Bill Gross on Pimco, Portable Alpha and Getting Fired
I never intended to become the conduit between employees at Pacific Investment Management Company and the public at large. Yet lately, that seems to be the role I have been playing with the bond giant, especially in commentary and criticism of co-founder Bill Gross -- whether it is “Friends of Bill” informing me about his unpublished farewell letter (parodied here), the disgruntled release of the Pimco bonus structure, or even debate on Bill Gross's track record.
This relationship resulted yesterday in an extensive Q&A with Gross himself for my "Masters in Business" radio show, to be broadcast in two parts on Bloomberg Radio and available as a podcast at Bloomberg View, this weekend and next.
It was the first time I’ve met Gross -- I found him intelligent, forthright and unambiguous. Over the course of two hours, we discussed the founding of Pimco, who his early mentors were, what influenced him in the 1970s and 80s to become the investor he is today.
He said quite a few surprising things -- about the Federal Reserve and quantitative easing, about what investors can learn from gamblers, and about his exit from Pimco. A few highlights of our conversation:
- The Fed. According to Gross, Fed officials had to do something to free up the frozen credit markets. It would have been an economic catastrophe had they not done so. Where he disagrees with their choices was zero-interest-rate policy. He would have stopped cutting rates at 1 percent. That would have encouraged savers, and left them some room to maneuver.
- Congress. He feels it should have put into effect a full stimulus plan after the Great Recession. When our elected officials didn’t act, the Fed was the only game in town.
- GSEs. After the Fed publicly announced it would be buying mortgage-backed securities, you might have thought this was a no-brainer trade. But that’s not how it turned out. There was so much distrust and fear in the heart of the crisis -- including of the U.S. as a counter-party -- that very few managers were willing to pull the trigger. Gross bet that Fannie Mae and Freddie Mac paper were “money good,” i.e., the same as U.S. Treasuries. He netted around $10 billion for his Total Return Fund on the trade.
- Corporate execs & real-world impact of QE. It's simple math: With rates as low as they were, the calculus for corporate execs was that they would get a better return buying back shares than making capital-expenditure investments; they were better off raising their dividends than doing more hiring. This is the real-world impact of rates at zero.
- The Taylor Rule. That dictum -- which sets a central bank’s benchmark interest rate based on the rate of inflation and the gap between the economy’s potential and actual level of output -- is now dead. It no longer correctly determines the proper Fed Funds rate in the “new normal”: a low-growth, low-inflation environment. The Fed seemingly agrees, and appears to not be paying attention to it.
- Efficient Market Theory. Markets are far from efficient. Gross's disbelief in the theory is what led him to becoming an active trader of fixed income. EMH was the last course he took, and he got a C-minus.
- The 10-year bond. It should be yielding closer to 3 percent, not under 2 percent looking like it wants to go lower. That’s why interest rates should be gradually raised by the Fed over the next 2 to 3 years, at least to 2 percent, possibly to 3 percent.
- U.S. deficit. Treasury has explored the idea of 50-year bonds to refinance America’s deficits. Officials spoke to firms such as Pimco and BlackRock to gauge interest. Most likely buyers would be public pension funds who could rely on the long-term guaranteed returns. Gross thinks it’s a good idea.
- Infrastructure. A no-brainer. The nation should also take advantage of low rates to repair America’s crumbling infrastructure, create jobs and stimulate the economy.
- Blackjack. Gross began his career by reading Ed Thorp’s "Beat the Dealer" and counting cards. The lessons from that experience, including “gambler’s ruin,” were transferable to investing.
- The 1987 crash. We were transfixed, he recalled. This supposed pro was like a deer in the headlights watching the carnage unfold. He should have bought more bonds, but didn’t.
- Portable alpha. The financial historian Peter Bernstein credited Gross with creating the investing strategy of "portable alpha" with Pimco StocksPlus in the 1980s. The funds bought S&P 500 stock futures along with 6-month to 18-month bonds.
- On starting Pimco. We were 20-something kids, he recalled, our knees were knocking when we approached Walter Gerken, the chief executive officer of Pacific Life Insurance Company about creating a spin-off.
- On leaving Pimco. “I was fired.” Gross said he offered to step down from running Total Return by the end of 2015, resign as chief investment officer, and manage only the closed-end funds. It was a good deal that Pimco made a mistake not taking.
- Why he doesn’t retire. This is what I do, he said, I am very competitive and I want to show the world my track record was not a fluke.
There is a nuance to an extensive in-person interview that gets lost in print. The tone of voice, the humility or arrogance, the sincerity in which someone states something is better heard than read. Which leads to this shameless plug: I expect the full interview will be better heard than read. For that, you will have to wait til this weekend at Bloomberg View.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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