Bill Gross, the founder and managing director of PIMCO, just released his latest “Investment Outlook” for September 2008. This month, Gross talked about the need for the U.S. government to start using more of its money to support markets in order to prevent an asset and debt liquidation of near historic proportions. He brought up a phrase that is repeated often by CNBC’s Jim Cramer on his “Mad Money” show, which is, “Remember, there’s always a bull market somewhere!” Gross addressed this by saying:

So the lesson must be to go forth and find the bull market, wherever it is. Almost always – but not now because in a global financial marketplace in the process of delevering, assets that go up in price are rare diamonds as opposed to grains of sand. For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:

What Happens During Delevering

1. Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
2. Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
3. The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.

The legendary bond investor talked about where the United States is at in the delivering process. Gross wrote:

This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.

As a result, Gross prescribed the following:

Common sense can lead to no other conclusion: if we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.

The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something… knows something,” it is time for the Treasury to do likewise.

Source:

“There’s A Bull Market Somewhere?”
Bill Gross
PIMCO, September 2008

Last month, Investment Director Keith Fitz-Gerald of the financial site Money Morning interviewed legendary investor Jim Rogers. Fitz-Gerald wrote today:

The U.S. financial crisis has cut so deep – and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae (FNM) and Freddie Mac (FRE) – that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning.

Indeed, the U.S. financial debacle is now so ingrained – and a so-called “Super Crash” so likely – that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away – if it ever is, Rogers said.

The end of this crisis “is a long way away,” Rogers said. “In fact, it may not be in our lifetimes.”

You can read part one of the exchange between Fitz-Gerald and Rogers here.

Source:

“Exclusive Interview: Jim Rogers Predicts Bigger Financial Shocks Loom, Fueling a Malaise That May Last for Years” (Part One)
Keith Fitz-Gerald
Money Morning, August 19, 2008

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Bond expert Bill Gross spoke to CNBC about the federal funds rate and a host of other issues on Friday. Writing for the financial news network, JeeYeon Park reported:

Bill Gross, founder and chief investment officer of Pimco, does not believe the U.S. Federal Reserve will raise interest rates, he told CNBC on Friday.

“I don’t think so,” he said when asked if he foresees a rate hike. “The concerns about inflation have got to be coming down… with oil prices down maybe 25 percent from the peak. Other commodity prices — gold down 20 percent, silver down 10 percent today alone… Those at the helm, so to speak, have to be observant of what’s happening in the commodities sector, and that’s been the biggest push in terms of inflation for the past six to 12 months.”

Though he sees uncertainty in the bond sector, Gross remain optimistic about the rest of the quarter.

“I think the third quarter will be fine based on some technical adjustments with inventory and continued strong trade. But the fourth quarter and the first quarter of 2009 do not look good—it is all dependent upon housing prices.”

According to CNBC’s Park, the founder and chief investment officer of PIMCO is uncertain as to when the U.S. housing market will reach a bottom. However, Gross went into detail about what he expected for the fourth quarter and beyond. Park wrote:

Gross said he believes that 2009 will call for “dramatic actions” from the government in terms of fiscal spending and in terms of new programs to provide liquidity for financial markets.

Gross expects “a deficit near $500 billion to move into the $600 to 700 million category in 2009 as the U.S. sees new programs such as healthcare move onto the agenda.”

Source:

“Pimco’s Gross: Fed Will Not Raise Interest Rates”
JeeYeon Park
CNBC, August 19, 2008

Money managers from around the world gathered in Chicago last week for the CFA Institute’s annual investment seminar. Yesterday, the Chicago Tribune’s Gail MarksJarvis talked about two of the speakers- Jeremy Grantham and Marc Faber. The personal finance columnist wrote:

“I am officially scared,” GMO investment manager Jeremy Grantham told professionals from as far away as Abu Dhabi and Malaysia. “In 2000, we had a technology bubble. But this is massive, a massive credit crisis and a bubble in global housing, global equity and global land.”

Grantham, whose clients have included Vice President Dick Cheney and 2004 presidential candidate John Kerry, warned that the world is working its way through the “first truly global bubble.”

The British money manager shared his investment outlook with seminar participants. MarksJarvis wrote:

When asked by a money manager what he would buy now, Grantham said, “long mattresses” — jesting about the stereotypical nervous behavior of hoarding cash. He seriously suggested: “Put money into something incredibly safe, like a high-quality hedge fund.”

Grantham said rather than buying stocks for the long run now, he would only “short” them, or bet that they will decline in price. He sees “nothing interesting in quality corporate bonds,” and he has been shorting oil. “Commodities had a good run, but that’s over,” he said.

Although downtrodden mortgage-related bonds might be a good deal now because some are selling for 59 cents on the dollar, he said he wonders if the price will seem compelling if home prices fall another 20 percent or 25 percent.

