07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

Bill Gross: "The Financial System As We Know It Can Be At Risk"

by Tyler Durden
Dec 7, 2017 9:08 AM

22
SHARES

In his latest monthly investment outlook, Janus Henderson's Bill Gross takes a trip to the dark side of monetary
machinations and examines the signals (from credit, yield curves, and bitcoin) to comprehend how long this 'dance'
can continue, "until the system itself breaks down."

1. Prior market tops (1987, 2000, 2007, etc.) allowed asset managers to partially “insure” their risk assets by
purchasing Treasuries that could appreciate in price as the Fed lowered policy rates. Today, that “insurance” is
limited with interest rates so low.

Risk assets, therefore, have a less “insurable” left tail that should be priced into higher risk premiums. Should a
crisis arise because of policy mistakes, geopolitical crises, or other currently unforeseen risks, the ability to
protect principal will be impaired relative to history. That in turn argues for a more cautious and easier Fed
than otherwise assumed.
 
Economists prior to Keynes viewed “modeled” as well as “real time” economies as self-balancing, but subject to
imbalances from external shocks like oil prices. Rarely did theory incorporate finance and credit as one of those
potential earthquakes.
 
It took Hyman Minsky to change how economists view the world by introducing the concept of financial stability
that leads to leverage and ultimate instability. He alerted economists to the fact that an economy is a delicate
balance between production and finance. Both must be balanced internally and then the interplay between them
balanced as well.

2. Credit creation begins at the central bank level, but in reality is predominantly expanded via fractional
reserve banking and near zero reserved shadow banks.

Thi d l ll b t ti l l d i AAA t t th th d t d til it

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 1/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge
This model allows substantial leverage and can overprice AAA assets at the core then expand outward until it
reaches the periphery of financial markets. At that point or even before, credit usually leaks out into the real
economy via purchases of real assets, plant and equipment, commodities and other factors of production. It is
this process that has become the operating model for 20th and 21st century capitalism – a system which
ultimately depends on asset prices for its eventual success.
 
This model, however, is leverage dependent and – 1) debt levels, 2) the availability, and 3) cost of that
leverage are critical variables upon which its success depends. When one or more of these factors
deteriorates, the probability of the model’s success and stability go down.

3. Our entire financed-based system – anchored and captained by banks – is based upon carry and the ability
to earn it.

When credit is priced such that carry can no longer be profitable (or at least grow profits) at an acceptable
amount of leverage/risk, then the system will stall or perhaps even tip. Until that point, however (or soon
before), investors should stress an acceptable level of carry over and above their index bogies. The carry may
not necessarily be credit based – it could be duration, curve, volatility, equity, or even currency related.
 
But it must out carry its bogey until the system itself breaks down. Timing that exit is obviously difficult
and perilous, but critical for surviving in a new epoch. We may be approaching such a turning point, so
invest more cautiously.

4. Money/cash is different than credit.

High-quality credit can at times take the place of money when its liquidity, perceived return, and safety of
principal allow for its substitution.
 
When the possibility of default increases and/or the real return on credit or liquidity decreases and
persuades creditors to hold classical “money” (cash, gold, bitcoin), then the financial system as we know
it can be at risk (insurance companies, banks, mutual funds, etc.) as credit shrinks and “money” increases,
creating liquidity concerns.

5. Someone asked me recently what would happen if the Fed could just tell the Treasury that they ripped up
their $4 trillion of T-bonds and mortgages.

Just Fugetaboutit! I responded that that is what they are effectively doing. “Just pay us the interest”, the Fed
says, “and oh, by the way, we’ll remit all of that interest to you at the end of the year”.
 
Money for nothing – The Treasury issuing debt for free. No need to pay down debt unless it creates
inflation. For now, it is not. Probably later.

Have a great December.

Be careful in 2018.

Comment viewing options

Threaded list - expanded Date - oldest first

50 comments per page Save settings

Select your preferred way to display the comments and click "Save settings" to activate your changes.

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 2/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

MonetaryApostate • Dec 7, 2017 9:12 AM

Everything will change once everyone realizes they have been printing & loaning hundreds of
quadrillions to steal everything...

Fake money, fake debt, fake value, fake news, fake investments, fake markets, fake history, fake
everything! 

https://plus.google.com/collection/QorNbB

YUNOSELL  MonetaryApostate • Dec 7, 2017 9:16 AM

The Financial System As We Know It Can Be At Risk
 

My Comment: Well, Duh

shitshitshit  YUNOSELL • Dec 7, 2017 9:54 AM

newspeak descrambler v 0.23.5.3:
THE FINANCIAL SYSTEM = LYING BAG OF DICKS BANKSTERS LEECHES

AS WE KNOW IT = THAT YOU CURRENTLY HAVE TO SUFFER

CAN BE = IS TRULLY AND MOST CERTINALY

AT RISK = DEAD (YEAH)

Steve Scuba  shitshitshit • Dec 7, 2017 12:30 PM

I'm making over $15k a month working part time. I kept hearing other people tell me how much money
they can make online so I decided to look into it. Well, it was all true and has totally changed my life.
This is what I do... http://disq.us/url?
url=http%3A%2F%2Fwww.Jobzon3.com%3Ab8eR_DQLwGRPVGtFvv...

FreeShitter  MonetaryApostate • Dec 7, 2017 9:16 AM

Fake tits, fake eyelashes, fake asses, fake muscles, fake orgasms, fake smiles, fake people.
 

Fake this, bitchez

MonetaryApostate  FreeShitter • Dec 7, 2017 9:20 AM

Fake everything yes.

