Life – and Death Proposition

http://www.pimco.com/EN/Insights/Pages/Life-and-Death-Proposition.aspx 

Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper. 

Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time.

To gold bears:  oops!  What do you think happens to the price of gold when PIMCO, the largest bond fund in the world with $1.3 trillion under management, decides to buy gold?  What about the other institutional investors, like investment banks, hedge funds, pension funds, mutual funds, corporate treasuries, sovereign wealth funds, and central banks?  Or the billions of peasants in Asia accustomed to corrupt governments and crooked bankers with a printing press?  It'll be like trying to fit a pig into a pin hole.  Or yelling "Fire!" in a theater of billions--when there is only one escape exit.

You've been warned--many times.  Good luck to us all.