Pacific Investment Management Company (PIMCO) built itself into a bond market juggernaut over the past forty+ years, thanks to a soaring bond market, savvy marketing and the superior fixed income management skills of now-septuagenarian Bill Gross.
I’m an admirer of PIMCO’s organizational success. But, at the same time, I can’t help thinking that the firm’s “New Normal” campaign of the past several years is mostly marketing hype–and wrongheaded, at that. No matter what the economic or market conditions, the PIMCO conclusion is “Avoid stocks and buy more bonds!!!” For all but the most risk-averse investors, that’s bad advice. A first-rank firm should be better than that.
This is not what I want to write about, however. I just want to declare that I have a vaguely anti-PIMCO point of view.
PIMCO has been having problems recently. Mr. Gross has been underperforming. Clients–even long-term clients–have begun to head for the door. So, too, Mr. Gross’s putative successor, Mohamed El-Erian, who resigned from the firm citing irreconcilable differences between himself and Mr. Gross. Press reports suggest Mr. Gross had been beating Mr. El-Erian over the head with his lack of actual portfolio management experience as a reason for dismissing his questions and concerns.
Great gossipy stuff …but not what should concern us as investors.
Mr. El-Erian may not be an accomplished portfolio manager, but that doesn’t mean he isn’t a very shrewd individual. What would make him a high-profile, high-prestige, high-paying job, instead of just hunkering down, busying himself with his considerable marketing responsibilities and waiting Mr. Gross out?
El-Erian’s decision to leave, I imagine, came when he realized that this strategy wouldn’t work. Mr. Gross’s behavior wouldn’t change. And it could well have consequences that would tarnish Mr. El-Erian’s image, as well. After all, although apparently powerless, he was the co-Chief Investment Officer.
I imagine that because Mr. Gross has had such phenomenal success for so long with an aggressive strategy, he sees no reason to adopt a more conservative approach–even though, intellectually at least, he knows that the great bull market in bonds in the US that rewarded that behavior is over. So he continues to take extra risk. But that translates only into extra volatility in today’s world, not extra return. Think: Jon Corzine, or any number of prominent hedge fund managers.
Growth stock investors went through a similar existential crisis as the Internet bubble imploded in 2000, so it wouldn’t be surprising to me if this were the case with risk-oriented bond investors today.
My point (finally!): we know about Mr. Gross. How many invisible clones does he have, however, running banks’ bond trading desks, fixed income hedge funds or private equity operations? …what fallout will occur as/when underperformance forces all of them to change tack? Will it be six months of really ugly bond returns? How much will spill over into the equity markets?
I don’t think anyone has a clue. The maerkt goes up too far on irrational exhuberance and unlimited debt. It goes down when reality hits. It goes back up when the printing presses are turned back on. There is a strong belief, even among those who should know better, that stocks only go up. This is assisted by the selective process in the indices (any buggy whip manufacturers in the Dow?). The major problem with this debate is the restricted utility of stock prices. A booming S&P 500 or DJIA has not helped real investment, employment or debt. It’s all just a bunch of silly numbers making Goldman richer.