Bill Gross Blasts Them Rating Agencies

From Pimco's Bill Gross:

• There’s a surfeit of instructionals on the secret to investing, ranging from Investing for Dummies to The Intelligent Investor. My bookshelves at home are full of them, and I’ve learned or at least absorbed something from many. Experience is a great teacher, but the foundation of civilization, and too investing, is also dependent upon the capsulization of the experiences of others and that is where books have played a formative part in my own career. Still, there’s never been a book called “Common Sense for Dummies,” which would be required reading in my investment class if either existed. That’s an oxymoron to begin with, though, which points to the obvious – that common sense cannot be taught. It’s like sex appeal – you either have it or you don’t, although both are subject to relative judgments of the observer. What is commonsensical to one investor may seem ludicrous to someone else. And even in cases where history has validated the irrationality of one investment idea or another – the subprime frenzy being perhaps the most recent – there are questions of timing. Michael Lewis’s book The Big Short is not only a tale of the validation of common sense, but of its delicate shelf life. Most of Lewis’s heroes were almost all closed out by their own clients before their logic blossomed and their profits multiplied.
  I’ve written on this topic before – an Investment Outlook in November of 2008 spoke to the necessity for a CQ – Common Sense Quotient – in addition to an IQ in order to succeed in investing. Actually, if a chef were to concoct a gourmet investment recipe, he would likely blend a teaspoon of intelligence with a tablespoon of common sense, but the same proportions would probably not apply in other professions. I can visualize the mad scientist irrationally pursuing an obvious dead-end only to – poof – incredibly discover penicillin or a cure for the common cold. Not so with investing, because prices are a delicate combination of mathematical value and human nature – something that quantitative scholars and practitioners rejected to their eventual ruin in their pursuit of “efficient” markets. And human nature, it seems, cannot be so easily modeled nor intelligently divined. It feeds on itself quite frequently, leading to accentuated periods of “greed” and “fear” that tend to be labeled “bubbles” or “black swans,” respectively. It is during those periods that a tablespoon of common sense is just the recipe for investment success.
  
  Hanging on the wall above my office credenza is a portrait of Bernard Baruch, who authored the quotation, “Two plus two equals four and no one has ever invented a way of getting something for nothing.” Well, we’ve been there recently, with Dot Coms and subprimes and the financed-based prosperity of the past several decades. He also said, “Two plus two equals four, and you can’t keep mankind down for long.” Been there too, it seems, and the last 12 months are an apt example. Whatever the future holds, remember that a tablespoon is larger than a teaspoon, and that CQ beats IQ most of the time in the investment world. “Two plus two equals four” needs a lot of CQ, but requires only a second grader’s IQ.
  
  In all of the hullabaloo over Goldman Sachs, a CQ analysis of the rating services – Moody’s, Standard and Poor’s and Fitch – has escaped front-page headlines. Not that a number of observers haven’t been on to them for a few years now, including yours truly. Back in July of 2007 some of you will remember my description of their role in the subprime crisis. “Many of these good-looking girls are not high-class assets worth 100 cents on the dollar. You were wooed, Mr. Moody’s and Mr. Poor’s, by the makeup, those six-inch hooker heels and a ‘tramp stamp.’” Now, it seems, I was a little long on humor and a little short on the reality. Tramp stamp and hooker heels do not begin to describe the sordid, nonsensical role that the rating services performed in perpetrating and perpetuating the subprime craze, as well as reflecting the general deterioration of investment common sense during the past several decades. Their warnings were more than tardy when it came to the Enrons and the Worldcoms of ten years past, and most recently their blind faith in sovereign solvency has led to egregious excess in Greece and their southern neighbors. The result has been the foisting of AAA ratings on an unsuspecting (and ignorant) investment public who bought the rating service Kool-Aid that housing prices could never really go down or that countries don’t go bankrupt. Their quantitative models appeared to have a Mensa-like IQ of at least 160, but their common sense rating was closer to 60, resembling an idiot savant with a full command of the mathematics, but no idea of how to apply them.
  
