Pimco boss berates US politicians and the comment boards say avoid treasuries

25th July 2011

He says: "It is likely that the nation's leadership will stumble into a short-term compromise over the next few days — one that raises the debt ceiling and avoids a debt default but, importantly, leaves the AAA rating extremely vulnerable and does little to lift the damaging clouds hanging over the US economy.

"It will come down to the wire; and when the stopgap compromise is reached, many in Washington will declare victory and, in the process, claim credit for averting a national disaster. Yet the resolution will likely be temporary, and the damage will be real and long-lasting — both of which render an already worrisome situation even more difficult going forward. Indeed, by illustrating so vividly to the whole world what is ailing America, the weekend's political theatrics should make us all worry even more about the world's largest economy."

Damning words indeed.

The Guardian also covers the story here and amid the political point scoring there is a debate about the wisdom of investing in US Treasuries.

dorlomin queries whether pension funds will be able to hold treasuries in the event of a downgrade.

"As I understand it many pension funds and banks are legally bound to only hold AAA debt for certain uses, if US treasuries lose this status it could create a bit of pandemonium round the word as people try to dump T bills and find something else worth holding in sufficient volumes. Good day to be long on gilts if it does happen?"

Scaff1 suggests the problem actually might rest with the people – in this case the American people.

"Although raising the current debt ceiling is of immediate concern, it doesn't address the problem that distinguishes this particular discussion: the "people" as a whole are unable or unwilling to agree on how to service the debt. Regardless of whether or not the debt ceiling is raised this time, in the medium term the US is far more likely to default (or force loss through inflation) than their AAA rating would suggest. The problem of being capable of servicing the debt does need addressing, but of primary concern is the ability to organise. With little changing over the coming months, politically, even a raised ceiling now will give little confidence to investors that this won't happen again in a few months time. Would you invest in US bonds? I'm far less certain than AAA, personally."

Gray62 agrees and suggests avoiding treasuries though he reserves some of his ire for the ratings agencies.

"No reasonable, responsible acting investor would buy US treasuries now, when the threat of those papers losing much of their value is very real. The rating agencies aren't doing their job, they're playing politics. They know damn well that downrating the US would trigger very damaging consequences, and they want to avoid that any way they can. At the same time, they don't feel any responsibility for any foreign nation, and happily do the spin for hedge funds gambling against the GIPSI's. More than enough reason for the EU to stop the dirty business of Moody's & Co. When ratings aren't based on rational judgment, they don't have any economic value at all."

To receive our free email newsletter sign up here

10 thoughts on “Pimco boss berates US politicians and the comment boards say avoid treasuries”

  1. Space Man says:

    So to summarise:
     “There are quite plausible scenarios where a default or even defaults in the Euro zone could see a tsunami type amount of cash demanding Swiss Francs.The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”

    Should be interesting. Surely the ‘unlimited quantities’ is as you say, just being macho and not a realistic proposition?

    Also I’m surprised you’ve not mentioned this Shaun, considering it’s a subject close to your heart:

    http://www.bbc.co.uk/news/business-16678608 

    1. Anonymous says:

      Hi Space Man

      Thank you for the link as I had not seen it. It is indeed one of my themes and topics!

      Whilst  I look at prices etc.before I write I often do not read too much other stuff as I prefer to write as unemcumbered so to speak as possible…

  2. Russell says:

    Shaun, I am the proud owner of a mint condition copy of a book by Bernard Connolly called “The Rotten Heart of Europe” printed in 1995 that I bought for a few pence at a car boot sale. It details the rise and fall of the ERM and the political reasons for its existence, thus setting the scene for the creation of the Euro. Hoping he might have updated this since 1995, I went online searching. Sadly it hasn’t been, but I did find a speech by him given in the year 2000 (8 years before it all fell apart!!) I cut this from the speech, since it is so prescient and pertinent to your own blog:

    “Monetary union in Europe must mean massive macro-economic destabilisation.
    We are already seeing it in Ireland, where that country’s crass abandonment of
    its own monetary policy is producing a massive boom-bust. The bust part of the
    cycle is almost inevitable, and it will produce a devastating financial
    crisis.

    Ireland shows how monetary union sets one country’s interests against
    another’s. For if ever Germany and France experience the structural economic
    revival that so many in the financial markets predict for them — though I have
    serious doubts about it — the rise in interest rates and the appreciation of
    the euro that would follow would condemn Ireland — and probably Spain,
    Portugal, Finland and Greece — to cataclysmic depression.”

    1. Anonymous says:

      Thanks for sharing this and I note the introduction of Finland to the list of possible casualties.I shall mull that one over as it has worse implications than merely not being in the core Euro zone.

      I remember Nokia being raised as a potential problem for Finland do you have other fears for her?

  3. JW says:

    Hi Shaun. Do you know what is the latest forecast for Euro/CHF from Stopler the FX Strategist at Goldmans? According to the ‘zero hedge’ guys the last 8 forecasts by this guy would have made you a packet if you had bet in the opposite direction. 

    1. Anonymous says:

      Hi JW

      I do not but do know that they have subjected him to some derision which unless he has great successes elsewhere is hard to argue with..

      Anti-seers do have their problems as one does not know whether another anti-seer has an opposite view! What do we do if Stephanie Flanders (Greece will get no-where near default:there is no sign of inflation etc.) disagrees with Will Hutton (we must join the Euro, we must mimic the Asian Tigers just in time for them to crash etc..)?

      Also there is the danger of Goodhart’s Law.

      “Once a social or economic indicator or other surrogate measure is made a target for the purpose of conducting social or economic policy, then it will lose the information content that would qualify it to play such a role.”

      1. JW says:

        Hi Shaun, you reference to Goodhart’s Law made me think about the BoE’s continuing stated mission to manage CPI, when I think its pretty obvious they are actually managing nominal GDP.

  4. Anonymous says:

    Shaun – regarding your final paragraph on the ECB. I cannot see how the “powers that be” will allow such a catastrophe; I read that the “silver fox” (Madame Lagarde) is calling (again) for an additional €500 million as a “larger firewall”. No mention of how, when or from whom, but that’s par for the course!

    1. Anonymous says:

      She is indeed Ray but it is the same money I wrote about last week. So it is echoing the Gordon Brown “saved the world” theme where you take credit for a pot of money more than once!

      Also I pointed out last week much less enthusiasm seems to be put into actually collecting the money..

  5. Pablo87 says:

    If I was the Swiss Central Bank, I would simply print the currency to buy gold and other precious metals (or foreign assets). When a Swiss citizen dies, his share could be transferred to his estate, a negative estate tax of sorts. This has two effects: maintain a competitive currency regardless of what happens elsewhere and reduce taxes to citizens. 

Leave a Reply

Your email address will not be published. Required fields are marked *