Archive for the ‘PIMCO’ Category
Oh Mr. President and Congress (El-Erian)
March 11th, 2010 | 
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Oh Mr. President and Congress (El-Erian)
Posted by Karl Denninger
Well now this is a rather interesting editorial:
Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects. To stay ahead of the process, we should keep the following six points in mind.
El-Erian goes on to list six points that make most people’s eyes glaze over. Indeed, the entire editorial is one of those things that reminds one of Alan Greenspan and his famous “how to write 3,000 words and yet never find two people who agree on what you said.”
The final three paragraphs are worth reading though:
This leads to the sixth and final point. We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.
You mean things like taking in 30% of what the government spends via taxes, then dismissing this as “oh we’ll just issue some more T-bills”?
There is a further complication. Timely recognition is necessary but not sufficient. It must be followed by the correct response. Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments.
Uh, did you parse that one folks?
“…..tyranny of backward-looking internal commitments”
That’s code for “entitlements that were promised to people but cannot possibly be provided, no matter how long people howl – or how loudly.”
Where does all this leave us? Our sense is that the importance of the shock to public finances in advanced economies is not yet sufficiently appreciated and understood. Yet, with time, it will prove to be highly consequential. The sooner this is recognised (sp), the greater the probability of being able to stay ahead of the disruptions rather than be hurt by them.
Forget it. One need only look to Greece, where telling people they have to actually go to work and produce something in order to earn a public-sector salary produces riots.
If you think we’re “more advanced” in our thinking here in the United States you’re simply insane.
Times like this require a man in the left seat with a big fat church-bell sized set of balls, and the willingness to be unpopular enough to be a one-term wonder. This is inherently in conflict with the narcissist personality required to run for President in the first place.
Nobody who wants the job and is electable to the office is fit for it at a time like this. I’d do it if drafted, but I’d never put up with the crap required to get there, nor am I electable – because I refuse to lie in the fashion required to obtain the office. Stumping for votes while pointing out that promising to pay $100 trillion in Social Security and Medicare that we don’t have and can’t acquire, that if we try to print our way out of debt that “obligation” will go from $100 trillion to $250 trillion (which still can’t be paid), and that the sort of measures required to bring the economy and government back into balance – at both a state and federal level – will result in massive shifts in the economy’s balance and, in the short-term, lead to even more pain, are not popular. To the contrary – not one person receiving those handouts would vote for me, and since they’re nearly half the population there’s not a snowball’s chance in Hades that I could carry the day at the polls.
So what’s required is a paradox. You need a man or woman who will run for the office saying all the “right things” while lying through their teeth. Someone who will shed that veneer the instant the election is over, then take the left seat and be a five-alarm bastard once in office, placing a big sign on the door “$ = NO!”
Someone who will take a look at The Constitution and if they can’t find whatever it is being proposed in the four corners of the text, it’s gone. That is, Social Security and Medicare – gone. Provide some sort of subsidy to the states with whatever we’ve actually got in the so-called “Trust Fund” (that is, distribute to them the “special Treasuries” in the so-called “box”) and immediately end FICA. The States are then free to run the programs as they see fit. This will instantly force accountability and a transition to a privately-owned pair of accounts, or perhaps one account that provides both functions, since people move and won’t accept anything else.
Someone who will align tax revenue with GDP permanently and radically. This means The Fair Tax, and if Congress won’t enact it, then The President does it by executive order – by abolishing the IRS’ funding and authority! Issue an executive order barring the DOJ and other Federal Law Enforcement from enforcing anything in The Internal Revenue Code, and suddenly Congress will become far more reasonable since in order to acquire funds they will have to do the right thing. Radical? Yes. Bye-bye 16th Amendment and “K Street.”
Now go find the rest. Departments of Education and Agriculture, as just two examples: Gone. All State Mandates from The Federal Government: Gone.