  But I come not to bury the rating services, but to dismiss them. To tell the truth, they can’t really die – they serve a necessary and even productive purpose when properly managed and more tightly regulated. A certain portion of the investment world will always need them to “justify” the quality of their portfolios. Governments and regulatory bodies say so – it’s the law. In 1975 the SEC officially designated the aforementioned three rating agencies as “Nationally Recognized Statistical Ratings Organizations.” For all intents and purposes, that meant that regulated financial intermediaries such as banks, insurance companies and importantly pension funds would be guided by the sanctity of their ratings.
  
  Such services, however, while necessary in the ongoing scheme of financial regulation, are overpriced as well as subject to the influence of the issuer, which in turn muddles their minds and clouds their judgment to say the least. E-mails from S&P employees have been cited discussing massaging subprime statistics in order to preserve S&P’s market share relative to their two competitors. PIMCO’s Paul McCulley said it as only he can – “[The breakdown of our financial system] was about the invisible hand having a party, a non-regulated drinking party, with rating agencies handing out the fake IDs!”
  
  Still, as future bond issuers belly up to the bar with their rating agency seals of approval, it is incumbent on the buying public to treat those IDs with a healthy skepticism. Firms such as PIMCO with large credit staffs of their own can bypass, anticipate and front run all three, benefiting from their timidity and lack of common sense. Take these recent examples for instance: S&P just this past week downgraded Spain “one notch” to AA from AA+, cautioning that they could face another downgrade if they weren’t careful. Oooh – so tough! And believe it or not, Moody’s and Fitch still have them as AAAs. Here’s a country with 20% unemployment, a recent current account deficit of 10%, that has defaulted 13 times in the past two centuries, whose bonds are already trading at Baa levels, and whose fate is increasingly dependent on the kindness of the EU and IMF to bail them out. Some AAA!
  
  Now let’s go the other way. GMAC, that only too recently near-bankrupt finance company, carries recently upgraded B ratings from the rating services. Profiles in courage for all three, I say! I mean the U.S. government has injected $20 billion of capital and owns 65% of the company. It’s the auto industry’s equivalent of FNMA and FHLMC, except those are AAA and GMAC is B with a “positive outlook!” For that, you can buy a GMAC two-year bond at 6½% (8% with what are called “smart notes” that Investment Outlook readers can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!
  
  No one or no one company has a monopoly on investment or ratings expertise. Second grade intelligence and a high CQ are a rare combination for an individual rating agency or an investment management firm as well. Still, the rating agencies in recent years have displayed little of either. In addition, they have brazenly sold their reputations for unbiased judgment to the very companies they were standing in judgment upon. Don’t bury them however; like vampires in the dead of the night they will outlast us all. Those looking to profit at their expense, however, will dismiss them. They no longer serve a valid purpose for investment companies free of regulatory mandates that can think with a teaspoon of IQ and a tablespoon of CQ.
  
  
  William H. Gross
  Managing Director

Source: here

Who Is Going To Lend US Money To Fund Its $2 Trillion Deficit?

Pimco's Bill Gross talked about it in his newsletter Staying Rich in the New Normal

• The immediate question is who is going to buy all of this debt? Estimates suggest gross Treasury issuance of up to $3 trillion this calendar year and net offerings close to $2 trillion – almost four times last year’s supply. Prior to 2009, it was enough to count on the recycling of the U.S. trade/current account deficit to fund Treasury borrowing requirements. Now, however, with that amount approximating only $500 billion, it is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board – which they are not. Someone else has got to write checks for up to $1.5 trillion additional Treasury notes and bonds...... (do read rest of Bill Gross letter here )

Henry Blodget acknowledged the debt issue back in May in his editorial on Business insider highlighting what John Mauldin had been saying.Why Are Rates Rising? Maybe Lenders Think We're Screwed

• Second, long-term rates are going up because traders are realizing that the world's big economies will need to issue trillions of dollars of new debt to pay for all their deficit spending...and there's just not enough dumb money in the world. Put differently, where is all this money going to come from?
  
