The Call Of Bill Gross For The Bail Out Of Freddie Mac And Fannie Mae Means Peak Treasuries
Saturday, 6. September 2008, 07:00:42
Introduction
The quotes of Bill Gross of Pimco on September 5, 2008, document a clear and immediate call for the bail out of Freddie Mac, FRE and Fannie Mae, FNM, These quotes call for the Fed to use its recently granted authority by Congress to nationalize the US housing and home lending organizations. The result will be a tight integration of government and enterprise into a combine of state corporate rule.
Mr. Gross said: If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury ... [A] systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.
Debt will be turning lower in value
Mr. Gross' call will have the effect of turning debt lower; I provide charts of the following for historical record.
the US Treasuries ETF, TLT,
the zero coupon interest mutual bond fund, BTTRX,
the corporate mutual bond fund PBDAX,
the long term US Government bond fund PLGBX,
the aggregate debt, AGG,
the futures marketplace US Treasuries, $USB, will all be turning lower.
The bond marketplace will declare a defacto interest rate hike: the interest rate on the 30 year government bond, $TYX, and the interest on the 10 year government bond, $TNX, will be going up.
DXKLX Direxion 10 Year Note Bull 2.5 Fund will be going down
DXKSX Direxion 10 Year Note Bear 2.5 Fund will be going up
Stocks will rise in value
Stocks, especially the homebuilding, financials, and banks will move higher.
The stock value of Freddie Mac, FRE, and Fannie Mae, FNM, will fall in value.
The call of Bill Gross for the immediate bail out of Freddie Mac and Fannie Mae
Bill Gross of Pimco in September 5, 2008 article There's a Bull Market Somewhere? relates:
For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:
What Happens During Delevering
1) Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
2) Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
3) The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.
It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse.
In the housing market for instance, it is one thing to observe a 15% national decline in home prices. It is much more serious however, when margin calls in the form of monthly mortgage payments (many of which are in-creasing due to adjustable or option-related contractual provisions) lead to foreclosures, which in turn cause a debt liquidation. The bank in this case, takes possession of the home and dumps it back on the market, lowering the price even further, which leads to more foreclosures, which leads to …
This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.
Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage. And the private market, in its attempt to anticipate a bear market bottom and snap up “bargains,” has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater.” We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments.
Step 2 on our delevering blackboard therefore has stalled and is inevitably morphing towards Step 3. Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning. There may be a Jim Cramer bull market somewhere, but it’s primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices.
New balance sheets? Is this now some Deloitte & Touche metaphor? Hardly. What I mean, what our blackboard and our Investment Committee point out is that to ultimately stop this asset/debt deflation, a fresh and substantial new source of buying power is required. This became all too obvious as the Treasury’s attempt to entice additional capital into Freddie and Fannie came up empty. Yet this same dilemma is and will continue to confront all highly levered institutions in the throes of asset liquidation. Without a new balance sheet, their only resort is to sell assets, which in many cases leads to further price declines, or ultimately debt liquidation/default.
If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.
The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise.
Commentary
This blog continually communicates that state corporatism is continually on the rise. In order to keep things stable, industry and government leaders have been continually work together continentally and globally to integrate commerce, industry and trade with the government.
Example include
a) The announcement of the framework agreement of the Security and Prosperity Partnership of North America, the SPP at Baylor University
b) The announcement of the framework agreement to create a western world EU US Government at the EU US Summit of 2007.
c) The Federal Reserve's announcment of assistance for the buyout of Bear Stearns by JP Morgan
d) The Federal Reserve's announcement of framework agreements of TAF, TSLF and PDCF on March 18, 2008.
e) The granting by Congress to the Federal Reserve and the Treasury to lend to and capitalized the two GSEs Freddie Mac, FRE, and Fannie Mae, FNM.
And this blog continually communicates that the Liquidation Thesis is being applied: government services and payments, service sector jobs, public and private debt of all types, and unfunded retiree benefits are being contnually liquidated, that is done away with.
The call of Mr. Gross has moved up the action date for required Federal Reserve action to nationalize the GSEs; his call will be forcing the Fed's hand to acquire, that is seize, the GSEs this weekend.
Public and private debt is going to get a haircut, that is a writedown by Mr. Gross' call.
A run on the US Treasuries will get under way soon.
Financial Application
I am short the financial sector via a long position is SKF; Market action is going to go against me in the short term; I plan to keep the SKF as I see a financial collapse coming soon.
Suggested Reading
US Considering Government Takeover of Fannie and Freddie by Jesse 9:00 PM Friday August 5, 2008
The quotes of Bill Gross of Pimco on September 5, 2008, document a clear and immediate call for the bail out of Freddie Mac, FRE and Fannie Mae, FNM, These quotes call for the Fed to use its recently granted authority by Congress to nationalize the US housing and home lending organizations. The result will be a tight integration of government and enterprise into a combine of state corporate rule.
Mr. Gross said: If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury ... [A] systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.