If you can’t find it in The Constitution it goes back to The States and is regulated within their borders. The ability of the people to freely migrate from one state to another enforces fiscal responsibility – if you behave like a jackass, such as California has done, you will be rapidly de-populated and without a tax base, your policies fail. End of discussion. No more Federal Welfare of any sort. If The States want to provide it and can fund it, goody for them. More likely what happens is that The States suddenly find that they can provide lots of workfare doing things that need done, provided they outlaw public employee unions first to disarm those thugs.
On monetary policy it’s simple: The Fed either honors its actual written mandate or they’re gone too. No more BS, no more opacity. Everything they do is public and published on The Internet. Send up a bill mandating that any gaming of economic statistics or monetary policy is a federal offense garnering you 20-to-life in the can and demand that it pass or you’ll veto every bill that comes to your desk until it does.
On Credit Default Swaps and other instruments: All trade on a public exchange. All exchanges in the US are public, non-profit organizations. The Federal Government will run one and The States are welcome to set them up too – but only as public non-profits. National Best Bid and Offer (NBBO) is guaranteed by law with felony criminal penalties for anyone gaming it – like offering ”Flash Orders.” Any federally-chartered institution that fails to adhere to One Dollar of Capital is instantaneously closed – without exception. All firms trading on a public exchange or doing business in The United States across state borders (and therefore under proper federal regulation) is required to produce full, complete and truthful financial statements, without exception. This means the use of off-balance sheet anything is absolutely prohibited under pain of immediate delisting and felony fraud prosecution.
We adopt a national policy that tariffs are set to provide wage parity. This will produce howling from the WTO. Tough. No longer will we permit wage arbitrage as a reason to offshore jobs. This is not only Constitutional, it is the premise upon which this nation was founded in terms of how the Federal Government is supposed to acquire its funds! Combined with The Fair Tax, which will make the United States a corporate tax haven (zero corporate and personal income tax rate) this will result in an instantaneous flood of manufacturing and high-tech jobs back into the United States – all GDP boosters. The United States GDP would double within a decade.
Refuse to sign any budget that does not run a primary surplus, except in times of declared war. If Congress or The Administration wants to play International Cop it either funds the entire thing on-budget and pays for it or declares war and has the ability to do so via deficit spending.
Adopt Freedom’s Vision for monetary policy. No more debt-backed currency. If The Fed doesn’t like being relegated to a clearing house for payments that’s too damn bad. Tell the CFTC you’d like them to list a “boiled rope” futures contract just to underline the point.
Radical? Yes.
The only solution long-term? Yes.
Will it happen? Not unless our present Administration grows a set of balls, which it does not at present possess, or someone is willing to both lie themselves into office and then do it anyway.
As a consequence what El-Erian is talking about will happen – an “unexpected” recognition of the reality that what is being done today both is unsustainable and won’t work, but we will do nothing appropriate about any of it until we find ourselves well-off the cliff and furiously pedaling in the air like Wile-E-Coyote – and at that point it will be to late to avoid the ugly consequences.
Posted in Banks, Corruption, Debt, Economic Crisis, Economy, Federal Reserve, Financial System, Freedom's Vision, Monetary Policy, PIMCO, Sovereign Debt, Sovereign Risk | 
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Pimco Move to Sell Gilts Raises Spectre of a UK Sovereign Debt Crisis
Pimco move to sell gilts raises spectre of a UK sovereign debt crisis
Fears that Britain may be heading for its first sovereign debt crisis since the 1970s hit a new intensity after Pimco, the world’s biggest bond house, declared that it is starting to sell off its holdings of gilts.
By Angela Monaghan and Edmund Conway
The American investment group said it will be a net seller of UK Government bonds this year, at the very point when the Bank of England brings its £200bn programme of purchases to and end and the Treasury attempts to raise unprecedented sums through the capital markets.