He confessed to the group that “I bought my first gold last week, and I hate gold. It doesn’t pay a dividend. I would only do it if I was desperate.”

MarksJarvis noted:

Generally, when bubbles burst, the asset prices stay down for lengthy periods. Grantham isn’t expecting the stock market to hit its low until 2010.

The Tribune columnist also talked about Marc Faber, who publishes the monthly investment newsletter The Gloom Boom & Doom Report. She quoted the Swiss-born investor as saying:

The Fed has created a bubble in everything — stocks in emerging market, real estate everywhere in the world, commodities, art. The only asset class that is down is the U.S. dollar…

It is quite likely that the current synchronized global economic boom and the universal, all-encompassing asset bubble will lead to a colossal bust.

MarksJarvis also noted:

And with commodity prices so inflated, he expects an “increase in international tensions” over resources.

Source:

“Even the pros may be stuffing the mattresses”
Gail MarksJarvis
Chicago Tribune, July 29, 2008

Yesterday, the financial publication InvestmentNews ran a piece about a roundtable that took place in June that focused on the prospects for markets and opportunities for institutional investors. Jeremy Grantham, chairman of GMO LLC of Boston, was one of those who participated. Grantham, a well-known money manager whose clients have included U.S. Vice President Dick Cheney and 2004 presidential candidate John Kerry, responded to the following questions:

IN: So is the credit crisis over?
GRANTHAM: The stock market never does lags very well. They always expect that the first impact is the whole ballgame. So you have the first impact of the credit crisis, the first round of the effects on the housing market, and then people missed the point that the longer-term effects of less credit burn through very slowly over two, three — and even longer — years. For me, that’s all part of the credit crisis.

Step one is, you recognize you have a problem in housing. Step two, in consumer debt. Step three, that the whole debt structure was much too high. Step four, you bring the debt leverage everywhere down. The debt-to-GDP ratio in ‘82 was 125[%], one and a quarter times [gross domestic product]. The cumulative debt rose to over three times. So we had a dazzling rise, and people learned to adjust their businesses to live in a world where all kinds of debt — financial debt, consumer debt — were rising. Now they have to change all that, and the changing period is lumpy and long-winded and painful. I expect we’ll have a lot of unexpected consequences because we never had this collection of problems before.

The idea that you would solve a long-term problem of too much debt by paying people to take debt, by having a negative real rate, brings to mind the hair of the dog that bit you. The guy is a drunk and you’re offering him a kind of early morning pick-up. It may get him to the office feeling reasonably good but it doesn’t do much for his cirrhosis of the liver.

Later on, the roundtable turned its attention to the topic of fixed income and the economy:

IN: Let’s turn to the bond markets and the economy. How will they play out over the next 18 months?
GRANTHAM: The inflation versus deflation argument is the central issue for investors for the next two or three years. Whether the credit crisis cools down the economy and commodity crisis and so on, is that the central issue or is the inflation coming through — particularly in the Middle Eastern and some third-world countries — induced mainly by huge sustained demand and pressure on commodities? Which of those two is going to tilt the scale the most? I don’t know. It’s what I spend my nights waking up sweating about. The consumer polls now say they’re expecting 7% inflation, which is higher than almost the last 20 years. Whether they’re right or not, I’m not sure. In general, I think the economy over 18 months will simply play out weaker globally than expected by a little bit.

I would like to, however, back up. You mentioned before, “What have we learned?” No one addressed that, and I would like to.

We’ve learned that there aren’t too many adults around. There’s nothing but easy solutions and easy answers. I think we’ve learned that the Fed is intellectually nearly bankrupt, that it’s stretched the law in bailing out investment banks and in the process compromised, as [Mr.] Volcker said, some long-established principles, which he obviously valued.

We’ve learned that the Fed has to think about asset-class bubbles, with the problem being that we have such academic members of the Fed that they’re not sure that bubbles could exist in an efficient world. It would be a real help to have a Fed boss who lived in this real world.

I have a job description for the Fed, which is a lot simpler than the compromising combination of growth and inflation, and that is to protect the integrity of the U.S. financial system. It does seem to me entirely appropriate for the Fed to have that on the list. They have totally allowed the integrity of our financial system to erode in the last 20 years and they should be ashamed of themselves.

