Wednesday, October 27, 2010

Mid Morning Update: Run Turkey Run - it's a Ponzi Scheme!

(This is the 2nd post of the day: below is a post on collapsing new unit real estate sales)

Bill Gross is a hugely successful bond fund manager and the co-chief investment officer of Pimco. He personally manages the company's flagship, the Total Return Fund, which has $158 billion in assets.

Gross is highly influential and US Treasury secretaries call him for advice. Warren Buffett, the Berkshire Hathaway chairman, and Alan Greenspan, the former Federal Reserve chairman, sing his praises.

So keen attention is being paid to comments Gross made today in an investment outlook report he put out this morning.

He calls next Wednesday's planned QE2 by the Federal Reserve an attempted hypodermic straight to the economy’s heart; an adrenaline injection with a following morphine drip.

Gross then makes a stunning statement. He says:
  • We are, as even some Fed Governors now publically admit, in a “liquidity trap,” where interest rates or trillions in QE2 asset purchases may not stimulate borrowing or lending because consumer demand is just not there. Escaping from a liquidity trap may be impossible, much like light trapped in a black hole

Gross supports Bernanke's moves because "it is, to be honest, all he can do. He can’t raise or lower taxes, he can’t direct a fiscal thrust of infrastructure spending, he can’t change our educational system, he can’t force the Chinese to revalue their currency – it is all he can do."

But while Gross gives Bernanke his 'qualified endorsement', he admits bondholders will likely eventually be delivered on a platter to more fortunate celebrants.

  • (Cheque) writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic.

Then Gross delivers this stunning conclusion which so many bloggers have been saying for over two years now. Remember... this is not a tin foil hat blogger, but a respected confidant of both Buffet and Greenspan:

  • Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors – banks, insurance companies, surplus reserve nations and investment managers, to name the most significant – the Fed has joined the party itself. Rather than orchestrating the game from on high, it has jumped into the pond with the other swimmers. One and one-half trillion in checks were written in 2009, and trillions more lie ahead. The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort. There is no need – as with Charles Ponzi – to find an increasing amount of future gullibles, they will just write the check themselves. I ask you: Has there ever been a Ponzi scheme so brazen? There has not. This one is so unique that it requires a new name. I call it a Sammy scheme, in honor of Uncle Sam and the politicians (as well as its citizens) who have brought us to this critical moment in time.

The Ponzi of all Ponzi schemes. Couldn't have said it better, Bill.



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  1. His comments are generating a lot of discussion. I'll wager a bet that he's front running with these statements and will actually leverage into bonds if even a marginal sell-off in government bonds materializes. Gross is a great fund manager, but he's looking out for himself and his clients first. I'd question the underlying motives for this statement, which he well knew would generate a huge amount of publicity. The guy runs the largest bond fund in the world. Is he really bad-mouthing bonds as an investment? I'm suspicious.

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