The move is doubly embarrassing for the Government because the head of Pimco’s European investment team is Andrew Balls, brother of Schools Secretary Ed Balls, who is mastering the Government’s re-election strategy. The move will be seen as a financial vote of no-confidence in the Government’s handling of the economy.
Paul McCulley, a managing director at Pimco, said: “We are currently cutting back in the US and UK because… supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines.”
The yield on the benchmark 10-year gilt has leapt from below 3pc to above 4pc in the past year amid concerns about the Government’s capacity to bring its budget back under control, and worries about the coming end of quantitative easing (QE), under which the Bank has been buying massive numbers of gilts. However, UK equities staged a strong start to the year, with the FTSE 100 up 87.46 points to a 16-month high of 5500.34.
The Pimco switch was described by Mike Amey, its portfolio manager in London, as “a significant policy statement”.
“Those areas of the bond market that have had greatest support from central banks will be most vulnerable as that support comes to an end,” he added. Few economists expect the Bank, whose monthly meeting begins tomorrow, to extend the QE scheme beyond February, meaning the private sector will soon be solely responsible for demand for government debt. The gilts market has also been supported by new liquidity rules, which have seen banks buy large gilt holdings to bolster their balance sheets. These purchases, too, are seen as one-off, again implying a sudden drop in demand in the coming months.
Although the QE scheme has had its detractors, it has kept gilt yields down and helped prevent the flow of money in the economy from dropping into “depression territory”, according to economists. Figures from the Bank yesterday showed a welcome 0.3pc rise in the holdings of broad money, M4, by non-financial companies, in November, indicating that the radical policy of pumping cash directly into banks’ balance sheets may now be yielding effects.
Some accuse the Government of failing to lay out extensive enough plans on how to bring the budget deficit back under control, with the major ratings agencies threatening to downgrade the UK’s credit rating unless the next Government provides more ambitious plans for budget reduction. In what was seen as the starting gun for the pre-election battle, Labour yesterday published a document accusing the Conservatives of hiding the full details of its tax and spending plans from the public, sparking a war of words between the parties.
Posted in Debt, PIMCO, Sovereign Debt, Sovereign Default, Sovereign Risk, UK, United Kingdom, sovereign debt crisis |
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Carnage Continues: PHK (Who Smells Smoke?)
Carnage Continues: PHK (Who Smells Smoke?)
Posted by Karl Denninger
The “rumor on the street” at the time of the dump in PHK a few days ago was claimed to be a “fat-fingered” trade.
Uh huh.
Let me guess. We’ve had three fat-fingered days in a row, right? The first one which was an honest mistake, and now two days of follow-up which were also honest fat-finger mistakes?
Pretty impressive to lose all of the gains since October – in three days.
Of course this isn’t being discussed on CNBS, nor the real reason for it, nor is anyone calling out those who disseminated the “claim” that this was a “fat-finger” mistake originally.
Yeah.
This is high-yield debt by the way. A PIMCO fund on top of it. Closed end, and yes, it does trade at a rather insane premium to NAV, but closed-end funds have a habit of doing that.
But gee, here we are in the New Year, the selling continues at ridiculous volumes compared to the historical average, and in a market where the DOW is up 160 points this issue is down another 5% today.
Who’s whistling past the grave here? If there’s a problem with the constituents in this fund then one has to ask if this is an “isolated incident” or whether it implies some really ugly things around the corner in the credit markets.
If you remember we had “little signals” like this back in 2007 – just before everything went totally to hell. Anyone remember this?
That’s from 2007. There were a few “signals” in this fund during that year…. and of course we all know what came next.
If this is fund-specific then why is it showing up in DPO too – erasing all the gains back to JULY?
Uh huh. A 25% decline in less than 5 days eh?
I’ll go out on a limb here a bit: The “fat finger” claim IS A LIE and there’s something nasty brewing here that, as is the usual practice, has been leaked to certain “privileged” players in the market.