  John Mauldin ran some numbers on this over the weekend. The US is in trouble. Japan's in trouble. Germany's in trouble. The UK's in trouble. Spain is in trouble. European banks are in trouble. All of the aforementioned countries, including the US, will be running deficits of over 10% a year, likely for several years to try to stave off economic collapse.
  
  The US deficit alone will eat $1.8 trillion next year, forcing the US to issue $1.8 trillion of new debt. When you go out a few years and add in the other countries, the amount of new money required gets very big very fast. And, again, the big question is...where is that money going to come from?
  
  Here's John Mauldin:
  
  The world is going to have to fund multiple trillions in debt over the next several years. Pick a number. I think $5 trillion sounds about right. $3 trillion is in the cards for the US alone, if current projections are right.
  
  The US trade deficit is now down to under $350 billion a year. The Fed can monetize a trillion [buy debt directly from the Treasury, thus printing new money]. Maybe... US savings are going to go up, but where is the incentive to buy ten-year debt at 3.5%? Four-year debt under 2% doesn't do much for your savings growth. Even with monetization and the Chinese buying our debt with the dollars we send them, that still leaves the bond market about $1.5 trillion short, give or take $100 billion...
  
  I think the bond market is looking at the mountain of debt that will have to be somehow sold and wondering where such a colossal sum will come from. Where do you find $10 trillion in the next ten years for US debt?
  
  And that is just for US government debt. $5 trillion for new global debt in the next two years? In a deleveraged world? How much will the other countries need? What about money needed for businesses and mortgages and credit cards and so on?
  
  If you add $10 trillion to the current $11.3 trillion (including Social Security trust funds, etc.), that totals $21 trillion in 2019. Let's be generous and suggest that interest rates will only be an average of 5%. That would be an interest-rate expense of over $1 trillion. That is 25% of projected revenues and 20% of expected expenses. And that assumes you have nominal growth of over 4% for the next ten years. If growth is less, tax revenues will be less.

Scary? Or perhaps you think that all these folks are simply singing the same tune.

Here is another set of opinion from famed Canadian fund manager Eric Sprott of Sprott Asset Management

Some bits of what Eric wrote...

• The US government raised $705 billion worth of new debt in 2008. The debt was raised to pay for a $455 billion budget deficit and $250 billion in “supplemental appropriations” for the wars in Iraq and Afghanistan. In 2009, the US government will (and must) sell $2.041 trillion in new debt. This debt will pay for a projected budget deficit of $1.845 trillion, supplemental appropriations of $196 billion for Iraq and Afghanistan, a fund for pandemic flu response and a line of credit to the IMF. In fiscal 2009, the United States must find buyers for almost three times the debt that was issued last year.
• Given the current state of the economy, it seems frighteningly apparent that a threefold increase in the debt purchased by the account holders listed above is a mathematical impossibility. There is simply not enough money in the present economy to support a tripling bond issue in the normal course of business. To confirm this, we have grouped together similar debt holders in order to assess their potential buying capability for fiscal 2009, which ends on September 30th.
• The Federal Reserve’s policy of Quantitative Easing is failing. The US budget is ludicrous, spending is out of control, spending promises are out of control, the world knows it - and we know it. For all the pundits who see the economy improving over the next year, we invite you to explain to us how this debt crisis will resolve itself without significant turmoil. We’ve tabulated the numbers above - and they do not lie. ( source: here - recommended reading. :D )

And here is my favourite pun... Where Is Ze Moola babe?

How now my dearest brown cow?

Gross: Double-Digit Returns Won't Be Back Soon

• Investors looking for double-digit returns from their holdings are going to have to learn to live in a different world for the next several years, bond kingpin Bill Gross said...

