For those of you not in the know, Bill Gross’s firm PIMCO is joined to the Federal Reserve at the hip, so this event is certainly interesting.
One thing to consider that Zero Hedge leaves out is that the US may forgo QE3 in lieu of a structured default.
We will simply stop paying our creditors back.
I think this is the logical scenario that will follow from there being no third round of money printing.
I’m not quite sure how this will play out in terms of asset prices, and apparently neither does Gross.
Some things to consider:
The value of commodities will continue to rise in real terms, this may or may not be true in nominal terms. We know that commodities will continue to rise in terms of real price because the only way for commodities to drop in terms of real price is for there to be more of them on the market. This means the productive capacity of the economy must be expanded in order to see a real decline in commodities prices.
Since it is highly unlikely that the US government will take measures to drastically cut its spending habits, there is no possible way the productive capacity of the US economy will increase over time. Therefore holding commodities will work out to any investor’s advantage over the long run.
Zero Hedge reports:
And many thought Bill Gross was only posturing when he said he is getting the hell out of dodge. Based on still to be publicly reported data by Pimco’s flagship Total Return Fund, the world’s largest bond fund, in the month of January, has taken its bond holdings to zero (and -14% on a Duration Weighted Exposure basis). The offset, not surprisingly, is cash. After sporting $28.6 billion in “government related” securities, TRF dropped to $0.0, while its cash holdings surged from $11.9 billion to a whopping $54.5 billion (based on total TRF holdings of $236.9 billion as of February 28). This is the most cash the flagship fund has ever held, and the lowest amount in Treasury holdings since January 2009 before it was made clear that the Fed was going to adjust QE1 to include Treasurys in addition to Mortgage Backed Securities. PIMCO’s Treasury holdings peaked in June 2010 at $147.4 billion and have declined consistently ever since. And while we expected that the spike in MBS holdings (at times on margin) was indicative of an expectation that QE3 would monetize mortgage backed securities, the ongoing decline in that asset class now leads us to believe that Bill Gross is now convinced there will be no QE3 at all, at least based on his just putting his money where his monthly pen is! And if Bill Gross, the most connected person to the upcoming actions by the Fed, believes there is no more quantitative easing, it is really time to get the hell out of dodge in all security classes – bonds, and most certainly, equities.