Bill Gross dumps bonds as end of QE2 signals financial market rout
Posted on 10 March 2011 with 2 comments from readers
A sudden end to the QE2 market support program is now being trumpeted for June, and the ‘bond king’ Bill Gross has just revealed that his main fund is completely out of US bonds.
Every month since November last year the Fed has been pumping $4 billion a day into US financial markets with its POMO support program. It has pumped up markets to record levels and helped stocks to record their longest rally since the mid-30s.
Liquidity squeeze
Take away this cash flow and the markets have to exist on lower levels of liquidity, and you do not need a PhD to know what happens when money stops flowing into financial markets, they go down.
In 1937 stocks tumbled by 50 per cent. It might be different this time but don’t count on it. You might expect bonds to rally in a stock sell off. But clearly the world’s biggest investor in bonds, and the most successful bond fund operator of the past 15 years thinks not.
Why? Because the main mechanism of market support has been through the buying of US treasuries by the Fed. Stop these bond purchases and the price of bonds will fall, and interest rates will soar.
Higher interest rates are not good news for stocks. They add directly to the costs of doing business. And rising interest rates also do horrible things to real estate prices.
Safe havens
Where to go as a safe haven? Cash is the obvious place, with interest rates rising on dollar deposits. Precious metals could get caught in the general market sell-off or become another safe haven asset class, particularly as demand has been so high in recent months.
Then again you have to ask if the withdrawal of QE2 will not be so traumatic that QE3 will very quickly appear on the agenda. At the moment the politics of Washington are aligned against it but what if the stock market crashes? Congressmen and women have stock accounts too and their electors certainly do.
But Bill Gross is the ex-professional poker player from Las Vegas who became the bond market king. He might occasionally read his cards wrongly but this is a major hand he is unlikely to play badly.
2 Comments posted by readers:
Before the end of QE 2, we will be treated to the spectacle of the raising of the USA debt ceiling debate in the Congress. (See http://www.usdebtclock.org, scary ain’t it!) Should that not happen, (I think they will raise it, after putting on a big play for the cameras of C-SPAN.) all hell could break loose as trillions of dollars of derivatives are triggered as interest rates spike up. The entire global financial system could collapse. I doubt that it will, but it could. According to several experts that I have seen on CNBC, it came within hours of meltdown during the Lehman collapse. That event was trivial compared to a USA debt default. Someone, the other day on CNBC, said that all the major banks are still nearly insolvent, and that without government backing, they could all go under in another crisis. You would want a mix of cash, and precious metals on that day. Oil is good too. I will stay in cash until they get the ceiling raised. That government pension & FDIC printing press are looking very good for now.
Remember what happened the first time Congress voted down the bailout/giveaway? The market dropped 700 points. The derivatives monster somehow gets activated, and it might drop 7000 points. Unlikely, but possible.
While I do admire the man and his Bond Fund … I think he might be wrong about the QE2. I do not blame him to exit bonds, but I believe that QE3 is already planned and it is just a matter of time.
This events in Japan, IMO, with just help justify why more, and cheap money is needed.
I believe it will go the way all the other non backed currencies go, to zero. However much money will be printed before we get there.