• "To the extent that investors previously thought that double-digit returns were there for the taking, were there for the having, in the forms of stocks for the long run or housing prices going up at double-digit rates, those asset classes will not show that type of appreciation," he said. "So bonds at stable incomes of 4 to 6 percent are an attractive situation."
  

Source: http://www.cnbc.com/id/29977297

Equities Are Dead - Bill Gross

• As Gross told me, "things will never be the same. Risk taking has been destroyed and any animal spirits must come from Washington. Global growth rates -- low, low, low -- asset classes will be readjusted for that outlook. That is -- stocks will be more of a subordinated income vehicle as opposed to a 'stocks for the long run' growth vehicle."
  
  This argument is great for bond fund managers such as Gross since it would tend to drive people out of stocks and into bonds. But his point about stocks as a subordinated income vehicle is interesting. If I understand him correctly, he views stocks as the bottom of the liquidation hierarchy -- meaning that if a firm files for bankruptcy, all the other stakeholders -- such as bondholders, lenders, and preferred stock holders -- get their money before the common shareholders see a dime.
  
  This is why so many common shareholders are getting wiped out. And in Gross's view, growth prospects are so dim that there is no point in owning stocks since common stock investors will not benefit when there's no economic growth. Moreover, they'll be last in line for any dividends that might be available.
  
  Meanwhile, Gross has an interesting analysis of how we got into this mess. He attributes it to too much borrowing, weak regulation and greed. He also thinks that the U.S. is going to have to come up with as much as $5 trillion to fill the capital hole in the banking system.
  
  As Gross said, "The cause of the current situation was too much leverage leading to over consumption which was facilitated by lax regulation and good ol' fashioned greed. Human nature will never change but our institutions will. Not sure policymakers understand what needs to be done -- there still is a $4 trillion to $5 trillion capital hole that needs to be filled but politics may inhibit necessary action. Bernanke and Co. get it though and have more freedom and flexibility -- they are independent -- for now."
  
  These are sobering thoughts from one of America's most powerful financial minds. My hunch is that over the medium- to long-run, we'll revive capitalism through venture-backed technology innovation. But I am not sure how soon that will happen. Meanwhile, what do you think of Gross's comments? Do they make you want to sell stocks?
  

Bill Gross, the $747 billion bond man, declares the death of equities

How?

Bill Gross Says T-Bill At Zero Is Overvalue And Has No Returns

Here's Bill Gross commentary on the US T-Bill on Bloomberg.

• Pimco’s Bill Gross Regrets Not Buying Treasuries Amid Rally
  
  By Kathleen Hays and Michael J. Moore
  
  Dec. 10 (Bloomberg) -- Bill Gross, manager of the world’s biggest bond fund, says he regrets not buying Treasuries in what is shaping up to be the best year for U.S. government debt since 2000.
  
  “If we had our druthers, if we went back 12 months and we had known then what we know now, it would have been all invested in Treasuries,” Pacific Investment Management Co.’s Gross said in a Bloomberg Television interview from Newport Beach, California. “The question going forward is ‘Is it the winner over the next 12 to 24 months?’ We don’t think so.”
  
  Gross’ $129.5 billion Total Return Fund lost 2.1 percent in the three months through Sept. 30, compared with a 0.49 percent slump by the benchmark it uses to measure performance, according to Pimco’s Web site. Mortgage securities and investment-grade corporate debt accounted for 93 percent of its holdings. The Total Return Fund has not held Treasuries since last December.
  
  Treasuries of all maturities have returned 11.9 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master Index, the best performance since the securities gained 13 percent in 2000.
  
  Gross said he continues to invest in corporate debt that is backed by the U.S. government, including the debt of American Express Co. and Sallie Mae Inc. The 64-year-old money manager also said Treasury Inflation Protected Securities represent “one of the best values” for investors seeking high-quality debt “once this delevering process winds down.”
  