Source:

“The market has been battered, but some opportunities exist”
InvestmentNews, July 28, 2008

This morning I was alerted to the fact that legendary bond investor Bill Gross just released his latest “Investment Outlook” on the PIMCO website. As usual, an informative, as well as entertaining, read. In “Mooooooo!” the managing director of Pacific Investment Management Company discussed the ongoing credit crunch in the United States, and specifically talks about the slumping housing market here. Gross wrote:

Yet housing, unlike other asset classes, carries with it an aura more like a bad dream than a fairy tale. Unlike the frog that when kissed turns into a handsome prince, housing can morph a froglike economy into something resembling Godzilla. That is because it is the most levered asset class and the one held by more “investor” citizens than any other. U.S. homes are market valued at over 20 trillion dollars with nearly half of the value supported by mortgage finance of one sort or another. At first blush that appears to be reasonably levered, but at the margin, homes purchased in 2004 and beyond are now at risk of turning upside down – negative equity – and there are some 25 million or so of those. The “upsidedownness” in many cases results in foreclosures, or outright abandonment and most certainly serves as an example of what not to do for millions of twentysomethings or new citizens choosing between homeownership and renting. The dominoes fall month-by-month, forcing prices ever lower as shown in Chart 1 provided by Case-Shiller. An asset deflation in turn becomes a debt deflation, as subprimes, alt-As, and finally prime mortgages surrender to the seemingly inevitable tide. PIMCO estimates a total of 5 trillion dollars of mortgage loans are in risky asset categories and that nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble. The problem with writing off 1 trillion dollars from the finance industry’s cumulative balance sheet is that if not matched by capital raising, it necessitates a sale of assets, a reduction in lending or both that in turn begins to affect economic growth, creating what Mohamed El-Erian fears as a “negative feedback loop.”

“…nearly 1 trillion dollars of cumulative losses will finally mark the gravestone of this housing bubble.” Bloomberg estimates that the global credit squeeze, triggered by housing, has resulted in more than $468 billion in write-downs and losses at banks and brokerages to date.

Gross talked about how to reverse housing’s deterioration. He began by saying:

Make no mistake, the current conundrum that must be solved is: how to make the price of 120 million U.S. barns stop going down in price and then to make them go up again. That, however, is easier said than done. One of the wisest men I know has this serious but admittedly impractical solution: have the government buy one million new/unoccupied homes, blow them up, and then start all over again.

All joking aside, the “King of Bonds” suggested:

…the yield on a 30-year agency mortgage-backed loan has actually risen since the Fed somewhat unexpectedly began to lower Fed Funds in early September of 2007. Add to that of course, the increased fees, points, and total spread that an actual homebuyer pays to finance his purchase now as opposed to then, and it is obvious that homes are not the bargains that starving realtors claim they might be…

Blow them up? Well, yes, I suppose if we could. But absent that, lowering the cost of mortgage credit via the omnibus housing/GSE bill now placed before the Congress and the President is the best way to begin the long journey back to normalcy.

His latest “Investment Outlook” can be accessed from the PIMCO website here.

Source:

“Mooooooo!”
Investment Outlook, August 2008
Bill Gross
PIMCO, July 25, 2008

Legendary investor Jim Rogers recently spoke to Commodity Online (India) and shared his investment outlook for China and India. According to the commodities portal this morning:

Global market meltdown, recession and bankruptcy fears and dipping profits of companies are wrecking major economies in the world these days. But ace commodities investor Jim Rogers continues to be very be hot on China.

“China is a country I am very hot on. I believe that Chinese economy will overtake the US economy, and China has the best investment potential in the world today,” Rogers, author of such famous books like Hot Commodities and A Bull in China, told Commodity Online.

The CEO of Rogers Holdings pointed out that three billion people living in Asia, most of them in India and China, will drive demand for commodities in the coming years, and added:

Asia is fuelled by massive investment and growth. And in Asia, China is the hottest destination. So I continue to look for investment opportunities in China.

Photo By Benjamin Earwicker, stock.xchng

However, the former partner of George Soros does not share the same level of optimism for India when talking about its investment potential. He said:

I am excited about India as a travel destination. For an investment proposition in India, I would think twice.

According to Commodities Online’s George Iype, Rogers’ caution stems from existing political/bureaucratic hurdles, such as the Indian government’s decision to prohibit futures trading in specific commodities, as well as serious infrastructure challenges. The Singapore-based investor noted:

Plus, the infrastructure in India continues to be bad compared to China. In China, truck drivers drive at the speed of 70 kilometers per hour. In India, they can drive only at a speed of 20 kilometers because the roads are so bad.

Source:

“Jim Rogers: Hot on China, cold on India”
George Iype
Commodity Online (India), July 18, 2008

The Internet news site Newsmax.com spoke to well-known bond investor Bill Gross about the direction of the federal funds rate. For those of you unfamiliar with the term, this rate is what news reports are referring to when they talk about the Federal Reserve changing interest rates. According to Newsmax.com:

Bond expert Bill Gross, founder of Pimco, says that the Federal Reserve will leave the benchmark federal funds rate at two percent through December, unchanged from today.

In an interview, Gross said that the Fed is walking a tightrope, inflation on one side and recession on the other.

