Bill Gross is the CEO of PIMCO, the world’s biggest bond fund. Off the top of my head, I recall the value of the fund being around $800 billion US. Here is the Bloomberg article:
By Dakin Campbell
June 3 (Bloomberg) -- Bill Gross, founder of Pacific Investment Management Co., advised holders of U.S. dollars to diversify before central banks and sovereign wealth funds ultimately do the same amid concern about surging deficits.
Treasury Secretary Timothy Geithner’s plan to bring the budget back into balance won’t be successful as consumers shrink spending and the U.S. growth rate slows, Gross said in a Bloomberg Radio interview today. The budget deficit will be narrowed to “roughly” 3 percent of GDP from a projected 12.9 percent this year, Geithner said June 1.
“I think he’ll fail at pulling a balanced rabbit out of a hat,” Gross said from Pimco’s headquarters in Newport Beach, California. “They are talking about -- once the economy in the U.S. renormalizes -- the move back toward balance or much less of a deficit. I suspect that will be hard to do.”
Higher savings rates and an increase in the cost to service the national debt will drag on the U.S. economy, likely meaning “trillion-dollar deficits are here to stay,” Gross wrote in his June investment outlook posted today on the firm’s Web site.
Gross, manager of the world’s biggest bond fund, said on May 21 the U.S. will “eventually” lose its AAA credit rating after Standard & Poor’s lowered its outlook on the U.K.’s AAA to “negative” from “stable” amid an escalating ratio of debt- to-gross domestic product. While U.S. marketable debt is at about 45 percent of GDP, annual deficits of 10 percent will push the amount to 100 percent within five years, a level that rating companies and markets view as a “point of no return,” he wrote.
‘Years to Come’
Government spending will push the budget deficit to $1.845 trillion in the year ending Sept. 30, according to the Congressional Budget Office.
Federal Reserve Chairman Ben S. Bernanke said today that large U.S. budget deficits threaten financial stability and the government can’t continue indefinitely to borrow at the current rate to finance the shortfall.
The U.S. growth rate “requires a government checkbook for years to come,” Gross wrote. Coupled with Medicare and Social Security entitlements, government borrowing could reach 300 percent of GDP, meaning “the Chinese and other surplus nations cannot fund the deficit even if they were fully on board,” he wrote.
China, the largest U.S. creditor, with $767.9 billion of debt, has shifted purchases of Treasuries into shorter-maturity securities amid concern about unprecedented debt sales.
Yield Curve
Geithner, speaking yesterday in an interview in Beijing with Chinese state media outlets, said he has “found a lot of confidence” in the U.S. economy during his trip to China.
Investors should position themselves in the front end of the yield curve as long-term Treasury yields likely move higher, steepening the so-called yield curve, Gross wrote.
Gross reduced his holdings of government-related bonds in the $150 billion Total Return Fund in April for the first time since January, according to company data. In addition to Treasuries, the government debt category can include inflation- linked Treasuries, so-called agency debt, interest-rate derivatives and bank debt backed by the FDIC.
Yields on benchmark 10-year notes climbed as high as 3.75 percent on May 28, the most since November, rising from a record low of 2.04 percent on Dec. 18. the 10-year yield dropped three basis points today to 3.59 percent today.
Currency Diversification
The dollar weakened beyond $1.43 against the euro yesterday for the first time in 2009 on bets record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency.
Russian President Dmitry Medvedev may discuss his proposal to create a new world currency when he meets counterparts from Brazil, India and China this month, Natalya Timakova, a spokeswoman for the president, told reporters yesterday. Russia’s proposals for the Group of 20 meeting in London in April included studying a supranational currency.
The U.S. currency climbed 0.9 percent to $1.4177 per euro at 11:15 a.m. in New York, from $1.4303 yesterday, in the biggest intraday advance since May 27. The dollar traded at 95.75 yen, compared with 95.76.
The government has pledged $12.8 trillion to open credit markets and snap the longest U.S. economic slump since the 1930s. The Fed will buy as much as $1.75 trillion in Treasuries and housing-related debt to drive down consumer borrowing costs. That could have “inflationary implications,” Gross said.
No Exit
“Our expectation is the government won’t be able to exit” from those positions, Gross said in an interview on Bloomberg Radio today. The programs “will be semi-permanent positions on their balance sheets.”
