The Market Has Never Been More Fearful Of An Extreme Event
BILL GROSS: The Fed Will Raise Rates This Year Read
The new Bill Gross investment outlook is out and Gross thinks the Fed is raising rates this year.
Because this is a Bill Gross investment outlook, there is an extended metaphor comparing the classic board game Monopoly to the global economy. But the main point is that the Fed will raise rates, bond yields are "ridiculous," and since the financial crisis, the rules of the global economic game have changed.
So more or less, Gross is hammering on the same theme he's talked about in recent letters.
On his call for rate hikes, Gross writes:
Officials at the Federal Reserve – the most powerful and strongest of Parker Brothers – seem to now appreciate the hole that they have dug by allowing interest rates to go too low for too long. Despite reasonable growth, some of them recognize the system’s distortion if only because inflation is going down, not up, in the process. Other Parker Brothers countries face deflation in the midst of negative interest rates. But the Fed, uniquely in my opinion, will move up the Monopoly board’s interest rates in late 2015, hoping to avoid landing on the figurative Park Place and Boardwalk in the process. It won’t however, move quickly – capitalism has been damaged by the change in rules since 2008.
On the economy, Gross thinks things are breaking down on the margin, writing:
In the final analysis, while there is no better system than capitalism, it is incumbent upon it and its policymakers to promote a future condition which offers hope as opposed to despair. Capitalism depends on hope – rational hope that an investor gets his or her money back with an attractive return. Without it, capitalism morphs and breaks down at the margin. The global economy in January of 2015 is at just that point with its zero percent interest rates
Gross' outlooks are usually colorful, with Gross last year calling himself a "philosophical nomad disguised in Western clothing."
Aside from Gross' sometimes opaque metaphors, Gross is still maintain a largely pessimistic outlook on the global economy.
Earlier this month, Gross wrote, "When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over."
In his latest outlook, Gross concludes that, "In the final analysis, an investor ... must be cognizant of future low and in some cases negative total returns in 2015 and beyond."
So, Monopoly or not, things are not looking up. At least not for Bill Gross.
The CBOE Skew IndexSM - referred to as "SKEW" – is an option-based indicator thatmeasures the perceived tail risk of the distribution of S&P 500® log returns at a 30-day horizon. Tail risk is the risk associated with an increase in the probability ofoutlier returns, returns two or more standard deviations below the mean. Think stockmarket crash, or black swan. This probability is negligible for a normal distribution,but can be significant for distributions which are skewed and have fat tails. Asillustrated in the chart below, the distribution of S&P 500 log returns has a sizeableleft tail. This makes it riskier than a normal distribution with the same mean and thesame volatility. SKEW quantifies the additional risk.
Gross Sees Fed Hike by September, Even as Job Growth Slows
Billionaire Bill Gross says a disappointing jobs report won’t dissuade the Federal Reserve from raising interest rates by September.
Why? Because U.S. central bankers can’t wait to normalize monetary policy after keeping benchmark borrowing costs near zero since December 2008.
“They want to get off the dime,” Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said in a Bloomberg Television interview Friday. “They want to get off zero, if only to prove that they don’t have to stay at zero for a long, long time.”
Gross’s view contrasts with a market that’s now putting the odds of a rate increase in September at 35 percent, down from a 39 percent likelihood on Thursday, based on trading in fed funds futures. Odds of a June liftoff are 10 percent, the trading implies.
The Fed will lift its benchmark rate by 0.5 percentage point per year, bringing it to 2 percent by 2018, according to Gross, 70, who had been the chief investment officer at Pacific Investment Management Co. until his abrupt departure in September. That would still be about half the central bank’s own forecast of 3.75 percent.
Bonds Rally
Treasuries surged Friday, sending yields to two-month lows, after a report showed the economy added the fewest jobs since December 2013. Yields on benchmark 10-year notes fell 0.07 percentage point to 1.84 percent, according to Bloomberg Bond Trader prices.
