by Michael Arbow, MBA
Partner, RSD Solutions Inc.
Rightly or wrongly, I believe that entrepreneurial billionaires didn’t become so merely by pure luck but rather they have been able to correctly assess their market more often than not. If we assume this, it is rather revealing that Bill Gross, founder of PIMCO and manager of the world’s largest bond fund ($236 USD billion) has not only reduced his US government debt to zero but has now begun to short government debt. For those unfamiliar with this concept, going short is when you sell something today in the belief that the price will fall so that you will be able to buy back that good in the future at a lower price; the difference being your profit. For Mr. Gross to make money he needs the price of US debt to fall, in other words he needs interest rates to rise. Interest rates can rise because of inflation or a lack of faith in the debt issuer (see other RSD blogs on government debt).
In combination with going short, Mr. Gross is currently holding almost 31% cash in the bond fund, further proof of his belief in future rising interest rates.
As numerous others have stated the days of cheap capital will inevitably draw to a close. When is uncertain, but hedging of interest rate exposure should definitely be moving towards top of mind for risk managers. The contagion of European debt is not complete and as forecasted by some it could conceivably cross “the pond” later this year. Stay tuned.
For more on this click on the link to Tyler Durden’s blog at Zero Hedge:
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