You’re welcome to believe this won’t infest and reflect into the broader marketplace. I believe, as has been the pattern over the last several years, one ignores signals like this at considerable peril.
You, the ordinary trader and investor, will never be “cut in” on the deal and given the opportunity to get out before the curtains are on fire and people start succumbing to the smoke, and those who both leaked whatever inside information there is and who traded on it will not go to prison for doing so.
Nor will the “mainstream media” investigate this and report on it. Not on CNBC, not on Bloomberg, not in the Wall Street Journal, NOWHERE.
Your only defense is to look for signals like this and get damn defensive when you see them – right or wrong – because someone who has more information than you do certain as the sun rising in the eastern sky is doing exactly that.
Posted by Karl Denninger
Following up on the earlier ticker…. (above)
Yeah, it’s a great idea.
Yeah, ok, there’s nothing going on here…. no problem with corporate credit, whether high yield or otherwise. Seriously, trust us.
There’s no need to worry or rush the door – that’s not smoke you smell, it’s the guy over there by the punch bowl with a bong. Really, come on over, buy some more stocks and enjoy the party! First hit is free so long as you buy 1,000 shares of SPY along with a bunch of GS, BAC and JPM!
The Dark Gray Swan: No More Foreign Dollars With Which To Buy US Treasuries
Could the next black/green/dark gray swan be so obvious that it has avoided everyone? Well, except for the deputy governor of the Bank of China, who just gave the world a startling reminder of economics 101, when he said that it is “getting harder for governments to buy United States Treasuries because
the US’s shrinking current-account gap is reducing the supply of dollars
overseas.” Oops.
The funny thing about natural (and economic) systems: they can only be pushed so far before they snap back to default state. With the entire world embarking on an unprecedented spree of domestic bubble blowing to mask the collapse in global GDP, everyone forgot to trade. Zero Hedge has long emphasized that the drop in world trade can only sustain for so long before it brings the current destabilized system back to some form of equilibrium. Because with every country intent on merely printing more of its own currency, whether it is to build bridges or to make the stock of electronic book fads trade at 100x earnings, said countries ran out of non-domestic cash. Alas, this is most critical for the United States, now that Treasury monetization is over, as the US needs to constantly find foreign buyers of its debt to fund unsustainable deficits. Foreign buyers who have US dollars. And according to Shanghai Daily, this could be a big, big problem.
Here is what the BOC’s Zhu Min said earlier:
“The United States cannot force foreign governments to increase their
holdings of Treasuries,” Zhu said, according to an audio recording of
his remarks. “Double the holdings? It is definitely impossible.”“The
US current account deficit is falling as residents’ savings increase,
so its trade turnover is falling, which means the US is supplying fewer
dollars to the rest of the world,” he added. “The world does not have
so much money to buy more US Treasuries.”
In a nutshell, in printing trillions of assorted securities, the Treasury has soaked up the world’s dollars, which due to US banks not lending, is sitting and collecting dust in the form of bank excess reserves. These excess reserves can not be used to buy Treasuries and MBS as that would be literal monetization (as opposed to the figurative one which is what QE has been). And the world is running out of dollars with which to buy Treasuries.
Does this mean that the “world” will be forced to buy dollars, and thus spike the value of the greenback? Not necessarily:
In a discussion on the global role of the dollar, Zhu told an academic
audience that it was inevitable that the dollar would continue to fall
in value because Washington continued to issue more Treasuries to
finance its deficit spending.
Posted in Banks, Cash, China, Collapse, Corruption, Debt, Deficit Spending, Deficits, Dollar, Economics, Economy, Excess Reserves, FED, Financial System, GDP, Greenback, Gross Domestic Product, MBS, Money, Mortgage-Backed Securities, Oops, PIMCO, Reserves, The World, The dollar, Treasury, US, United States, World Trade, Zero Hedge, Zhu Min, default, funding, hedge, lending, mortgage, securities, spending |
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