Wounded Heart - PIMCO

Joseph Schumpeter, the originator of the phrase “creative destruction,” authored a less well-known corollary at some point in the 1930s.

“Profit,” he wrote, “is temporary by nature: It will vanish in the subsequent process of competition and adaptation.”

And so it has, certainly at the micro level for which his remark was obviously intended.

Once proud, seemingly indestructible capitalistic giants have seen their profits fall short of “everlasting” and exhibited a far more ephemeral character.

Kodak, Sears, Barnes & Noble, AOL and countless others have been “competed” to near oblivion by advancing technology, more focused management, or evolving business models that had better ideas more “adaptable” to a new age.

Continue reading -- Wounded Heart - PIMCO

Original content +Bob DeMarco , All American Investor

Bill Gross on Bernanke

The Federal Reserve has done a "masterful" job of keeping global markets relatively quiet, which for investors means stocks and bonds are unlikely to change much in the coming months, Bill Gross, Pimco’s co-chief investment officer, told CNBC Wednesday.

“What the Fed (learn more) has done, rather masterfully, in terms of asset markets, is to suppress volatility".

Mohamed El Erian on Greece

The latest from Bill Gross (Pimco) QE3 is on the way

If you don't see the video go here.

The latest from Mohamed El Erian of Pimco

Dr. El-Erian is CEO and co-CIO of PIMCO and is based in the Newport Beach office.

He re-joined PIMCO at the end of 2007 after serving for two years as president and CEO of Harvard Management Company, the entity that manages Harvard’s endowment and related accounts.

Dr. El-Erian also served as a member of the faculty of Harvard Business School.

He first joined PIMCO in 1999 and was a senior member of PIMCO's portfolio management and investment strategy group.

All Eyes on Europe PIMCO

The importance of the European sovereign debt crisis should not be underestimated. Simply put, Europe remains a main driver of “animal spirits” and volatility in financial markets and can significantly shape the outlook for the global economy.

By Mark Kiesel
September 22, 2011

The question on everyone’s mind these days is whether policymakers can contain the European sovereign debt crisis. Europe has roughly the same amount of government debt as a percentage of GDP as the United States.

PIMCO Boss Bill Gross Calls For Massive Taxpayer-Backed Mortgage Refinance Initiative

Gross said the refi scheme would spur some $50-60 billion a year in new consumer spending and raise home prices between 5-10 percent.

PIMCOs Mohamed El-Erian on the Bank Stress Test

The article was written by PIMCO's Mohamed El-Erian.

The stress tests will accelerate the redefinition of the financial landscape, with a meaningful impact on future economic growth and welfare. However, whether the impact is for good or ill depends on how the results of the tests, and policies that flow from them, are pursued.

He makes the following key points:

• The report must be transparent. He points out that the results will be examine by analyst all over the world. As a result, the methodology, assumptions, and analysis needs to clear and easily understood.
• The results should be forward looking. The report should explain how the good banks get out from under the government. And, how bad banks that do not have access to private capital will be handled.

There can be little doubt that the release of the bank stress test information needs to be clear, concise, and understandable.

This is essential to create confidence in the market place. If the bull market in stocks is to continue, the report must create a sense of confidence. Anything less is likely to send the market back for a test of the lows we saw in early March.

This is a well written article that should be read and considered.

Bank tests we should get stressed about

PIMCO CEO El-Erian on Journey to New Normal in the Markets (Video)

Lots's of useful information and perspective. Worth watching to get a feel for the current state of affairs in the market and ideas about future trends. Good look at the obvious and beyond the obvious.



The markets are on a volatile journey to a "new normal," says Mohamed El-Erian, Pimco CEO.

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Bob DeMarco is a citizen journalist and twenty year Wall Street veteran. Bob has written more than 500 articles with more than 11,000 links to his work on the Internet. Content from All American Investor has been syndicated on Reuters, the Wall Street Journal, Fox News, Pluck, Blog Critics, and a growing list of newspaper websites. Bob is actively seeking syndication and writing assignments.

