PIMCO's Gross admits he struck out on bonds this year


In a Special Edition letter posted on PIMCO’s website, Gross, who runs the $242 billion PIMCO Total Return portfolio, wrote that he underestimated the contagion effect from the Europe debt crisis and the U.S. debt ceiling debacle.”As Europe’s crisis and the U.S. debt ceiling debacle turned developed economies toward a potential recession, the Total Return Fund had too little risk off and too much risk on,” said Gross, who also shares the title of co-chief investment officer at Pacific Investment Management Co. with Mohamed El-Erian.Gross, known as the “bond king”, came under heavy criticism earlier this year when he bet heavily against U.S. Treasuries which have turned out to be one of the biggest outperformers of 2011.His fund’s poor performance led Gross to simply call his open letter to investors, “Mea Culpa.”It is up only 1.06 percent year to date versus the benchmark BarCap U.S. Aggregate Index which is up 3.99 percent.Gross, who helps manage more than $1.2 trillion at PIMCO, said late Friday the Total Return fund had positions in German bonds and Canadian Treasuries to counter the U.S. underweight position, “but not enough.”He added that minor percentages of emerging market corporate and sovereign debt, effectively denominated in their local non-dollar currencies, did not perform well either.”The simple fact is that the portfolio at midyear was positioned for what we call a “New Normal” developed world economy - 2.0 percent real growth and 2 percent inflation,” Gross said.That’s all changed, of course. Gross said PIMCO’s internal growth forecast for developed economies “is now zero percent over the coming several quarters and the portfolio more accurately reflects this posture.”Last week, Reuters reported that Gross ramped up buying of mortgage-backed securities in September, albeit by using leverage, on the likelihood the Federal Reserve’s reinvestment program in those securities will boost prices significantly.Gross increased mortgage debt to 38 percent of assets in September, from 32 percent in August, as the U.S. central bank announced last month that it “will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.”His move into mortgage-backed securities also comes as the PIMCO Total Return fund’s cash equivalents and money-market securities fell to negative 19 percent September, from negative 9.0 percent in August.In having a so-called negative position in cash equivalents and money-market securities, it is an indication of using derivatives and short-term securities as collateral in order to boost the fund’s buying power with leverage.Gross’ move to seek more yield by putting more money into mortgage bonds is yet another bold bet which many will be watching after Gross’s call on Treasuries cost his fund’s performance. In doing so, he is effectively extending the average duration of his fund’s investments, making them potentially more exposed to a rise interest rates.Clearly, Gross is betting interest rates will remain low for some time as the world economy continues to struggle.In his “mea culpa” letter, Gross resorted to baseball analogies and metaphors. He closed his letter by saying: “This is big league ball, where your ticket holders come to the park expecting not a circus-Willie Mays-catch but more wins than losses and a year-end performance that places your bond assets near the top of the standings.”He added, “Baseball metaphors aside, we know why PIMCO Total Return is arguably the largest and hopefully the greatest bond fund in the world.”


Real Business Leaders Want to Save Capitalism

A few weeks ago I was visited in my office by the chairman of one of the country’s biggest high-tech firms who wanted to talk about the causes and consequences of widening inequality and the shrinking middle class, and what to do about it.

I asked him why he was concerned. “Because the American middle class is the core of our customer base,” he said. “If they can’t afford our products in the years ahead, we’re in deep trouble.”

I’m hearing the same refrain from a growing number of business leaders.

They see an economic recovery that’s bypassing most Americans. Median hourly and weekly pay dropped over the past year, adjusted for inflation. 

Since the depths of the Great Recession in 2009, median real household income has fallen 4.4 percent, according to an analysis by Sentier Research. 

These business leaders know the U.S. economy can’t get out of first gear as long as wages are declining. And their own businesses can’t succeed over the long term without a buoyant and growing middle class.

They also recognize a second danger.

Job frustrations are fueling a backlash against trade and immigration. Any hope for immigration reform is now dead in Congress, and further trade-opening agreements are similarly moribund. Yet the economy would be even worse if America secedes into isolationism.

Lloyd Blankfein, CEO of Goldman Sachs, warned recently on “CBS This Morning” that income inequality is “destablilizing” the nation and is “responsible for the divisions in the country.” He went on to say that “too much of the GDP over the last generation has gone to too few of the people.” 

Blankfein should know. He pulled in $23 million last year in salary and bonus, a 9.5 percent raise over the year before and his best payday since the Wall Street meltdown. This doesn’t make his point any less valid. 

Several of business leaders are suggesting raising the minimum wage and increasing taxes on the wealthy.

Bill Gross, Chairman of Pimco, the largest bond-trading firm in the world, said this week that America needs policies that bring labor and capital back into balance, including a higher minimum wage and higher taxes on the rich. 

Gross has noted that developed economies function best when income inequality is minimal.