  ‘Bubble Characteristics’
  
  “Treasuries have some bubble characteristics, certainly the Treasury bill does,” Gross said. “A Treasury bill at zero percent is overvalued. Who could argue with that in terms of the return relative to the risk? There is no return.”
  
  The Treasury sold $30 billion of four-week bills yesterday through an auction at zero percent, while three-month bill rates turned negative for the first time since the U.S. began selling the debt in 1929.
  
  Gross expects the Federal Reserve to cut its target rate to 0.5 percent when policy makers meet next week and will likely signal that interest rates will remain low for a “considerable” period of time.
  
  “There’s some risk” for the dollar to weaken, said Gross. “Certainly the government and the Fed cannot continue to talk about trillions of dollars of expansion of the Fed’s balance sheet without the risk of the dollar going south. It is fair to say other economies are doing much the same thing. The dollar doesn’t have to go south if all the economies reflate at the same time.”
  
  Pimco, a unit of Munich-based Allianz SE, has about $790 billion in assets under management. The Total Return fund has gained 4.63 percent over the last five years, ranking it among the top one percent of all comparable funds, according to Bloomberg data.

Source: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asgkk4AucjU8

See also: Zero! US T-Bills Fall To Zero! and Tips: How To Make 13 cents In 3 Months!!!!

Bill Gross Says Bull Market Is Imminent

Posted on CNBC.

• A bull run will begin for the stock market once major financial institutions have deleveraged, Bill Gross, head of bond titan Pimco, said on CNBC.
  
  While warning of the implications of shedding bad debt, Gross said the market may be nearing a point where it comes out of a severe bear market and makes a run higher.
  
  "Bull run, yes, but to what extent in terms of the total return, I don't think it would be typical of prior cycles, because this is a secular delevering," he said. "It's never occurred before—at least it hasn't occurred since the 1930s—and it will carry with it implications for corporate profits, for margins and for ultimately a significantly delevered system not just in the United States but globally."
  
  "To the extent that that happens, not only is the financial marketplace not prepared for it but the global economy is not prepared for it," he added. "We will have to see how it all adjusts going forward. But yes, from a certain price point here and we may be close, a bull market is imminent."

Source: http://www.cnbc.com/id/27363513

Bill Gross Massive Statement To The Feds, Inflation, Boone Pickens Latest View on Oil And Baltic Dry Index Keeps On Diving!

What a week!

Pimco's Bill Gross September 2008 letter was massive, There's a Bull Market Somewhere

The following passages were massive!

• This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage. And the private market, in its attempt to anticipate a bear market bottom and snap up “bargains,” has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater.” We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments.
  
  Step 2 on our delevering blackboard therefore has stalled and is inevitably morphing towards Step 3. Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning. There may be a Jim Cramer bull market somewhere, but it’s primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices.

And the strong statement were posted on CNBC, Bill Gross to Paulson: I'm Not Buying It

• But as far as Gross is concerned, if Fannie Mae , Freddie Mac, Citigroup and Merrill Lynch hold offerings to raise capital, Pimco will be sitting them out.
  
  This puts Henry Paulson and the Treasury Department in position to have to act. Washington has been holding on any kind of bailout, hoping that buyers like Gross will keep struggling banks afloat. But by refusing to take part, Gross, the biggest bond buyer in the world, is in effect calling the Treasury’s bluff.

And over on Newsweek, another Gross, Daniel Gross writes about the falling oil. Most are believing that lower oil will ease inflation but Daneil Gross doesn't think that the great inflation scare of 2008 is over! The Bad News About Falling Oil Prices

• Yes, the falling prices of commodities are welcome news. But on the way up, and on the way down, there is rarely a direct translation of changes in commodity prices into changes in consumer prices. In recent years—and especially in the past year—businesses have acted as shock absorbers, unwilling or unable for competitive reasons to pass along the full brunt of the costs. But many of the shock absorbers have become worn, suggesting that inflation is likely to rise even if commodity prices drop.
  