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Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

Big Boys Buying Mortgages In Reaction to Treasury Plan

Big Boy Investors like PIMCO, TCW, and Fifth Third Asset Management are buying mortgage backed securities and favoring them over treasuries.

A March 23 Ried, Thunberg & Co. survey said fund managers overseeing $1.19 trillion cut their government securities holdings to the least this year while they increased mortgage assets.

This is in reaction to the Federal Reserves March 18 plan to buy Treasuries and $750 billion of mortgage-backed securities from Fannie Mae, Freddie Mac and Ginnie Mae.

So far the plan which is designed to lower consumer interest rates by taking supply out of the market seems to be working. A contrarian might ask? Is this front running or the makings of a trend that can be sustained over a long period of time?

Interest rate spreads are clearly narrowing across most quality preferences. The spread between the ten year Treasury and Fannie Mae’s current-coupon 30- year fixed-rate narrowed to 118 basis points last week, down from 232 basis points in November. The spread on industrial corporates narrowed from 557 basis points to 468 basis point since the announcement.

These narrowing in the interest rate spreads can also be seen as a vote of confidence for the recently announced Fed plan.

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PIMCOs Gross: Find ways to prop up the Values of Assets

To PIMCO, the remedy for this deflationary delevering and mini-depression is simple and almost axiomatic: stop the decline in asset prices.

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Investment Outlook
Bill Gross | February 2009

BEEP BEEP!

The current financial and economic crisis is difficult to appreciate, not only for the drop in elevation, but because of the swiftness of the declines. It’s been a Wile E. Coyote 12 months – straight down like a dead weight. A year ago, global equity prices were nearly twice today’s levels and recession was only a whisper on the lips of the gloomiest of economists. Today, descriptions drawing parallels to the Great Depression make it obvious that a major shift in economic growth and its historic financial model, as well as policy prescriptions for its revival, are underway. Most of the world’s connected economies and its citizens are in shock, conscious but not fully aware of the seismic shifts that will unfold in future years.

PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a “shadow banking” system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels. But, with U.S. housing prices as its trigger, the delevering process did a Wile E. Coyote and headed over the cliff in mid-year 2007, dragging down almost all asset prices except government bonds. The real economy followed shortly thereafter, not just in the U.S., but globally, proving that linkages work on the “down” as well as the upside. To PIMCO, the remedy for this deflationary delevering and mini-depression is simple and almost axiomatic: stop the decline in asset prices. If that can be done, the real economy will level out as well. When home prices stop going down, newly created households will be more willing to take a chance on ownership as opposed to renting. If stock prices consolidate, recently burned investors will be more willing to invest, as opposed to stuffing their 401(k) mattresses with Treasury bills. Business investment, jobs, and profits should follow quickly behind.

The simplicity of the solution, however, is not easily achieved once deflationary momentum takes hold. Animal spirits, once dampened, are hard to reignite; “fear of fear itself” dominates greed. Under such circumstances, the benevolent hand of government is required and Keynes is reincarnated in an attempt to plug the dike via fiscal spending and imaginative monetary policies that support asset prices. PIMCO has recently been contracted to assist in several publically announced programs which have helped in that effort: the CPFF, which has benefitted commercial paper yields, and the Federal Reserve’s purchase program for agency-backed mortgage loans, which has lowered 30-year mortgage rates to 4.5% and fostered the affordability of new and secondary housing prices. These two programs, in our opinion, have been the major policy successes to date – not because of our involvement – but because they have supported and increased asset prices whose decline has been the major deflationary thrust behind the real economy. Stop asset prices from going down and with a 12-month lag, unemployment will stop going up, and President Obama’s targeted three million new jobs will have a fighting chance of being achieved.