Debt will be turning lower in value
Mr. Gross' call will have the effect of turning debt lower; I provide charts of the following for historical record.
the US Treasuries ETF, TLT,
the zero coupon interest mutual bond fund, BTTRX,
the corporate mutual bond fund PBDAX,
the long term US Government bond fund PLGBX,
the aggregate debt, AGG,
the futures marketplace US Treasuries, $USB, will all be turning lower.
The bond marketplace will declare a defacto interest rate hike: the interest rate on the 30 year government bond, $TYX, and the interest on the 10 year government bond, $TNX, will be going up.
DXKLX Direxion 10 Year Note Bull 2.5 Fund will be going down
DXKSX Direxion 10 Year Note Bear 2.5 Fund will be going up
Stocks will rise in value
Stocks, especially the homebuilding, financials, and banks will move higher.
The stock value of Freddie Mac, FRE, and Fannie Mae, FNM, will fall in value.
The call of Bill Gross for the immediate bail out of Freddie Mac and Fannie Mae
Bill Gross of Pimco in September 5, 2008 article There's a Bull Market Somewhere? relates:
For the past several months our PIMCO Investment Committee blackboard has continued to display the following lesson plan:
What Happens During Delevering
1) Risk spreads, liquidity spreads, volatility, term premiums – they all go up.
2) Delevering slows/stops when assets have been liquidated and/or sufficient capital has been raised to produce an equilibrium.
3) The raising of sufficient capital now depends on the entrance of new balance sheets. Absent that, prices of almost all assets will go down.
It is the debt liquidation that potentially turns a stagnant/recessionary economy into something much worse.
In the housing market for instance, it is one thing to observe a 15% national decline in home prices. It is much more serious however, when margin calls in the form of monthly mortgage payments (many of which are in-creasing due to adjustable or option-related contractual provisions) lead to foreclosures, which in turn cause a debt liquidation. The bank in this case, takes possession of the home and dumps it back on the market, lowering the price even further, which leads to more foreclosures, which leads to …
This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami.
Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage. And the private market, in its attempt to anticipate a bear market bottom and snap up “bargains,” has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater.” We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments.
Step 2 on our delevering blackboard therefore has stalled and is inevitably morphing towards Step 3. Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning. There may be a Jim Cramer bull market somewhere, but it’s primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices.
New balance sheets? Is this now some Deloitte & Touche metaphor? Hardly. What I mean, what our blackboard and our Investment Committee point out is that to ultimately stop this asset/debt deflation, a fresh and substantial new source of buying power is required. This became all too obvious as the Treasury’s attempt to entice additional capital into Freddie and Fannie came up empty. Yet this same dilemma is and will continue to confront all highly levered institutions in the throes of asset liquidation. Without a new balance sheet, their only resort is to sell assets, which in many cases leads to further price declines, or ultimately debt liquidation/default.
If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury – not only to Freddie and Fannie but to Mom and Pop on Main Street U.S.A., via subsidized home loans issued by the FHA and other government institutions. A 21st century housing-related version of the RTC such as advocated by Larry Summers amongst others could be another example of the government wallet or balance sheet that is required during rare periods when the private sector is unable or unwilling to step forward.
The bill for our collective speculative profligacy, obvious in the deflating asset markets, can be paid now or it can be paid later. Those aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible. Now that the Fed has spent 12 months proving that it “knows something…knows something,” it is time for the Treasury to do likewise.
Commentary
This blog continually communicates that state corporatism is continually on the rise. In order to keep things stable, industry and government leaders have been continually work together continentally and globally to integrate commerce, industry and trade with the government.
Example include
a) The announcement of the framework agreement of the Security and Prosperity Partnership of North America, the SPP at Baylor University
b) The announcement of the framework agreement to create a western world EU US Government at the EU US Summit of 2007.
c) The Federal Reserve's announcment of assistance for the buyout of Bear Stearns by JP Morgan
d) The Federal Reserve's announcement of framework agreements of TAF, TSLF and PDCF on March 18, 2008.
e) The granting by Congress to the Federal Reserve and the Treasury to lend to and capitalized the two GSEs Freddie Mac, FRE, and Fannie Mae, FNM.
And this blog continually communicates that the Liquidation Thesis is being applied: government services and payments, service sector jobs, public and private debt of all types, and unfunded retiree benefits are being contnually liquidated, that is done away with.
The call of Mr. Gross has moved up the action date for required Federal Reserve action to nationalize the GSEs; his call will be forcing the Fed's hand to acquire, that is seize, the GSEs this weekend.
Public and private debt is going to get a haircut, that is a writedown by Mr. Gross' call.
A run on the US Treasuries will get under way soon.
Financial Application
I am short the financial sector via a long position is SKF; Market action is going to go against me in the short term; I plan to keep the SKF as I see a financial collapse coming soon.
Suggested Reading
US Considering Government Takeover of Fannie and Freddie by Jesse 9:00 PM Friday August 5, 2008