  To get a sense of what I'm talking about, look at two measures of inflation: the Producer Price Index and the Consumer Price Index. The PPI measures the inflation that producers (people who buy stuff that they then package into other stuff or sell to other people) experience, and it breaks down the price increases in crude, intermediate, and finished goods. The CPI measures the inflation that consumers experience when they pay for gas at the pump, food at the grocery store, and clothes at the mall.
  
  The PPI has been on a rampage in the past year, thanks to the raging costs of raw materials, commodities, and energy. In July, the PPI rose a hefty 1.2 percent from June, and the price for finished goods rose a worrisome 9.8 percent from July 2007. In the past year, the prices of crude and intermediate goods rose an incredible 51.2 percent and 16.6 percent, respectively. These numbers bear witness to a progressive absorption of costs as goods go through the supply chain.
  
  A look at the CPI reveals another phase in inflation absorption. The CPI is running hot, too. In July, it rose 0.8 percent from June 2008, and 5.6 percent from July 2007—the highest level of this century. In the past three months, the CPI has been rising at a 10.6 percent annual rate. The data show a significant gap between the PPI (up 9.8 percent in the past year) and the CPI (up only 5.6 percent in the past year). Translated into English, it means producers have been able to pass on only about 60 percent of their higher costs to consumers. The result has been sharply lower profits. In the first 11 months of the current fiscal year, corporate income taxes are off 14.6 percent. Economist Paul Kasriel of Northern Trust notes that operating profits over the S&P 500 have declined year over year for three straight quarters. Last week, with 96 percent of the constituents having reported, S&P 500 profits were down 29 percent from the year before.
  
  But isn't that all in the past? After all, we know the Federal Reserve and the stock market are more concerned about the next three months than the last three months. And the recent fall in commodity prices should, in theory, translate into lower prices for all participants in the economy. Or maybe not. First, there's always a lag between the action in the commodity markets and the prices of finished goods—especially at a time when companies desperately need to pad their margins. Second, despite the action in the commodity pits in recent weeks, the indicators of inflation at the producer level have picked up pace through this year, accelerating through the second quarter and into July.
  
  Third, many companies have reached their limit in absorbing higher costs. That is why we've had large bankruptcies in the restaurant industry (Bennigan's), and in retailing (Linens 'n Things). Today, every company is faced with a choice of absorbing the higher costs passed on to them by suppliers or passing them on to consumers. Many companies are choosing the latter course. Airlines are furiously tacking on charges for luggage, food, drink, blankets, and pillows. Hershey's, complaining of costs for sugar and other commodities that have risen between 20 percent and 45 percent so far this year, in August announced a 10 percent price increase. Frank Bruni reports in Wednesday's New York Times that restaurateurs are substituting cheaper goods (shiitake mushrooms instead of morels, lump crabmeat instead of jumbo lump crabmeat) and keeping the prices steady. When you pay the same for smaller portions or for goods of lower quality, that's inflation.
  So, no, the great inflation scare of 2008 isn't over. It may just be beginning.

However, on today's Business Times, our second Finance Minister says that Malaysia inflation: 'The worst is over'

• THE worst for inflation is behind us and the consumer price index (CPI) will grow slower than July's 8.5 per cent in the following two months, Second Finance Minister Tan Sri Nor Mohamed Yakcop said.
  
  Malaysia's inflation rate grew at the fastest pace in 26 years to remain high in July after a 7.7 hike in June, as higher costs of food and transportation drove the CPI up.
  
  But the government is convinced that the current high inflation rate is temporary and that raising interest rate may not be the best option to rein in price gains.
  
  "(The high) inflation is one-off and it is moderating. It should be lower than 8.5 per cent in August and September. The worst is behind us," Nor Mohamed said when interviewed by The Exchange, a business programme on TV3 in Petaling Jaya yesterday.

