Bill Gross: investment manager, billionaire, neg on US government debt

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

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:

http://tinyurl.com/5uh838b

 

Asia’s next export: Inflation. G20 response: Increase interest rates

by Michael Arbow MBA

Partner, RSD Solutions Inc.

www.rsdsolutions.com

info@rsdsolutions.com 

 

Here in the rich western world, consumers are witnessing an interesting disconnect; namely the difference between what we see at the gas pump and grocery store and what we hear when our government’s announce inflation rates.  The disconnect stems from the definition of core verse headline inflation rates. The core rate strips out the so-called "volatile energy and food prices". Luckily, for many in the West the rising cost of food and energy is an annoyance and living with the core rate of inflation – from which the countries’ central banks base their interest rates on, is grudgingly accepted. 

On the other hand however, in the emerging economies where household incomes are lower and food and energy consumes a substantial portion of household income; national governments consider these elements as part of core inflation. Thus you are finding increased pressure for the central banks of emerging economies to raise interest rates to tame inflation and protect their currencies. The local trickle down effect of this will be for consumers to seek higher wages.  Higher wages, when combined with higher (commodity) input cost will translate into higher prices charged on manufactured products.  Once exported Asia’s pivotal role as deflation exporter will change; for their manufactured exports help constitute core inflation in the developed economies. 

As core inflation rises, so to will interest rates. If your firm is highly leveraged and thus sensitive to interest rates what steps are you taking today to reduce this future financial risk?  For the consumer, perhaps locking in longer terms rates is starting to look more attractive. 

 

For more on this follow the link to Pimco’s Mihir P. Worah’s viewpoint:

 http://tinyurl.com/4jcjnqd