But stopping the decline of asset prices can be and has been attempted in numerous, seemingly uncoordinated ways. Recapitalization of the banks has been the major thrust, in the hopes that banks would extend credit which would reinvigorate asset pricing. Those who argue strongly for a recapitalization of the banking system, however, may be missing the distinction between the banking system as we once knew it, and the “shadow banking” system that superseded it. Jim Bianco, who heads up the research tank bearing his own name, brought the difference to mind in a recently produced piece entitled, “When Will The Banks Start Lending?” His conclusion was that banks already were – lending – but it was the “shadow system” (my words) that was holding up the parade. According to his analysis, shown in Chart 1, securitization has for several years exceeded bank loans as a percentage of private credit market debt. In contrast to recent headlines, however, banks have been picking up their lending, but it has been the “shadow banks” that have faltered. That makes sense. While banks may have tightened their lending standards, fresh capital from the TARP has made it possible to make new loans. The shadow banks, however – hedge funds, investment banks, and structured financial conduits – have been forced to delever as government funds have been directed to more visible institutional lenders. Granted, Goldman Sachs and Morgan Stanley have been TARP recipients, but only under the conditions of downsizing and degearing on their way to becoming regular banks, which have cut their holdings of assets significantly in percentage and actual dollar terms. It should not surprise, therefore, that with the exception of specifically directed government programs directed at commercial paper rates and 30-year mortgage yields, past policies have been unsuccessful. Banks have been recapitalized – yes – and banks have cautiously started to lend. But shadow banks are still delevering due to disappearing and unavailable fresh capital and, as they do, they continue to drag asset prices with them. PIMCO’s Ramin Toloui has produced Chart 2 which correlates the contraction in household debt to the decline of the securitization market. He estimates that there is a one trillion dollar hole that needs to be filled by policymakers in this area alone.




Stressing the importance of the shadow banks is not the same thing as suggesting that they should be next in line for government largesse and bailouts. Lord knows, the Obama Administration is not going to bail out hedge funds, CDOs, private equity firms (Cerberus?), or Donald Trump. There are levered risk takers that will be, and should be, allowed to fail. But in permitting failure, policymakers must still be cognizant of the need to support asset prices – hopefully by inducing confidence and trust in private investors, as pointed out by Robert Shiller in a recent Wall Street Journal op-ed, but if need be by the financing or purchase of assets themselves. It’s not so much that the stock market needs to go back to 10,000. That would be nice for millions of 401(k)s that have been cut in half over the past 12 months, but it is not likely. Rather, asset prices securitizing commercial real estate and credit card receivables, as well as plain old-fashioned municipal bonds, must stop going down if the real economy has any chance to revive by 2010.

Example: CMBS or commercial real estate mortgage-backed securities are now priced to yield over 12% vs. 5% in recent years. As real estate financing comes due and rolls over in the next few years, it is imperative these yields return to mid-single digits if shopping centers, retail malls, and office buildings are to remain viable. How best to bring those yields down is debatable: another CPFF-like structure with self-insurance and contributed fees as its equity backstop? A generous portion of remaining TARP billions providing a reserve cushion for Federal Reserve funding? A good bank, bad (aggregator) bank structure? All three are being debated by policymakers and we should have clarity within a week’s time. But one thing is certain: an economic recovery is dependent upon commercial real estate prices stabilizing and most retail stores staying open for business in the months and years ahead.

Similarly, municipal yields are now trading at nearly twice their Treasury counterparts, implying that municipal bonds are trading at 80 cents on the dollar instead of 113 cents like the average Treasury. To enable states and cities to return to normal functioning, those bonds must return to par. Modern day capitalism depends on the successful refinancing and issuance of securities at a price and yield level not significantly divorced from past experience. That is the same thing as saying that current yields must come close to matching the economy’s embedded cost of debt if default is to be avoided. Not only municipalities, but the efficient operation of hospitals, nursing homes and even universities depend on the leveling and returning of municipal bond prices to higher levels. Similar arguments can be made for corporate bonds as well.