For the economy, though, the Fed is probably doing the right thing for now, Gross said.

“The Fed, I think they are at neutral, and they should be,” said Gross.

Federal Reserve, Washington, DC

Gross addressed talk coming from the Fed about taking a tougher stance on inflation, and possibly raising the fed funds rate. The manager of the $130 billion Pimco Total Return Fund told Newsmax.com:

The Fed is jawboning, and they are jawboning appropriately. By this time in December, the Fed funds rate will still be at two percent.

The Internet news site noted that Gross sees inflation coming down during the next year, and thinks the Federal Reserve is managing the U.S. economy in that direction.

Source:

“Bill Gross: Fed in Neutral Until December”
Newsmax.com, July 15, 2008

CNBC-TV18 in India interviewed Mark Mobius, managing director of Templeton Asset Management, about his outlook for the United States and emerging markets. From MoneyControl.com (CNBC-TV18’s website) this morning:

CNBC: What is the outlook on what is happening in the US? Are you expecting some kind of implosion of any financial institution? Are you expecting further pain from that economy or stock market? What may be the ramifications for emerging markets? Are you seeing severe pain in emerging markets as well?
MOBIUS: There is severe pain in the US. When you have regional banks going bankrupt and not being able to meet their obligations, then that is a very serious matter. That situation impacts globally, because the US is exposed so much to the globally economy. We are already seeing the impact on emerging markets. They are having problems.

Everyone in the past was asking me about relationships between the US and other markets. The reality is that there is tremendous amount of interplay between these markets. So, we have to be ready for further downturns in these various markets.

One must keep in mind that emerging markets are continuing to grow at a very good pace. Economic growth in these markets, including India, is good. So, we should not be overly pessimistic. Stock prices are one thing and the reality on the ground is another. The ground reality is that many of these countries are doing very well. The economies are humming along.

The impact of what is happening in the US is to the greatest extent very psychological and not real. So, the economies of these countries will be impacted.

CNBC: Would you be picking up for instance in a country like India? Are you buying at current levels?
MOBIUS: We are looking very carefully because Indian stocks are now getting very attractive in valuation terms. The problem is that other markets are becoming very attractive. Prices are coming down everywhere as in Poland. So, we have to make comparisons all over and then make a decision on what we want to do.

Source:

“Valuations attractive, further dips likely: Templeton AM”
MoneyControl.com (India), July 15, 2008

NewsMax.com recently talked to well-known money manager Marc Faber, who shared his views on the U.S. central bank, bank failures, and bailouts with the Internet news site. Dr. Faber is famous for advising clients to get out of the U.S. stock market one week before the October 1987 crash. On the Fed:

The Federal Reserve has misled the public, and its fiscal policy has greatly damaged the U.S. economy. But the big Wall Street banks and brokerage firms will be bailed out by the Fed if they get in trouble because they’re members of the same “club.”

Those are the opinions of Marc Faber, economist, author, former Managing Director of Drexel Burnham Lambert, and editor of The Gloom Boom & Doom Report, a monthly investment newsletter.

“Let’s say if I’m a manufacturer and I’m a bad businessman and I go out of business, who’s going to help me? But Bear Stearns and the Wall Street elite because they’re tied into the Treasury and the Federal Reserve and they lunch together, it’s a club… and they’re bailed out. I mean it’s a joke.”

“The first thing that people should do is stop listening to the Federal Reserve in America, and specifically to Mr. Ben Bernanke,” Faber said in a recent CNBC interview.

“They are misleading the public and investors by claiming they want to have a strong dollar and that they’re concerned about inflation. But when it comes to actions, they show no concern about inflation and [about] the ordinary Americans and middle class at all.”

Getting The Shaft?

Dr. Faber is also forecasting an explosion of bank failures over the coming year. According to NewsMax.com:

In Faber’s recent note to investors he writes with extreme pessimism that he expects 150 bank failures in the next 12 months.

“I think a lot of banks are already bankrupt,” Faber says.

“And a lot of insurance companies and financial institutions, but they hide their rotten assets in level three asset categories, where you don’t need to value them.”

“I think the financial sector by and large has much larger problems than is perceived by the investment community. The stock market to some extent is telling you that, is giving you the price signals.”

The Swiss-born investor also feels that the Fed acted irresponsibly when it bailed out Bear Stearns. The news site explained:

Yet after the Bear Stearns bailout, the Fed has essentially promised bailouts for the largest firms if they go belly up, says Faber.

“It’s a very questionable practice in life to have a financial sector that made so much money in the good days, and when something goes bad the government just bails them out. It sets a very bad precedent.”

Source:

“Marc Faber: Bernanke, Fed a ‘Joke’”
NewsMax.com, July 10, 2008