Wednesday, October 27, 2010

Sammy Ponzi Scheme

Interesting Investment Outlook from Bill Gross today. Bill is a Managing Director at PIMCO and commonly known as a leading expert on the fixed income market.

Today Bill published a report titled Run Turkey, Run. Basically a slam on the QE2 plans and the end of the 30 year bull market in bonds (finally!). Not to mention a slam on the 2 party political system that leaves the American people high and dry. The bondholders remaining after QE2 will be like the turkey waiting on Thanksgiving Day. They might receive some immediate fat gains from bond yields being pushed lower for the last time, but ultimately they'll be served up on the platter of rates that can't go lower.  Rates ultimately will begin creeping higher.

Bill basically outlines why a thesis of investing in companies that prosper abroad has been very rewarding over the last 10 years. The political system in the US has become as corrupt as ever and void of a fiduciary responsibility to the American people. He suggests the best places to invest in fixed income will be in emerging markets debt and high quality corporate debt with short durations. It even appears that he suggests moving money to stocks and commodities though as a fixed income manager that'd never be prudent to announce.

Definitely read the report, but below are a few of the highlights and funny comments.


Highlights:


  • The Fed’s announcement of a renewed commitment to Quantitative Easing has been well telegraphed and the market’s reaction is likely to be subdued.
  • We are in a “liquidity trap,” where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there.
  • The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment.

Who said Bond strategists weren't funny?
  • This isn’t a choice between chocolate and vanilla folks, it’s all rocky road: a few marshmallows to get you excited before the election, but with a lot of nuts to ruin the aftermath.
  • Still, while next Wednesday’s announcement will carry our qualified endorsement, I must admit it may be similar to a Turkey looking forward to a Thanksgiving Day celebration. Bondholders, while immediate beneficiaries, will likely eventually be delivered on a platter to more fortunate celebrants
  • The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time. 

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