Bond King Gross Warns: “Bernanke Losing Control!”

Posted by Bill Gross via Brad Hoppman - Uncommon Wisdom

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imagesEvidence is piling up, and it points to big changes in markets around the globe. I suggest you read this very carefully. You need to know about the latest developments.

Three weeks ago I told you about the May 10 Tweet from legendary bond trader Bill Gross. He said “the secular 30-yr bull market in bonds likely ended 4/29/13.” Our team here at Weiss Research made the same prediction months earlier, but it was still significant that Gross said this publicly. His huge PIMCO funds are a major player in Treasury, corporate and other bond markets, so people pay attention whenever Gross speaks.

On Wednesday of this week, Gross spoke again. In a CNBC interview — with no need to stay within Twitter’s 140-character limit — Gross went further. He predicts a new relationship between stocks and bonds.

Let’s stop here for a second. Stockbrokers and investment advisers typically recommend a “balanced” strategy. Keep part of your money in stocks and the rest in bonds. Over time the stocks should outperform, but you still need bonds. Why? Bonds tend to do well when stocks are in a bear market. They’re useful as a cushion, reducing your overall portfolio volatility.

Think of it this way: Stocks and bonds are a playground see-saw. When one side goes down, the other goes up. Stocks and bonds have a similar pattern. (In investment lingo it’s called “negative correlation.”) When your stocks are doing well, the bonds probably don’t look very exciting. But when the stock market crashes, the bonds are likely to outperform. So the experts recommend holding both, and reducing the stock allocation as you enter your retirement years.

Historically, this approach worked well for many years. Everyone from trillion-dollar pension funds to middle-class IRA holders depend on it. If this is your plan, I’m not suggesting you abandon it, and I don’t think Bill Gross would, either.

But yesterday he hinted the “balance” is changing.


Gross now thinks the correlation between stocks and bonds is changing from negative to positive. In other words, they will be much more likely to move up and down together. Here is how he described it to CNBC viewers:

“If bond prices go down, stock prices should go down as well. That’s simply because the global levered trade is dependent upon a stable Japanese yen and a stable (Japanese government bond) yield and a stable Treasury yield.

“Once you produce instability, then that leverage starts to unwind, the housing market gets affected, and stocks come down.”

Whew! This quote has a lot to unpack, but zero in on the second sentence. He says global trade depends on three factors:

  • Stable Japanese yen
  • Stable JGB yield
  • Stable (U.S.) Treasury yield


Now look at the markets the last few weeks. The yen is anything but stable. JGBs are under serious pressure, with much-higher yields looking very likely. And now U.S. Treasury yields are breaking out to levels we haven’t seen in over a year.

Add those three together, and according to Gross we should expect instability, de-leveraging and problems in both housing and stocks. Wow!

“But wait,” you may say. “Ben Bernanke and the Fed have their hands on the wheel. They’ll keep us on track, won’t they?”

No, they won’t. Gross says Bernanke can’t control the economy and never has. Here is another quote.

“I think Bernanke has a lost a little control in terms of the real economy. As a matter of a fact he never had it. And to the extent that low interest rates reduce savings and therefore reduce consumption, to the extent that they reduce the return on investment for corporations, to the extent that they destroy business models and then technically jam up the repo market, you’ve sort of lost control of economic growth going forward.”

Cutting through the jargon, Gross says Bernanke didn’t have much control in the first place, and is losing whatever influence he may have had on the economy.

Once a central bank cuts interest rates to zero, it has no more bullets. The Bank of Japan found out the hard way when 20+ years of forced liquidity resulted in almost zero growth.

What does this mean for investors like you and me? Two conclusions:

First, if your investment strategy depends on bonds remaining stable as the stock market falls, you may want to consider alternatives.

Second, we have to watch the markets closer than ever. The global changes Gross talks about may unfold slowly for months, or the world could change in a matter of weeks.

I know this is a lot to think about, but it’s very important. Here are some other stories the Uncommon Wisdomteam is following.


In Other Market News:


  • U.S. stocks rallied today on some good economic news. A revised estimate for U.S. economic growth in the first quarter came in at 2.4%, a bit weaker than expected. Traders think this may influence the Fed to keep the faucet open.
  • The Securities and Exchange Commission hit the Nasdaq stock market with a $10 million fine for last year’s botched Facebook (FB) public offering. The exchange’s systems failed when the highly-anticipated FB shares hit the market. (Speaking of Facebook, have you liked our Uncommon Wisdom fan page yet?)
  • Agribusiness giant Monsanto (MON) has egg on its face after a wheat species that was genetically modified to resist normal pesticides was found on an Oregon farm. The seeds were never supposed to leave the lab. Now the entire U.S. wheat harvest is under suspicion.
  • Many of our main export customers won’t buy genetically modified crops. Already the European Union said it would test wheat imports from the U.S. and Japan canceled a tender offer for white wheat. Monsanto shares finished the day slightly lower on the news.


I’m watching all these stories closely — and keeping watch for any more Bill Gross comments. Look for more news and analysis for you tomorrow.

Have a great evening!

Good Luck and Happy Investing.

Brad Hoppman
Uncommon Wisdom Daily