Several months ago Gross urged his wealthy investors, who benefit the most from a capital-gains tax rate substantially lower than the tax on ordinary income, to support higher taxes on capital gains. “The era of taxing ‘capital’ at lower rates than ‘labor’ should now end,” he stated. 

Similar proposals have come from billionaires Warren Buffett and Stanley Druckenmiller, founder of Duquesne Capital Management and one of the top performing hedge fund managers of the past three decades. Buffett has suggested the wealthy pay a minimum tax of 30 percent of their incomes.

The response from the denizens of the right has been predictable: If these gentlemen want to pay more taxes, there’s nothing stopping them. 

Which misses the point. These business leaders are arguing for changes in the rules of the game that would make the game fairer for everyone. They acknowledge it’s now dangerously rigged in the favor of people like them.

They know the only way to save capitalism is to make it work for the majority rather than a smaller and smaller minority at the top.

In this respect they resemble the handful of business leaders in the Gilded Age who spearheaded the progressive reforms enacted in the first decade of the twentieth century, or those who joined with Franklin D. Roosevelt to create Social Security, a minimum wage, and the forty-hour workweek during the Depression.

Unfortunately, the voices of these forward-thinking business leaders are being drowned out by backward-lobbying groups like the U.S. Chamber of Commerce that are organized to reflect the views of their lowest common denominator.

And by billionaires like Charles and David Koch, who harbor such deep-seated hatred for government they’re blind to the real dangers capitalism now faces.

Those dangers are a sinking middle class lacking the purchasing power to keep the economy going, and an American public losing faith that the current system will deliver for them and their kids.

America’s real business leaders understand unless or until the middle class regains its footing and its faith, capitalism remains vulnerable.

“ RBC Global Asset Management has appointed Clive Brown as chief executive of RBC GAM…

  • RBC Global Asset Management has appointed Clive Brown as chief executive of RBC GAM International. Mr Brown joins from JPMorgan Asset Management where he was global chief operating officer and chairman of Asia.
  • BlackRock has hired Gary Clarke as co-head of its global equity team, working alongside James Bristow. Mr Clarke was previously head of global retail and thematic investing at JPMorgan…

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Bill Gross on the new normal

Bill Gross on the new normal

In this 2009 essay, after an incomprehensible and irrelevant introduction involving golf, Bill Gross from PIMCO gives us his reasons why we may be in a “new normal” of lower economic growth:

  1. American-style capitalism and the making of paper instead of things.Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then…

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华尔街见闻

近两年不谋而合大宽松的全球主要央行走上了三岔路:欧洲央行的负利率一降再降,日本央行的超级双料QE根本没有停手的迹象,而美联储还在按每月减少购买150亿美元资产的速度继续缩减QE。

正如全球最大债券基金之一PIMCO的前任CEO Mohamed El-Erian上周评论,发达国家的货币政策正在由一致行动的单轨系统转入多轨系统,这将是第四季度深度影响全球经济多个领域的一大因素。

如底部高盛图表所示。回顾19世纪中叶以来的历史可以发现,主要央行的货币政策无不受到突发市场事件和经济环境的影响。

以美国为例,但凡经济萧条或是大银行倒闭引起金融恐慌、世界大战后陷入经济萧条,美国的政策利率都会直线下滑。进入21世纪,“9•11”恐怖袭击和科技网络泡沫破灭也是美联储降息的推手。

从这个角度看,即使主要央行现在有的保持宽松的现状、有的继续发力、有的开始逐步为退出宽松铺路,也难保未来不会因为经济形势恶化或者突发的市场冲击,而继续踩着宽松的油门不放。

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Two Questions on Fixed Income from the Mailbag

Photo Credit: Ana Flávia Cador

From my readers:

What are your thoughts on Pimco’s new strategy for its flagship fund?

This concerns me because its one of the few “safe” funds in my company’s 401k plan.

I haven’t heard anyone critique this and thought you’d be the best that I know of.

It seems to me that its a disproportional risk. And that due to its size could potentially cause problems.

http://blogs.barrons.com/focusonfunds/2014/09/17/deriving-returns-at-pimco-total-return/

This is not a new problem with Pimco.  You can review these two articles here:

Pimco has always used a lot of derivatives, though for marketing reasons some of their funds have fewer derivatives, even as Pimco tries to follow the same strategies.  You can view this three ways:

  • It hasn’t had horrible effects in the past, so why worry now?
  • We haven’t had the market event that would test the limits of this strategy yet, but can it really get that bad?
  • Now that the bond market is more crowded, Pimco’s quantitative bond strategies have less punch.  They don’t have the same room to maneuver.  Like the London Whale, have they become the market?

I lean toward the last of these views.  When you manage so much money, it becomes difficult to wrench alpha out of the market because mispricings are limited, and it is difficult to keep your trades from moving the market.

