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Bill Gross Says 'Jump.' Will the Fed Once Again Say 'How High'?

by: Paul Kedrosky October 06, 2008    
Paul Kedrosky

Paul Kedrosky

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Pimco's Bill Gross has put out his latest missive, and if recent history is any evidence then it has a solid chance of being causal, as opposed to being merely predictive. The key part is this:

A systemic delevering likely requires a systemic solution, which moves beyond cyclical interest rate cuts, liquidity provisions, or even the purchase of subprime mortgage-backed bonds. We believe that the Federal Reserve must now act as a clearing house, guaranteeing that institutional transactions clear (and investors receive) their Big Macs at the second window. They must also take another bold step: outright purchases of commercial paper. They should also cut interest rates to 1%, because we are experiencing asset deflation, and the threat of headline inflation is long past. [Emphase mine]

I'm just spitting in the wind here, but given the continued logjam in credit markets, and given Gross's causal skills of late, I'm willing to bet the Fed starts buying commercial paper -- like maybe this week.

More here.

[Update] And like clockwork, not ten minutes later, the WSJ runs this breaking news headline:

U.S. officials are examining ways to ease deepening strains in the commercial paper market, which have been hit by an unwillingness among money market investors to hold risky assets.

Not that I'm necessarily objecting to doing something about the CP problems, but does the Fed have to leap to action so quickly every time Pimco's Gross writes a column?

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This article has 9 comments:

  •  
    Oct 06 10:31 PM
    Be happy that he wrote the column because he is dead right on the money. Hope the Fed acts and implements his recommendations!
    Reply
  •  
    Oct 06 10:51 PM
    Bill is managing the largest fixed income fund in the world.
    He has been writing columns for quite sometime.
    Occasionally he is right and sometimes he is wrong .
    Certainly he has a right to express his concerns.
    The FED certainly does not jump to implement his convictions.
    Certainly in this cycle the FED is behind the curve .
    I am sure Bill did not ask the FED to lower the rates to 1% but rather the FF to 1% -it is quite a difference.
    I think many experts would agree that the FED should ease aggressively.
    The fact that Bill is so vocal ,is pehaps refective of his attempt to deflect market turbulance in PIMCO's portfolio-a valid concern.
    I would remind Mr.Kedrosky one more time that the FED can lower the FF but not the rates .
    In any event U.S turmoil is about over but the rest of the economic zones are about to experience their own Armageddon.
    The FED and the Treasury did enough .Now we need to eliminate investors psychosis and allow incremental time to for the "stimulus" to work.
    Reply
  •  
    Oct 07 12:15 AM
    I have put money in Gross's funds PTTDX and HABDX. They are both holding lots of cash, and if anyone can find a bargain in this mess, I will trust Bill Gross to do so.
    Reply
  •  
    Oct 07 02:54 AM
    When I'm dictator I will immediately issue an edict BANNING, henceforth and forever more, all euphemisms for borrowing or loaning money.

    No more of this:
    The BFLS (Big Fat Liability Sheet) Corporation announced today that its 31 October 2008 bond offering will be $1 billion.

    They will have to call it what it is:
    The Big Fat Liability Sheet Corporation announced today that it will go to the bond market on October 2008 and attempt to borrow $1 billion.

    When we rename something it matters.

    When I go to the bank to borrow money to buy a house, I say "I took out a mortgage." "It's mortgaged" has taken on a clear meaning: it's not mine until I pay back the loan. This too is euphemistic, but "taking out a mortgage" is a lot closer to the truth (I borrowed money) than "My next bond offering will be $1 billion." That makes it sound like you're the one doing the world, or in this case the capital markets, the favor. Yes, widows and insurance companies and pension funds need a place to put their capital in order to earn a return that matches their liabilities. But they are the ones offering, not the borrower. They are offering cash and you are asking to borrow it.

    Am I crazy? Am I the only one who thinks that one of the reasons we have periodic debt meltdowns is because we are so steeped in debt, we can't even call a loan . . . a loan.

    Elect me dictator and I will implement these changes immediately.
    Reply
  •  
    Oct 07 03:00 AM
    "Am I crazy? Am I the only one who thinks that one of the reasons we have periodic debt meltdowns is because we are so steeped in debt, we can't even call a loan . . . a loan."

    We're in this mess because:
    1: Banks are permitted to create money.
    2: Debt pays interest.
    Reply
  •  
    Oct 07 03:11 AM
    I agree as I usually do with Bill Gross's recommendations, but I don't think it is aimed at the real problem. Extending credit eases the short-term liquidity crisis but does nothing to increase the solvency of financial institutions holding MBS. I also like Glen Hubbard's ideas on directing relief to homeowners by allowing them to refinance for 30-year fixed at 5.25%. About a year ago, Bill Gross came up with the idea of the government buying up 1 million vacant homes and knocking them down. I think he was joking but I wish he wasn't.
    Reply
  •  
    Oct 07 03:24 AM
    Sweet! You guys said it all.

    Gabe, I do hope you are right. It takes time to implement such a Huge Plan & the bottom 20% don't have that long to wait. If they drop the FF rate this would be excellent. The affect of a real rate cut may go much futher to inspire Investor Confidence. This doesn't have to be for a long time, just long enough for Pavlov's Dog to hear the Buzzer...

    Nothing is going to bring back the housing mkt until people have jobs. I see this from a micro view: The equity loans are spent, the investments are down, credit limits have been cut. Only fresh cash from work is going to really reverse this, so that people can make their debt service.

    Gross & Buffett were the only ones who really were in position for this. Both were in Huge amounts of Cash=Euro's @ that time. Gross had 82% cash, Buffett moved Billions into same as well. All of the Brightest Minds will have to be working late night to caulk the cracks as there are many.

    All I can add to the coment by Mr Gross is: P & B need to make a Statement to the Public...We have the Funding, to Put the Train Back on the Tracks, we have the tools. The rate cuts (potentially lower,) are the grease that will keep the wheels moving while we work. The End-No Comment by Bush, he is Not a Calming Influence right now.
    Reply
  •  
    Oct 07 03:33 AM
    Sean Mc: The idea of 5.25% on a Refi is exactly what people need right now. Those that are in the lower 30-40% will have a good chance of surviving. Love it. What I've seen is the Business Related Move that leaves 1 for sale while the people are living in another city. IF they would do this, Responsible People could then Rent w/015% - Cash Flow. These People Are Responsible, but there are many property's for rent & many can not rent for PITI. Principle, Interest, Taxes, Insurance.

    If the Jobs are not created, the Mort Rates may have to go much lower to keep the escalation of this in check. I figured-5.25-4.5% on Good Credit Individuals. Young Dr's who are working should not be losing the house they can not sell @ the moment! This is Stupid. The System is going to Have to bend here & soon.
    Reply
  •  
    Oct 07 11:03 AM
    I want to send a huge Thank You to Bill Gross, as well as to contributors and commentators such as Paul on Seeking Alpha. I spend an inordinate amount lot of time working/worrying over accounts. You are a huge help. Thanks !
    Reply
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