“Obviously, the economy’s cooling,” said Gross, who earned his reputation as the bond king by building Pimco into a $2 trillion money manager at its peak, with some of the industry’s highest returns.
He said he still sees the Fed raising rates as soon as August and that Janus has been buying shorter-term Treasuries with an average maturity of about four years, while selling short German sovereign debt that’s been trading with record low yields.
Gross’s Pimco Total Return Bond Fund, which he managed until he left, ballooned to $293 billion in April 2013 before performance faltered and clients started to pull money amid concern that interest rates would rise.
They should : now it is turning out how rigged the FED data was
I agree, but where do you get that from?
They revised downwards the last 3 (not 1) NFP data
They revised downwards the last 3 (not 1) NFP data
It was not possible that FED did not know for those revisions before of us
Today FOMC minutes will be interesting : if they are lying or they are hoping that all is OK
Bull market 'supercycle' for stocks, bonds is ending: Bill Gross
The bull market "supercycle" for stocks and bonds is approaching an end, as the unconventional monetary policies that have bolstered asset prices since the financial crisis are running out, widely followed investor Bill Gross said on Monday.
The attempt by global central banks to cure a debt crisis with more debt doesn't have much further to run, which will end a rally that's lasted three and a half decades, the 71-year-old manager wrote in an investment outlook for Janus Capital Group Inc..
Gross, manager of the $1.5 billion Janus Global Unconstrained Bond Fund, has made such warnings before and acknowledged they've come too early.
In May 2013, Gross, then the manager of the world's largest bond fund, the Pimco Total Return Fund, jolted Wall Street participants on social media with this Twitter (NYSE:TWTR) post: "The secular 30-yr bull market in bonds likely ended 4/29/2013."
On Monday, Gross said investors should stop focusing on price appreciation and, instead, look to "mildly levered income," such as his recommendation to short German government debt.
"Credit-based oxygen is running out," Gross wrote in the outlook, titled "A Sense of an Ending," in which he compared the final stages of the market cycle with his own mortality.
"I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang."
It is closer and closer. As soon as the weather permits we are not going to as too much about forex
The whole thing is a gigantic bubble - wars are produced just to hide that the politicians and cbs have no idea what to do.The idea they have is simple : it worked in the past (see US and the wars and the economic effect on them) and they think that it will work again. It will not. Not this time. Fiat money ponzi scheme is coming to the end
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"There's something going on in derivatives land," is the warning from ADM's Andy Ash and as Paul Mylchreest notes the relationship between VIX and SKEW suggests the options market is pricing in the possibility of a major market event. The process enables professionals to maintain the illusion of calmness in VIX while hedging their positions (as they attempt to unwind as we have shown). Whether this 'event' is a crash or melt-up is historically unclear but given the taper and the trend of the last few years, we suspect the former more likely that the latter.
Via ADM Investor Services' Paul Mylchreest,
A rather thought-provoking chart which we've been looking at is the ratio of the SKEW (the chance of an extreme or outlier event, i.e. OTM versus ATM options) versus the VIX (the expectations for more 'normal' day-to-day volatility - the price of hedging implied by ATM options)... and is an indicator of how the market is pricing the possibility of a potential black swan event.
You can see how extended we are right now… (actually at record highs)
We can’t help wondering when Bill Gross tells the world that he is selling volatility, whether he is, in fact, selling ATM vol and buying OTM vol ???
While (curiously) 2000 didn’t register, the two previous highs in the SKEW/VIX ratio were 1994 and 2007 which turned out to be pivotal dates in terms of changes in market direction.
One up and one down... Which does it look like this time?
* * *
Think briefly about who is buying and who is selling? Thiunk about who is buying deep OTM protection? Smells like the professionals are a little less sanguine than their chatter suggests...
Institutional clients are dumping equities off to retail clients... thank you very much...
and those that can't dump their assets are hedging aggressively (while maintaining the illusion with VIX that all is well)
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