PIMCO’s advice to policymakers is as follows: you can’t bail out everyone, yet economic recovery is not possible unless certain critical asset sectors are not only reliquefied, but rejuvenated in price. The prior Administration’s focus on the banks has been critical but unidimensional. The shadow banking system with its leverage and financial innovation, powered a near 25-year global economic expansion, but it is the delevering of those hidden quasi-banks that is now threatening its petrification. Policymakers should not focus entirely on one-off bailouts of large real estate developers, municipalities, or even credit card issuers like they have with Citi, BofA, and AIG. Rather, they should recognize that supporting critical asset prices such as municipal bonds, CMBS, and even investment grade corporate bonds is a necessary step towards eventual economic revival. Capitalism at its philosophical and practical center depends on credit, and while new loans can be and are being advanced via the banking system, it’s a much more difficult task to force shadow banks to lend. That lending depends on securitization which in turn depends on stable and eventually higher asset prices than currently exist. The original focus of the TARP was on asset prices, but the prior Administration quickly lost its way or perhaps its nerve. Like his Road Runner nemesis, Wile E. Coyote must now extend some infrequently used figurative wings to avoid the deflationary precipice below. Support asset prices. Beep Beep!

William H. Gross
Managing Director
Investment Outlook

PIMCOs Gross: Find ways to prop up the Values of Assets

PIMCOs Gross likes Muni Bonds and Treasury Inflation Protected Securities

Municipal bonds are among the best buying opportunities now as states line up for billions in federal aid from the incoming Barack Obama administration, said Bill Gross, chief investment officer of the giant bond firm PIMCO.

Other strategies offered by Gross in his January investment newsletter were buying Treasury Inflation Protected Securities (TIPS) and certain investment-grade corporate bonds.

By contrast, in the Treasury market, "low yields offer little reward and increasing risk," given ballooning federal budget deficits, he said.

PIMCO's Gross says muni bonds and TIPS "attractive"

By Ros Krasny

CHICAGO (Reuters) - Municipal bonds are among the best buying opportunities now as states line up for billions in federal aid from the incoming Barack Obama administration, said Bill Gross, chief investment officer of the giant bond firm PIMCO.

Other strategies offered by Gross in his January investment newsletter were buying Treasury Inflation Protected Securities (TIPS) and certain investment-grade corporate bonds.

By contrast, in the Treasury market, "low yields offer little reward and increasing risk," given ballooning federal budget deficits, he said.

Gross noted that requests for aid from municipalities and states total nearly $1 trillion "and to think California or New York City would be allowed to fail is, well -- unthinkable."

"Municipal bonds ... selling at historically high ratios relative to U.S. Treasuries, offer attractive price appreciation potential, or at the very least a defensiveness with high carry that a 2 1/2 percent 10-year Treasury cannot," Gross said.

According to Municipal Market Data, top-rated 30-year munis now yield 161 percent and 10-year munis yield 133 percent of comparable Treasuries.

Triple A rated munis started 2008 yielding a more normal 85 percent of 30-year Treasuries and 79 percent of 10-year government bonds.

Meanwhile, Gross said he doubted the U.S. economy was in for the type of deflation that markets are forecasting, making TIPS a good buy.

Current ultra-low Treasury yields "cannot possibly be maintained unless deflation, as opposed to inflation, becomes the odds-on favorite," he said.

Market-based break-even inflation rates now point to a consumer price index averaging negative 1 percent for the next 10 years, which Gross termed "possible, but not likely."

On the corporate bond side, yields of 6 percent or more for intermediate maturities are still common, Gross said.

"Investors should recognize the value of high-quality, investment-grade corporate bonds in many markets."

Otherwise, PIMCO continues to maintain a strategy of buying assets that are under the federal bailout "umbrella."

"Shake hands with the government ... their checkbook represents the largest and most potent source of buying power in 2009 and beyond," Gross said.

Gross said investors needed to be vigilant about higher inflation over the long term, given the "near certainty of future budget deficits approaching 6 percent to 7 percent of GDP."

(Additional reporting by Karen Pierog; Editing by Kenneth Barry)