Thursday, March 10, 2011

Absurdly Illogical-Gross Sells Treasuries to be Long US Dollar-What???

I saw this and at first thought Bill Gross made comments alluding to this.  However, it is just an illogical and somewhat absurd analysis of his remarks.

    Why Is Bill Gross Betting On A Vicious Move Higher In The Dollar?


    Joe Weisenthal, On Thursday March 10, 2011, 7:05 am EST

    Yesterday PIMCO reported that it had completely abandoned US government bonds.

    Perhaps more importantly, PIMCO now has a gigantic position in cash -- it's biggest ever.

    Is PIMCO betting on a vicious rally in the dollar?

    There are a few reasons it could happen:

    • The crackup of the Eurozone will help the dollar.
    • The end of QEIII is looking more and more likely.
    • Anti-dollar sentiment is extreme.
    • Commodities are all looking peakish, etc.
    • Aggressive spending cuts in DC.

    The signs are building up.

    Unfortunately, I had to do something I don’t like to do to find out--read his outlook.  In it, he states

    An inflation-adjusted “negative buck” might be more likely.

    which I interpret to mean losses on interest rates and the US dollar.

    If (and I think a hugely doubtful if this time around) the US maintains the status quo with the dollar as reserve currency for the world, then all of the events listed below incite a rally in US Treasuries, in which Bill Gross would want to participate.  Neither Bill Gross nor his fund receive any benefit from being long a US dollar, since he and his clients are already implicitly long the dollar and he is measured by US bonds.  Selling US Treasuries and holding US dollars as cash implies a belief that US interest rates move higher.  What most likely causes US interest rates to move higher are inflation through higher commodity prices, continued stimulative and aggressive monetary policy, and/or abandonment of the US dollar as a reserve currency.  However, strangely enough, each of those reasons leads to the other two.  Monetary policy is inflationary and leads to higher rates and eventual loss of confidence in the Fed and abandonment of the US dollar as reserve currency; and similarly but in reverse inflation through higher commodity prices causes Emerging Asia to rectify their undervalued currencies by selling US Treasuries and US dollars but does nothing to stop Ben Bernanke and Fed policy.

    The Fed has lost its ability to be lender of last resort, so now the lender of last resort is emerging Asia.

    US interest rates and really everything are entirely dependent on the US dollar as a reserve currency in an imbalanced and vulnerable global situation.  The only thing that fixes these imbalances are lower US dollar and higher rates, and we do not get one without the other, and we don’t get any without some considerable pain.  I always shutter when I hear “This time is different,” so let me be clear,

    last time 2007-2009 was different

    and what happens next will be the same as all of recorded financial history as the US finds the limits to its monetary and fiscal policy.

    Now, the real question is what reserve currency fails first and faces speculative attack.  If it is the Euro, then the US dollar probably rallies, and we’re stuck in an imbalanced system.  If it is the British Pound or Japanese Yen, then the first line of defense will be to sell the US dollar and US Treasuries, which then leads to a domino effect and US dollar failure.  If it is the US dollar, then I don’t know what to do except be short everything except Emerging Asian currencies and potentially the only thing of value in the US (agricultural commodities).

    I feel very fortunate to be a US citizen, but I have also resolved to not let my citizenry blind my investment policy and implicitly get me even more leveraged to the US dollar.  US investors do not have to face the same fate as US citizens.

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