You might want to split your “safe monies” in your 401(k) plan if you have other credible investments.  That said, the likelihood of a large disaster harming Pimco is small — but you could try to cover that risk by setting a relative stop loss where you would exit Pimco versus a similar maturity fund run by Vanguard.

Another letter:

I’m a fledgling portfolio manager and blog reader.  Would you care to comment on the bounce we’ve seen in Treasury rates this month? (28 bp on the 10-year month to date).  I just don’t get it.  I see global growth continuing to underwhelm, more monetary opiates out of Asia, persistent dovishness from the Fed and the arrival (?) of the Godot that has been ECB stimulus.  These circumstances plus ongoing geopolitical issues make me wonder why Treasury yields have not gone further down or at least held the line.  I know it might be mean reversion or a supply/demand phenomenon but do not feel qualified to say and would enjoy reading your perspective.

Separately, are you aware of any Readers’ Digest Condensed summaries of monetary policy in Europe since 2007?  My career is not so old and each time I read about their approach to sorcery I encounter yet another acronym of which I am ignorant.

Best and thank you!

Back when I was a corporate bond manager, and things were moving against me, I would do a few things:

  • Seek out contrary opinion, and see if there was something I was missing.
  • Go out to lunch for Chinese food, dragging my trading notebook, and a sheaf of research with me, and schmooze over the data while there was no Bloomberg terminal in front of me.

Now, my own current views are conflicted, because I view the global economy like you do.  There is no great growth anywhere.  Geopolitical events should lead to a Treasury rally, and sanctions should weaken growth prospects.  I’m still long a moderate amount of the iShares 20+ Year Treasury Bond (TLT), for myself and clients — it is difficult to see too much of a bear market with monetary velocity so weak.

That said, my recent 2-part series on the shape of the yield curve suggested that the curve shape was the sort where we often get negative surprises.  Despite the Fed’s confident mutterings that amount to little more than “Trust us!” the Fed has never been in a situation like this one and does not have the vaguest idea as to what it is doing.  They are proceeding largely off of untested theories that so far haven’t done much good or bad, aside from allowing the US Government to finance its deficits cheaply, thus cheating savers who deserve a better return on their money.

This is my thought: the slightest hint of tightening coming sooner moves the forward yield curve up, particularly in the 3-5 year region of the curve, but extending to 2- and 10-year notes as well.  But the questions remain how well growth holds up, how sensitive will the economy be to higher interest rates, and whether banks start genuinely lending against their expanded liabilities.

Personally, I expect rates to go lower after further growth disappointments, but I could be wrong, very wrong, so don’t be too bold here — scale into positions as you see opportunity.

Full disclosure: long TLT

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Two Questions on Fixed Income from the Mailbag was originally published on The Aleph Blog

Robert Shiller on the new normal

Robert Shiller on the new normal

Here’s Robert Shiller in Project Syndicate talking about the “new normal” of slow economic growth:

There is a name for the despair that has been driving discontent – and not only in Russia and Ukraine – since the financial crisis. That name is the “new normal,” referring to long-term diminished prospects for economic growth, a term popularized by Bill Gross, a founder of bond giant PIMCO.

The…

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Janet Yellen's "Double-Dissent, Exit Strategy" FOMC Press Conference - Live Feed

Having used the most words ever in an FOMC statement to describe the total shenanigans that they have created, Janet Yellen prepares to ‘meet the press’ to explain how ‘considerably’ well things are going and yet how much ‘considerably’ more is needed to be done… For now the meme is that this statement is more dovish than the previous one…

  • *PIMCO’S GROSS SAYS FED MORE DOVISH THAN HAWKISH NOW: CNBC

We suspect she will want to walk that back a little (before Nasdaq hits all-time record highs). And it isn’t just the Fed’s balance sheet, or total US debt, hitting daily highs, so is the number of words in the Fed’s statement:

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Pimco's head of emerging market equities Masha Gordon departs

By Chris Vellacott and Jennifer Ablan LONDON (Reuters) - Pimco’s London-based emerging market equities head Masha Gordon has left the giant U.S. asset management firm “to pursue other interests”, the company confirmed on Wednesday. In a statement, Pimco said Virginie Maisonneuve, who is the company’s Deputy Chief Investment Officer and Global Head of Equities, is running the emerging markets equity strategy following Gordon’s departure. Gordon joined Pimco in 2010 from Goldman Sachs’ asset management arm where she had worked on emerging markets equity strategies since 2003. … http://q.gs/7cqxV
PIMCO's Top Picks!

PIMCO’s Top Picks!

While it may be harder for investors to find high returns in this market, many good opportunities still exist with the right names, Pimco’s Mark Kiesel told CNBC Monday.

The best investments can be found in industries with superior growth, both near-term cyclical growth as well as long-term secular growth, and are in industries with pricing power, he noted.

“Above all, we’re looking for high…

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