

Bill Gross of PIMCO calls an end to the 30 year bull market in bonds - anigbrowl
http://www.pimco.com/Pages/RunTurkeyRun.aspx

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duncanj
As much as I want to defer to the expertise of the author, to say that there's
been a 30-year bull market in bonds is to say that there was at least a
20-year bear market before 1983. This may be the long term trend, but within
that is up and down like you'd expect in the business cycle. The confusing
thing is that those who are buying bonds are bearish about the economy as a
whole. You have to be buying these things thinking they won't be wasteful when
interest rates rise. If interest rates skyrocket like many voices claim they
will, those who are holding 0.25% paper are going to be unhappy when they are
unloading it at 80 cents on the dollar.

His discussion of the matter seems very confused. The problem with the bond
market right now is that there is no inflation, but real returns elsewhere are
often negative. So bonds are a safe place to put money. It's certainly not
being invested. Now, one can argue whether the Fed has any ability to affect
that. The clock may have run out on quantitative easing, as I have heard
argued. That means the Fed would be somewhat irrelevant and the US economy
would falter in the absence of fiscal stimulus.

There aren't many voices articulating sense in this discussion. Many have
simply said "deficits bad" and called on increasing unemployment as the
solution to our concerns. Good luck with that. I think the solution probably
requires preventing the unemployed from becoming the desperately long-term
unemployed, at a minimum, and also using the favorable bond situation to
repair infrastructure, which is apparently in huge backlogs across the
country.

To some extent, I wonder if Bill Gross is really just sort of pandering to his
clientele, who are not sophisticated economists and who are happy to agree
that politics is full of apes. After all, at the end, his call to action is
for a vote of confidence in PIMCO. This article doesn't give me much faith,
but I suppose if he hit the right buttons, his investors might just pull that
lever, and keep sending the money his way.

~~~
btilly
Over the last 30 years bond yields have fairly steadily declined. Admittedly
with variation, but the trend has been clear. However there is no way for them
to decline further at this point - they can't go much below 0%. (They can go
below 0%, Treasuries did briefly during the crisis, but not by much.)
Furthermore in the last 30 years we've seen the broad expansion of bond
categories like junk bonds and securitized bonds. This has resulted in great
growth in the bond market, and it simply doesn't have room to grow by that
much again. (Indeed fallout from the subprime debacle is likely to make it
shrink going forward.)

Prior to that the advent of increasing inflation rates winding up with
stagflation did constitute, from the point of the bond market, a long and
nasty bear market.

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kreek
"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."

That pretty much sums up modern politics for me, and I was a crazed politico
just a few years ago.

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T_S_
Tough call with real interest rates at zero or negative.

The Fed has created a bond market bubble to replace the last couple that
popped. They mean well, not wanting Mom to default on her upside-down,
floating rate mortgage. But they are not doing us any favors in the long run
by threatening the value of money.

~~~
anigbrowl
It's certainly troubling; I'm skeptical of inflation panic but Bill Gross
isn't known for being a doomsayer.

~~~
T_S_
To your point about PIMCO, I agree. They make a living offering people a way
to own bonds. The call must be past obvious to them.

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brc
This article points out a couple of important points: \- it's a giant ponzi
scheme of the likes never seen before, so the outcome is far from certain, but
no ponzi scheme ever ends well for all involved. \- because everyone expects
QEII to happen, it should be already priced in. So the effects can only really
change things if it is either more or less than expected. \- For people like
me who price in USD but spend in another currency, this is becoming more and
more difficult to bear. I have to increase revenue by 20% per year in order to
just stay still. With further inflation of the USD. -Those who think that
inflation can be carefully controlled are not conversant with history. When
inflation outbreaks occur, they are by nature uncontrolled.

Basically the post Bretton-Woods era is coming to a close, and history is
being made. Nobody knows what will happen.

~~~
secretasiandan
That it is "priced in" only means that the probabilistic effect of it is
priced in : what is priced in is its probability of working (p) times its
effect (e). As things play out, p will get closer to 0 or 1. That things don't
change immediately after the announcement does not mean that e is zero or that
p*e is zero.

That you have to grow revenues by 20% a year to stay still does not
necessarily mean that you are getting screwed. It may mean that the value of
your services (at least from the economies that can buy them) are becoming
less useful due either to cheaper competition or simply lack of need in a less
sophisticated economy.

Side question : why 20%? I don't think the dollar index is weakening and
currently there is very low inflation or slight deflation.

Is there an alternative to trying to control inflation? Are you saying that
energy spent trying to do it is wasted or that inflation would be stable with
no intervention?

~~~
brc
>why 20%

I earn in USD, I don't spend in USD. Therefore I am exposed to currency
fluctuations. In this case it is USD depreciation because of inflation
expectations and virtually negative interest rate.

The USD has lost 20% in the last 12-18 months against many currencies. I'm
getting screwed because the actions of a country I have no say in are
systematically devaluing their currency, which happens to be the 'standard'
pricing unit of the internet. There's not much I can do about either. So two
forces beyond my control are conspiring to make me earn less for the same
amount of work. That's getting screwed in my book.

The value of the products/services is exactly the same. It's the pricing units
that are changing, and changing fast. People inside the USA don't notice this
because they earn and consume in USD, until they start looking at a trip
somewhere else. Importing companies haven't really started to adjust prices
yet, but the day is coming soon when imported items really start to jump in
price.

Is there an alternative to trying to control inflation? Well, QE doesn't
control inflation, it creates it. If you're going to accept that a central
bank should have pricing power over money, then you have to accept the tools
they use to create inflation and disinflation.

My stance is that stable monetary periods are periods of growth and
prosperity. All paper currencies eventually reach their net worth - which is
zero. The USD is one of the longest lasting currencies in the history of the
world, but nearly 100 years ago it was given over to a central bank, and
nearly 40 years ago it was turned into a purely paper currency. In that time
period it has lost nearly 95% of it's value. While that stimulates certain
types of economic activity, my personal belief is that the bad has probably
outweighed the good.

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treeface
It will be interesting to see how (and how quickly) Treasury yields rise when
they ultimately do. I suspect that the longer the Fed keeps up T-bill
purchases, the more violent will be either the collapse of bond prices when
they finally pull out or the greater the rate of inflation when they don't
pull out early enough.

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thewileyone
There's been a lot of speculation on the condition of the US bond market in
the recent years. For PIMCO and Bill Gross to come straight out and call a
spade a spade confirms the speculation.

The US is caught in currents that lead in two general directions: one, a slow
recovery with a soft landing; two, a slow recovery with a very hard landing.
There's nothing positive to look forward to.