For all the hand-wringing over the dollar’s slide, expanding deficits and declining credit ratings, the bond market shows international demand for American financial assets is as high as ever. The Federal Reserve’s holdings of Treasuries on behalf of central banks and institutions from China to Norway rose by $68.8 billion, or 3.3 percent, in May, the third most on record, data compiled by Bloomberg show.
The Total Return Fund rose 4.8 percent in 2008, beating 93 percent of its peers, data compiled by Bloomberg show. The fund has returned 1.5 percent this year, according to Pimco data.
To contact the reporter responsible for this story: Dakin Campbell in New York at dcampbell27@bloomberg.net
Last Updated: June 3, 2009 11:26 EDT
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German chancellor attacks central banks
By Bertrand Benoit and Ralph Atkins
Financial Times, London
Tuesday, June 2, 2009
Angela Merkel, the German chancellor, criticised the world's main central banks in surprisingly strong terms on Tuesday, suggesting that their unconventional monetary policies could fuel rather than defuse the economic crisis.
The attack on the US Federal Reserve, the Bank of England, and the European Central Bank is remarkable coming from a leader who had so far scrupulously adhered to her country's tradition on never commenting on monetary policy.
"What other central banks have been doing must stop now. I am very sceptical about the extent of the Fed's actions and the way the Bank of England has carved its own little line in Europe," she told a conference in Berlin.
"Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds," she said. "We must return to independent and sensible monetary policies. Otherwise we will be back to where we are now in 10 years' time."
Ms Merkel's decision to ignore one of the cardinal rules of German politics -- an unwritten ban on commenting monetary policy out of respect from central bank independence -- suggests Berlin is far more concerned about the route taken by the ECB than had hitherto transpired.
Berlin is concerned that the central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and about the long-term inflationary potential of hyper-lose monetary policies.
The ECB's efforts have been focused on pumping unlimited liquidity into the eurozone banking system for increasingly long periods. But in May it followed the US Federal Reserve and Bank of England in announcing an asset purchase programme to help a return to more normal market conditions.
The ECB announced it had agreed in principle to buy E60 billion in "covered bonds," which are issued by banks and backed by public-sector loans or mortgages.
The covered bond purchases, however, were only agreed after extensive discussions within the 22-strong ECB governing council. According to one version of May's meeting, the council had discussed a E125 billion asset purchase programme that would also have included other private-sector assets, but only the purchase of covered bonds was agreed.
Axel Weber, ECB council member and president of Germany's Bundesbank, has been among those who expressed scepticism about direct intervention in financial markets. In a Financial Times interview in April he expressed "a clear preference for continuing to focus our attention on the bank financing channel."
Mr Weber has also been among the most proactive council members in warning that the monetary stimulus injected into the economy will have to be reduced or even reverse quickly once the economic situation improves.
Details of the covered bond purchase scheme will be unveiled by the ECB after its meeting on Thursday. One likely solution is that the package will be split according to eurozone countries' capital shares in the ECB, which would result in Germany accounting for about 25 per cent of the €60bn programme. Meanwhile, the ECB is widely expected to leave its main interest rate unchanged at 1 per cent, its lowest ever.
Northwestern Mutual Makes First Gold Buy in 152 Years (Update2)
By Andrew Frye
June 1 (Bloomberg) -- Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time the company’s 152-year history to hedge against further asset declines.
“Gold just seems to make sense; it’s a store of value,” Chief Executive Officer Edward Zore said in an interview following his comments at a conference hosted by Standard & Poor’s in Brooklyn. “In the Depression, gold did very, very well.”
Northwestern Mutual has accumulated about $400 million in gold, and Zore said the price could double or even rise fivefold if the economy continues to weaken. Gold gained 10 percent last month, the most since November. The commodity has more than tripled since 2000, rising for eight straight years. Gold futures for August delivery slipped $4.80 to $975.50 at 4:03 p.m. in New York.
“The downside risk is limited, but the upside is large,” Zore said. “We have stocks in our portfolio that lost 95 percent.” Gold “is not going down to $90.”
Policyholder-owned Northwestern Mutual, based in Milwaukee, ranks third by 2008 life insurance premiums according to data from the National Association of Insurance Commissioners. The data excludes annuities.
To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net
Last Updated: June 1, 2009 16:34 EDT
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