Antifaschistische  MonetaryApostate • Dec 7, 2017 9:51 AM

fake everything........except the interest you pay.   That is very real.

MonetaryApostate  Antifaschistische • Dec 7, 2017 10:28 AM

Taxes, interest, fees, mandated insurance, legal requirements, licenses,  inflation, bank fees, fake
markets, fake investments, casinos, etc etc..
Forced Perpetual Poverty for the fake money loving serfs!

The Black Hole(s) on your finances...

Ron_Mexico  FreeShitter • Dec 7, 2017 9:49 AM

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 3/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

fake news, sad . . .

SurlysonofaBitch  FreeShitter • Dec 7, 2017 11:51 AM

What's wrong with fake tits?

Vlad the Inhaler  MonetaryApostate • Dec 7, 2017 10:39 AM

"everyone" will never realize this, they can ID everyone in the Kardashian family but couldn't pick Janet
Yellen out of a lineup of Victoria Secret models.

vofreason  MonetaryApostate • Dec 7, 2017 11:19 AM

Maybe but when?!?!?.......seems we've all known this for so long yet nothing happens.  The dummies in
the public that just think if the economy does well the stock market will go up and pay no attention to
price think all is well.  Everyone should have bought gold up to $10,000 while fleeing treasuries and
stocks after QE began .....but they didn't.  I don't have any faith in the average person "waking up" until
the market crashes and then there will be more printing and more excuses just like last time so I just
don't see how this doesn't continue for a long time.  

I really wish people would realize that a legitimately gold backed crypto would be an amazing fix to all
this ..... but they won't.  

LawsofPhysics • Dec 7, 2017 9:14 AM

Retire already Bill!  It was a good run and you have a nice spread in Corona Del Mar.  Just shut the fuck up
already.  You know the Fed will buy all your paper, gloating at this point just makes you look like an
arrogant ass. You must be on the Fed's payroll because you know damn well that it is The Fed that has
been issuing debt for FREE (ZIRP) to the bankers and financiers, NOT the treasury.

wmbz • Dec 7, 2017 9:13 AM

"Our entire financed-based system"

Correction... "debt-based" system.  Every "dollar" that enters into the system is borrowed.

MonetaryApostate  wmbz • Dec 7, 2017 9:17 AM

Created out of thin air & entirely fake, so correctly we should say it is a fake ass economy controlled by
the money printers / upper wealthy / nobles class.
While we are forced to serf, they get mega expensive everything for fucking free!.

MGA_1 • Dec 7, 2017 9:15 AM

Start prepping !!! (or maybe not...)

MonetaryApostate  MGA_1 • Dec 7, 2017 9:18 AM

Long oxygen tanks, I think the fires are just getting started.

bshirley1968 • Dec 7, 2017 9:17 AM

"Can be"?  "As we know it"?
WTF!?  Get out of here!  Who is this guy?  Where has he been?  And who is he talking to?

500 "experts" parroting the same thing.......pointing out the obvious.  Kudos!  Lmao
http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 4/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

cpnscarlet • Dec 7, 2017 9:21 AM

Lies LIes LIes!!!

EVERYTHING IS AWESOME!!!

I am COMEX Gold

Muslimania • Dec 7, 2017 9:27 AM

Just keep stacking...............

copernicuson • Dec 7, 2017 9:32 AM

Can you please stop posting stuff from Bill Gross.  He is conflict of interest in person.  Nothing he says is
likely to be untainted.

ToSoft4Truth • Dec 7, 2017 9:36 AM

Shoot the tellers. 

buzzsaw99 • Dec 7, 2017 9:37 AM

bill has lost his mind.  he's a blithering fool now.  he talks like some of the biggest idiots ever in the
history of the zh comments section.  divorced from reality entirely.

Schmuck Raker • Dec 7, 2017 10:20 AM

ICYMI "...classical “money” (cash, gold, bitcoin)..."

MrBoompi • Dec 7, 2017 10:50 AM

This financial system sucks so I hope it is at risk.  Too bad the financial overlords will try to take humanity
down with them.  

myopinion • Dec 7, 2017 11:24 AM

Right or wrong; rational or irrational Bitcoin and the digital currency space has become a voting
machine.  A statement to the loss of faith and trust in governments worldwide. 

Tonterias • Dec 7, 2017 11:43 AM

Buy the Goldman-Fed dip

Roger Ramjet • Dec 7, 2017 12:39 PM

Just one problem with point #5, the Fed isn't just remitting the interest back to the U.S. Treasury, first
they are paying out interest to the large member banks on the Excess Reserve Balanaces held at the Fed. 
Currently there are over $2.7 trillion in excess reserves, currently earning interest at an annualized rate
of 1.25%.  That means that the big banks are receiving over $27 billion annually for essentially doing
nothing (after all the Fed simply created these reserves out of thin air).  That's why Goldman Sachs all of
the sudden converted into a depository bank back in 2008, remember that.  They weren't going to miss
out on this gravy train!

The bailouts continue to this day!

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 5/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

In fact, this is the Fed's biggest balancing act, between raising the rate paid on these excess reserves and
reducing the size of excess reserves.  If you push rates up too far, somebody may notice how much is
being paid to these banks (and how much is not being remitted back to the Treasury).  Reduce excess
reserves too far and you will hurt bank earnings.  Delicate balancing act indeed.

Of course the Fed is simply looking out for the interest of the common man.  Right?

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 6/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 7/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 8/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 9/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 10/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 11/12
07/12/2017 Bill Gross: "The Financial System As We Know It Can Be At Risk" | Zero Hedge

http://www.zerohedge.com/news/2017-12-07/bill-gross-financial-system-we-know-it-can-be-risk 12/12