Thursday, February 21, 2008

Interview with fixed income guru Bill Gross

I will warn you that this interview is actually quite depressing, yet worth listening to. Bill Gross is consistently right on the mark and his views mirror Prem Watsa's interview comments from my last article post.

Below is a link to the interview on Bloomberg. But first a few take aways from the interview -

- We're facing an environment where assets such as houses,shares are experiencing deflation while commodities (oil & food) are rising rapidly and creating inflation. The net effect being a real erosion of wealth.

- Bill Gross (citing Peter Bernstein) says the unwinding of the global derivatives and massive debt leverage globally will be akin to "water torture" both slow & painful. (I immediately had a recall to Warren Buffett & Berkshire Hathaway's nightmare with Gen Re & the un-winding of Gen Re's derivative portfolio. It cost Berkshire hundreds of millions in losses and was nothing compared to the global derivative trade we now have)

- cheap credit is over , the ability to obtain credit & the cost of credit will be higher in spite of recent interest rate cuts .

-the total losses from subprime will be $400-$500 billion but when combined with other corporate loan losses, losses in mututal funds & hedge funds , the total losses could be over $700 billion.

- Bill Gross didn't suggest there wasn't value in banking stocks. He did say Pimco was investing in corporate bank loan bonds paying a nice 8% yield.

-Bill Gross did suggest eventually there will be value in mortgage loans but only after the great unwinding happens and we are still yet to see that completely play out.


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