Tags: Bill Gross | liquidity | Brian Sullivan | Federal Reserve

Bill Gross: Fed's Fischer, ECB's Draghi 'Yelling Fire in Crowded Theater'

By    |   Thursday, 11 June 2015 07:05 AM

Bond guru Bill Gross, of Janus Global Unconstrained Bond Fund, repeats to CNBC’s Brian Sullivan the adage of the late, great technician Marty Zweig: “Don’t Fight the Fed.”

Sullivan asked Gross what happens when Fed support for the bond market stops.

Gross responded, “Liquidity dries up, and if we think that liquidity is poor now, it’ll be even worse, two, three, four, five years from now when these maneuvers typically stop. You would think that a central banker wouldn’t stop if they knew it would produce a crisis type of moment and lots of volatility, but central bankers don’t exactly know the way home, and we’ll just have to see.”

Sullivan noted that investors have been waiting for this to happen and “have missed out on some good returns” in the meantime.

Gross acknowledged this and pointed to the spreading of bond market support from the Fed to other central banks and to corporations.

Sullivan asked Gross whether he is one who “treats the Fed’s word as gospel.”

Gross quipped that he has a coffee mug with the legend “Don’t Fight the Fed,” but he has added in his own hand, “But Be Very Afraid.”

He questioned the validity of the models the Fed relies on, which he said are 20 or 30 years old.

Gross criticized both the ECB’s Mario Draghi and Fed Vice Chairman Stanley Fischer for their recent warnings to “watch out for volatility” in bond markets.

Such a warning was "very unusual" and not unlike "yelling fire in a crowded theater," Gross said.

"They basically came out and said watch out for volatility, while central bankers have been trying to dampen volatility for the past five years."

Gross said behind this is a concern of these central banks for the effects low long-term yields have had on insurance companies in the U.S. and in Europe. He bluntly added that investors realize that central banks “want long-term yields to move higher in order to salvage business models.”

Turning to his investing philosophy, Gross’ latest big idea is to play the 2.5 percent spread between Mexican and American debt, which he believes to be excessive. "There's a 2.5 percent spread between those two and believe me the quality difference doesn't justify it," Gross said.

This writer suspects that rather than withdraw support from bonds, the Fed will find new areas in which to intervene, and the rescue of the insurance industry is evidence that the Fed will continue to expand federal safety net.

Meanwhile, Ivanka Trump, EVP for Development of the Trump Organization, responded to a question from CNBC’s Kelly Evans as to how concerned she is about investing in commercial real estate.

Trump responded that the company has “been doing a tremendous amount in the global space,” particularly in hotels in Vancouver and Rio and CRE in New York, “which has seen a major surge in terms of value.”

She stressed that the company is renovating properties it “bought prudently during the downturn” and has invested with a long-term perspective.

With the Dow up 281 points, Art Cashin, of UBS, attributed the rally to news from Europe about the intentions of German Premier Angela Merkel to make advance negotiations with Greece, and investors bought into a thin market, causing an upward spike.

Cashin warned stock investors in the U.S. are concerned that, “If yields move up, bond funds and other places begin to get nervous, and they start to redeem their shares in these bond funds. That may force bond funds to liquidate even more and thereby push yields even higher. So while the Fed is talking about being ‘measured and data dependent,’ they’re potentially playing with fire here, because they could start ‘spontaneous combustion’ that they can’t control.”

Cashin’s views are consistent with this writer’s concern that the Fed will lose control of interest rates long before it takes formal action and will end up engaging in another bailout of client sectors such as insurance companies.

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Robert-Feinberg
Bond guru Bill Gross, of Janus Global Unconstrained Bond Fund, repeats to CNBC’s Brian Sullivan the adage of the late, great technician Marty Zweig: “Don’t Fight the Fed.”
Bill Gross, liquidity, Brian Sullivan, Federal Reserve
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2015-05-11
Thursday, 11 June 2015 07:05 AM
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