Bill Gross, manager of the world’s largest mutual fund, said Europe poses the biggest risk to the U.S. economy.
BlackRock Inc.’s Laurence Fink said Germany is playing a “dangerous” game letting markets push debt-laden European nations to fiscal discipline.
The agreement among the two biggest fixed-income managers, who spoke yesterday during an alumni event hosted by the UCLA Anderson School of Management and Bloomberg Television, highlights the increasing investor unease over Europe’s failure to end its sovereign-debt crisis.
As holders of Greek debt begin talks in Athens on structuring a 50 percent write-off that was the cornerstone of a deal pieced together last month, government borrowing costs in some core European economies have soared to euro-era records amid resistance from German Chancellor Angela Merkel to use the European Central Bank as a lender of last resort.
“It is a very dangerous stake Germany’s playing,” Fink, who runs the world’s biggest asset manager, said at the event at the Beverly Hilton Hotel in Beverly Hills, California. “And many people would not play these stakes because the outcomes can be black or white.”
Fleeing Safe Havens
Since last month’s agreement, the euro has lost 2.9 percent against the dollar and borrowing costs on two-year Italian government debt have jumped 149 basis points as of Nov. 17. The cost of insuring against a default on five-year Italian debt using credit default swaps has jumped 23 percent in the period.
The differences in yield between French, Spanish and Belgian 10-year government bonds and their German counterpart rose to a euro-era record this week, as the crisis is spreading to some of Europe’s core economies. Gross said it’s becoming increasingly difficult for investors worldwide to find a safe haven.
“Investors are basically fleeing what were previously safe havens,” Gross said. It’s “certainly a moment of 2011 which is significant.”
Gross and Fink, whose firms collectively manage $4.7 trillion in assets, have differed in the past in their views of markets and the economy. Fink said in January that he never believed in an economic scenario outlined by Pimco under the term “new normal” that described an extended period of below-average growth for the U.S. following the 2008 financial crisis.
The two managers, both alumni of the Anderson School, also diverged in their view of Treasuries, which Gross eliminated from his main fund at the start of this year, only to reverse course after he missed the biggest quarterly rally in Treasuries since 2008. Fink said in March that he’s a “big buyer” of the U.S. dollar.
Gross’s $244 billion Pimco Total Return Fund has returned 2.5 percent this year, trailing 75 percent of peers. The fund has risen an average of 7.7 percent over the past five years to beat 97 percent of rivals, according to data compiled by Bloomberg. Unlike Gross, Fink doesn’t manage a bond fund.
Gross has criticized the Federal Reserve for keeping interest rates artificially low by purchasing Treasuries. While Fink said that he had welcomed the first two rounds of the so-called quantitative easing, both agreed last night that the Federal Reserve by now has run out of monetary tools to stimulate the economy.
“I think Operation Twist was a mistake,” Fink said, referring to a program to lengthen the maturity of the Fed’s bond portfolio. “And any more form of quantitative easing I would find troublesome.”
While the Fed is seeking to solve the debt crisis with more debt, the ECB is held back by a German tradition of tight money, Gross said.
“We are at a point in time of philosophical differences in terms of how to solve the debt crisis,” Gross said. “It’s not a determinable outcome at the moment but it’s certainly in flux and very dangerous.”
Fink and Gross agreed that the only way to stimulate the U.S. economy is by fixing structural problems such as the lack of manufacturing jobs in the country.
“I agree with almost everything that Bill says,” Fink said. “My conclusion is just somewhat more optimistic than Bill’s, but I see the same pitfalls.”
Pimco held the distinction of being the world’s biggest manager of bond funds until December 2009, when BlackRock’s acquisition of Barclays Global Investors and its exchange-traded fund strategies helped it vault past its biggest rival.
Pimco, co-founded by Gross in 1971, and BlackRock, started in 1988 by a team including Fink, have chosen different paths to growth. Unlike BlackRock, which has expanded to $3.35 trillion in assets through acquisitions, Pimco is building its two-year-old equity unit by rolling out strategies one at a time and hiring executives.
BlackRock hasn’t pinned its expansion to any one single product or strategy, while Pimco until recently relied on Gross’s top-performing bond funds to fuel a more than sixfold surge in assets to $1.35 trillion over the past decade.
“There can’t be more than a few handfuls of people in history who’ve had the track record, the longevity, and the influence that Bill and Pimco has had,” Fink said yesterday.
Gross said that he admired BlackRock’s ETF business and would like to build out Pimco’s products in that area.
“I’d take their ETF franchise,” Gross said to laughter from the audience of UCLA alumni. “I don’t know if I’d pay for it but I’d certainly take it if I could take the best of BlackRock.”
(Bloomberg Television’s special event, “Heavy Hitters: Gross / Fink,” airs Monday, Nov. 21, at 10 p.m. Eastern time.)