Boone Pickens reckons that oil will returning to $150 per barrel within a year! See video clip on Bloomberg http://www.blinkx.com/video/pickens-sees-oil-returning-to-150-a-barrel-within-year/cFLyfEPnpU3NRC9LogV1aA

And the Baltic Dry is now sinking deeper!

The BDI closed at 5663, down another 211 pts or 3.59%!!

Here are some of the recent blog postings.

1. The Collapse of the Baltic Dry Index
2. Goldman Downgrades Bulk Shippers!
3. Baltic Dry Index Keeps Falling!
4. Baltic Dry Index Stages Strong Rebound!
5. Baltic Dry Index Set For Strong Recovery???
6. Baltic Dry Index Plunges To Seven Month Lows!
7. The Baltic Dry Index Keeps On Plunging!

Bill Gross Reckons US Fed Will NOT Raise Interest Rates

Bill Gross reckons that the US Federal Reserve will NOT raise interest rates.

In article on CNBC, Gross states the following reasoning.

• I don't think so,” he said when asked if he foresees a rate hike. "The concerns about inflation have got to be coming down ... with oil prices down maybe 25 percent from the peak. Other commodity prices, gosh, gold down 20 percent, silver down 10 percent today alone ... Those at the helm, so to speak, have to be observant of what's happening in the commodities sector, and that's been the biggest push in terms of inflation for the past six to 12 months."
  
  Though he sees uncertainty in the bond sector, Gross remain optimistic about the rest of the quarter.
  
  “I think the third quarter will be fine based on some technical adjustments with inventory and continued strong trade. But the fourth quarter and the first quarter of 2009 do not look good—it is all dependent upon housing prices.”
  
  Additionally, Gross said he's uncertain about when the housing market will hit bottom. As prices keep going down, he said, financial institutions need to continue raising capital, which complicates the economic outlook.
  
  “As the capital is raised, it raises interest rates and it stretches risk premiums and it forces asset sales, which perpetuates the cycle,” he said. “We need a new balance sheet to provide new capital and funds for the housing markets and the financial sectors.”

Source: http://www.cnbc.com/id/26225842

Bill Gross: Lack of Proper Disclosure

Here is an excerpt of an article posted on CNN website: Tough love on Wall Street

• What Citigroup's Chuck Prince, the Fed's Ben Bernanke, Treasury Secretary Hank Paulson, and a host of other sophisticates should have known is that the bond and stock market problem is the same one puzzle players confront during a game of "Where's Waldo?" -- Waldo in this case being the bad loans and defaulting subprime paper of the U.S. mortgage market.
  
  While market analysts can estimate how many Waldos might actually show their faces over the next few years -- $100 billion to $200 billion worth is a reasonable estimate -- no one really knows where they are hidden.
  
  First believed to be confined to Bear Stearns's hedge funds and their proxies, Waldos have been popping up with regularity in seemingly staid institutions such as German and French banks, and that has necessitated state-sanctioned bailouts reminiscent of the Long-Term Capital Management crisis of 1998.
  
  IKB, a German bank, and BNP Paribas, its French counterpart, encountered subprime meltdowns on either their own balance sheets or investment funds sponsored by them. Their combined assets total billions, although their Waldos are yet to be computed or even found.

So how now Brown Cow? Just how bad is it?

If one does not know how bad is it, how does one manage the current market risk?

Bill Gross continues..

• Those looking for clues to the extent of the spreading fungus should understand that there really is no comprehensive data to allow anyone to know how many subprimes actually rest in individual institutional portfolios.
  
  Regulators have been absent from the game, and information release has been left in the hands of individual institutions, some of which have compounded the uncertainty with comments about volatile market conditions unequaled during the lifetime of their careers.
  
  Also many institutions, including pension funds and insurance companies, argue that accounting rules allow them to mark subprime derivatives at cost. Default exposure, therefore, can hibernate for many months before its true value is revealed to investors and, importantly, to other lenders.
  
  The significance of proper disclosure is, in effect, the key to the current crisis.