt that it is).
Mike “Mish” Shedlock