Courtesy of Mish.
Bill Gross echoes my statements that Germany is poised for a big hit either by a piecemeal breakup of the eurozone, by Germany indefinitely ponying up more money to keep the eurozone intact, or by Germany saying it has had enough and goes back to the deutsche mark.
On Bloomberg TV’s “Market Makers” Bill Gross of PIMCO spoke to Erik Schatzker and Stephanie Ruhle today and said, “I would be leery of German bunds simply because there are only a few scenarios in which they can do well…Germany for me is a credit risk. It’s not an attractive market.”
Gross on what he sees happening in Europe:
“I would be leery of German bunds simply because there are a few scenarios in which they can do well. If they will do well, if Germany leaves the zone and some way or another move back to the deutsche mark opposed to the euro and pay off obligations in euros and benefit because of it. Otherwise, increasingly, as we have seen over the weekend in terms of Greece, this kick the can environment adds liabilities to the German balance sheet day after day. They have what they call it a target 2 type of liability where they assume constant liabilities from Spain, Italy, and others as they move to the German Bundesbank. Increasingly, as the months move on, Germany becomes more and more liable for the euro balance sheet despite the possibility that Greece departs. Germany to me is a credit risk and certainly in terms of its tight shirt and shrinking shirt at the sleeves, is not an attractive market.”
On countries like Germany and Japan:
“We were making a point in internal discussions that these clean dirty shirts have to fit. To the extent that these have been shrunk at the dry cleaners and the sleeves are up to the elbows in terms of low yields then perhaps you do not want to wear that shirt either. That is the case in Germany, not necessarily the case in Japan. In Germany, we have seen a bubble of some proportions as money is moving from Greece and other peripherals into the heart and the core of euro land. Would I buy a two-year German Schatz at close to 0% yield? Probably not. It is not only the dirt on the shirt, but the fit in terms of the yield that is important as well.”
On Subprime and Distressed Credit:
“We want yield, but we want what we call safe yield. We want to invest in the cleanest dirty shirts, which appear to be the United States and perhaps the United Kingdom. To that extent, we’re looking at mortgages, non-agency mortgages, not subprimes, but agency mortgages which provide a 1.5%-2% yield. These are instruments which because they prepay so rapidly at 25-30% a year, really present a two to three year maturity like the portfolio that Jamie Dimon was mentioning and they yield 1.5%-2%. These are not the heydays of bond investing, those were back in 1981, but to the extent you can beat a two-year treasury at 27 basis points with a mortgage that resembles that at 1.5 to 2 is what we are doing.”
On whether Germany has the ability to rescue Spain:
“I think the ECB as representative of euro land as a core has the ability. The question is do they have the will. Any central bank has the potential to increase their money supply to buy obligations and to write checks if they are willing to suffer the currency depreciation that comes from that. Up until this point, the euro has gone down in value. Will the ECB be willing to permit a 10-15-20% decline from this point forward? It’s not very German-alike in terms of their attitude. It’s not very Austrian in terms of their monetary policy, but increasingly the market expects them to at least move closer to the margin in that regard.”
…
