Telling TIME interview with Bill Gross

Bill Gross of PIMCO is an interesting animal.  Part market, part politics, part market maker, part market prognosticator, Gross, and PIMCO, remains a huge cog in the capital markets. 

Gross’s unique position means he’s a man who has to choose his words carefully. 

Gross is powerful, which is why this TIME interview published yesterday is very telling and well worth the read.  You get the sense that Gross is very worried about the bond markets, but he can’t really say so too forcefully without causing a riot in US Treasuries and mortgage ARMageddon. 

But there’s no question this must be one of the most bearish interviews Gross has done and reading between the lines leaves one with little confidence regarding the US bond markets.  In fact, just reading the lines paints a worrying picture. 

It is very interesting that Gross is starting to talk “second stimulus”.  Marc Faber and Peter Schiff have been on about this for months now and Zero Hedge yesterday reported that Market News was citing possible Fed talk of an extension to quantitative easing after March.  

This Gross interview backs this up.  An end to QE for mortgage backed securities in particular, which the Fed has supported to the tune of more than $1 trillion in 2009, will wreak havoc in the market and destroy any headway the Fed thinks it has made in keeping Treasury yields subdued and in propping up the housing market. 

The one thing we disagree with Gross on is that another stimulus would be politically very difficult what with the already unpopular profligacy emanating from Capitol Hill.  2010 is a big US election year so this point is worth some focus, especially with the Dems losing political capital by the week.  But, when stimulus gets withdrawn and the sick underbelly of the US economy is exposed, rest assured, the politically popular route will be more of the same false tonic we’ve seen throughout the crisis so far, not the necessary remedial pain. 

In other word’s, if anything, the unavoidable political choice will be for more not less stimulus as 2010 unfolds.  This is another reminder why inflation is not an economic phenomenon but a political one, and it doesn’t really matter whether the political leaders are Red or Blue, because the Fed will always be green (as in money printing) and the politicians yellow (as in bellied). 

Some notable snippets from the Gross interview, 

The first half will be dominated by government stimulus and by inventory accumulation or a lack of [inventory] liquidation among businesses. I expect nothing from consumer [spending] and nothing really from housing or really any of the standard cyclical leading sectors. 

Just speaking about Pimco’s general portfolio strategy, we’ve sold our agency mortgage securities, Fannie and Freddie, in the billions to the willing check of the Fed. They’re buying a trillion dollars of them, or have over the past 9-12 months, and so we sold them a lot of ours. Now, what did we do with the money? We bought Treasuries, we bought corporate bonds, and so the bond markets in general have benefited, as have stocks because this available money effectively flows through the capital markets. So it’s a trillion-and-a-half dollar check that won’t be there as the Fed withdraws from the market. How that affects the markets, I just don’t know. I’m not eagerly anticipating the answer, but I think it holds some surprises in 2010, not just in mortgage securities but stocks as well. We could miss the money, put it that way.  

I’d be careful about this continuing assumption that U.S. Treasuries are the place to go. There are a number of reasons to have doubts about Treasuries, not just because of America’s sovereign risk but also from the standpoint of an over-owned currency [the dollar]. Add onto those concerns the comments from Chinese authorities and others. They that haven’t said they’re up to their neck in Treasuries, but you know they’re getting close. 

Over the past six to nine months, the 60% pop off the bottom not just for stocks but for high-yield bonds, etc., is indicative of a return in perspective to the old normal as opposed to the new normal. We think that 2010 will be tempered, and that doesn’t mean bear markets but it does mean a growing realization that we have a lot of problems and the markets aren’t necessarily priced for it.  

I do sort of expect another stimulus program in 2010 at some point…