Pimco’s Crescenzi Gets Award for Artless Candor

Bloomberg tells us:

The Federal Reserve’s decision to buy Treasuries and keep interest rates low will support “risk assets” without bringing down unemployment, said Anthony Crescenzi at Pacific Investment Management Co.

“Low volatility tends to be good for the interest-rate climate,” said Crescenzi, who is based in Newport Beach, California at Pimco, manager of the world’s biggest bond fund. “It does push investors out the risk spectrum generally. That tends to be good for risk assets.”

Let’s parse this:

1. Official policy favors moneyed classes, as in asset holders, over the population generally. If you need a job and want to work, too bad, the banks went to the head of the line for government rescue money.

2. But a lotta asset holders aren’t too happy either. The Fed’s continuing rescue operations means they get crappy yields.

3. So Pimco says at least some are gonna chase yield. That means taking risk. So prices of those assets go up.

4. But wait! Remember 1. Unemployment sucks. Unless unemployment gets less sucky, there won’t be much of any growth, so those risky assets will probably not deliver. And if we go into deflation, the smart place to be is not risky stuff, but cash and safe bonds.

We tried a variant of this program starting in 2002 with a more solid economy and we are still trying to recover from how that movie ended. Einstein defined insanity as doing the same thing over and over again and expecting different results. And since the financial sector profited so handsomely from this exercise the last time around, they have every reason to encourage this insanity.

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  1. skippy

    Cattle get fat on grass slowly, as intended, till some one sticks a needle in its ass or supplements its feed, drags it into a feed lot to be fattened for short term profit.


  2. john bougearel

    These days, the word ‘investor’ is a euphemism for big bank speculation. If you put the corrected word ‘big banks’ into Crescenzi’s statement, you get the following “It does push big banks out the risk spectrum generally.” The word ‘investor’ is another badly misused word in the financial lexicon today as it pretty much excludes the retail investors, mom and pop who are reluctantly along for the ride with what is left of their retirement accounts.

    But, the game changer for the big banks were the media leaks that the Irish banks were going to pass the stress tests on July 22 2010. That was what was good for risk assets. This meant the big banks could speculate and put risk back on (The SP500 had closed at 1064 on July 21. On July 22, the SP500 gapped open 1.4% higher at 1078 the next morning, The SP500 is now at 1108, 4% above the July 21 close price). Return moves in the SP500 towards the 1064-1078 will continue to attract further buying as long as there are no significant credit default risks.

    Deflation in this environment (where there is no credit default risk thanks to another regulator sleight of hand to reclassify sovereign debt as held to maturity) pertains to some assets such as the housing market and inflation in other asset classes like the bond, stock, and commodity markets. If credit default risk were to resurface such as it did in 2007-2008 (and it will eventually), stocks and commodities would deflate along with the housing mkt.

    Crescenzi is also telling us that the Fed’s latest QE announcement means that they are supporting a low vol environment for the foreseeable future. But what really created the low vol environment was the reclassification of European sovereign debt as ‘held to maturity’ as big banks can now continue to roll that debt into perpetuity until one or more sovereigns find themselves unable to service that debt.

    Prop, prop, fizz fizz, oh what a relief it is.

    Now what retail investors won’t know until its too late is when things will start to blow up again. The reason the retail investor is precluded from knowing when things will start blowing up again is due to asymmetry of information, the banks have the information but withhold disclosure until a sovereign actually misses a payment.

    So, the big banks baseline scenario as outlined by economists calls for a ‘slow recovery’ and omit by and large discussions when and where credit default risks are emerging. Risk disclosure tend to be coincident (or oh yeah, forgot to mention) indicators. And what is perhaps even more culpable is that these risks are always defined as idiosyncratic and minimized or downplayed as ‘contained.’ Risk of contagion would be a six sigma event, and well, that could flat out never happen we are thus falsely assured. Deny, deny, deny.

    To the extent their slow recovery forecasts omit a full discussion of material risk disclosures before they occur, they can be said to be making misleading and fraudulent statements as Goldman was accused of doing to its clients with its disclosure docs (for which it received a mere out of court settlement and slap on the wrist).

    Oh, and by the way, since the big banks happen to have knowledge of all the material risks, (some of which does get relayed or leaked back to retail investors via the LIBOR or credit default swaps markets) they will have plenty of time to have hedged themselves in the futures markets with appropriate short positions.

    Heads the banks always win, tails the retail investor loses. Isn’t asymmetry grand.

  3. dsawy

    Why wouldn’t we try the same ‘solution’? After all, we have the same Ivy League kleptocrats in charge as in 2002… they’re just taking care of their own, just as they did in 2002.

  4. Jim Haygood

    The big news of the Fed’s plan to buy Treasurys was in the devilish details — namely, the commitment not to let the Fed’s assets fall below $2.05 trillion. My claim yesterday of a ‘tacit admission that the Fed’s balance sheet will never fall below $2 trillion again’ was truer than I realized.

    But this policy sends a mixed message: the desired stimulative effect of expanding the monetary base is diluted by the scary plunge in Treasury yields, which sends a distinctly deflationary message to many. A deflationary psychology has taken hold, and buying more Treasurys isn’t going to break it.

    Thus, I am hereby proposing the Haygood Inflationary Plan (HIP) — the antithesis of Gerald Ford’s Whip Inflation Now (WIN) initiative. Specifically, the FOMC needs to take two steps: (1) Revalue its gold holdings to the market price; (2) Buy (i.e., ‘monetize’) more gold so as to drive up its price to an unannounced target of $2,000 per ounce.

    As a student of Depression I, Ben Bernanke will recognize the rhyme to Frank Roosevelt’s revaluation of gold from $20.67 to $35.00 per ounce — which, in my view, was the sole effective measure Ol’ Frank ever took. Once again, we are trying to devalue the dollar against something — something more substantial than other squishy, unredeemable fiat currencies.

    The jolt to the Fed’s balance sheet from the gold revaluation — though merely an accounting artifact — plus the rocketing gold price will set inflationary alarm bells ringing worldwide. And that’s exactly what’s needed to pole-ax the deflationary miasma, which is largely an artifact of our own perfervid imaginations.

    Full disclosure: implementation of HIP would make me a ton of loot. Of course I’m talking my own book. But Bill Gross does it too. I’m merely emulating the equity elite and the bond barons, while seeking to constructively contribute to the common weal.

    Are you HIP? Pass it on. In aurum salus — in gold our salvation!

  5. Peter T

    I don’t understand your displeasure at the Fed’s decision to buy more treasuries. Yes, it does push investors out the risk spectrum generally and, yes, that tends to be good for risk assets – like bonds of smaller companies, venture capital investment, etc. who get now lower interest rates. That makes general investment at least a bit easier. I think the Fed should even buy more treasuries of longer maturities, to force investors either to accept low yields or to investigate better where they could invest better (tip: not in zero-downpayment mortgage backeds bonds). The moneyed classes probably prefer to invest in high-yield treasuries, but they should earn their returns instead.

  6. Seth

    Jim Haygood:

    Not sure many people would agree that FDR’s gold buying was effective. What makes you think so?

  7. Jim Haygood

    The pathological 10% annual rate of deflation during 1930-32 stopped when FDR devalued the dollar against gold during 1933-34.

    Other nations — e.g., Britain, which unpegged from gold earlier in 1931 — experienced a shallower contraction than the US.

    Competitive devaluation works. And combatting ingrained deflationary psychology with inflationary signaling works, too.

    I’m pleased to see that Ben Bernanke is already implementing my plan this morning. Go, Ben, go!

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