
Bill Gross – Banking/finance “permanently damaged” [pdf] - mn_joel
http://image.exct.net/lib/ff021270746501/m/8/32803+-+TL-Bill+Gross+Investment+Outlook_March+2016_exp+03.30.17.pdf
======
Animats
Yes, we have a capital glut and no place to put it that will earn a reasonable
return.

What's the limiting factor on investment? It's not capital; there's a glut of
that. It's not land; outside a few big cities, there's plenty of space. It's
not labor; there's no labor shortage. It's not management; there are lots of
unemployed managers with good track records. It's not manufacturing capacity;
there's plenty of idle capacity and more could easily be built if needed.

It's demand. We're out of demand. US workers are spent out and can't buy more.
This stalls out the whole economy.

This is a new thing, historically. For most of history, the problem was making
enough stuff. That's now a solved problem. In the developed world, just about
anything you can consume can be delivered to your door within hours or days.

Market-based capitalism treats labor as a cost, not an output. (The measured
output is return on investment.) As technology progresses, more work
previously done by humans is done by machines. This reduces the relative value
of labor.

But buying power comes from labor. As the buying value of labor declines (in
the US, it peaked in 1973), the whole economy winds down.

We have no clue how to handle this.

An unanswered question: is there another stable point in this system? If wages
were forced up above their economic value, by legislation, minimum wages, or
unions, would overall economic output increase or decrease?

~~~
roymurdock
We do know how to increase aggregate demand. The formula:

    
    
      D = C + I + G + NE
    
      D = Demand
      C = Consumer spending on private goods and services
      I = Business investment in capital goods
      G = Government expenditures on public goods & services
      NE = Net exports (Exports - Imports)
    

Right now there is a huge economic opportunity to increase G due to
historically low interest rates (cheap to raise debt) and stagnant wages
(cheap labor). The economics are clear, but the way forward through fiscal
policy roadblocks is not.

Read for more details:
[https://sites.google.com/site/kocherlakota009/home/policy/th...](https://sites.google.com/site/kocherlakota009/home/policy/thoughts-
on-policy/2-19-16)

~~~
wheaties
Only if G isn't already overspent. In the US and several counties G is well
over budget and has been for a long time. This combined with large liabilities
coming down the pipeline and G should not be something we look to solve the
issue.

~~~
jbooth
Infrastructure spending in the US is backlogged for decades. Hard to argue
we're overspending on that when we see a major bridge collapse disaster every
5 years.

Bring that schedule forward through issuing more debt at record-low interest
rates, and bang, you've solved several problems at once. People have jobs,
they spend money, that helps the economy, and we get the infrastructure out of
it as well.

You'll even get some of that inflation that's been missing during the QE
period, while all the fed economists looked at their macro textbooks in utter
confusion.

~~~
jpadkins
That is just a misallocation of funds, not a lack of budget. I think the
federal government can find a way to fix bridges with a 4 Trillion dollar
budget.

~~~
jbooth
So where would you reallocate from?

Calling it '4 trillion' is technically correct but I find that taking out the
passthru social programs (SS, medicare, medicaid) leaves you with the real
number of what's available to allocate differently. Hard to say that we could
pay for something out of SS benefits while still collecting FICA tax, and if
you want to eliminate the program entirely that's a different discussion.

------
chollida1
So if you don't know who Bill Gross is:

[https://en.wikipedia.org/wiki/Bill_Gross](https://en.wikipedia.org/wiki/Bill_Gross)

He's been called the bond king and his old firm PIMCO was at one point the
biggest bond trading firm in the world. Over the past 5 years PIMCO's sold
volatility to the rest of hte world.

He was booted out of PIMCO a couple of years ago and he's had a really tough
time getting his new fund at Janus going.

As you'll see from the PDF, he's a very eloquent writer and is always on TV as
a markets expert.

Just keep in mind when reading that everyone who runs a fund is always talking
their own book when they talk in public. He might be right with his pessimism
but keep in mind that before he released this he has almost certainly put on a
position that will be benefited by people reading his work and believing him.

~~~
mathattack
_Just keep in mind when reading that everyone who runs a fund is always
talking their own book when they talk in public. He might be right with his
pessimism but keep in mind that before he released this he has almost
certainly put on a position that will be benefited by people reading his work
and believing him._

Yes - he has two goals... The more people who pile in to his investments, the
better the returns look. (Until everyone piles out at the same time) Also, he
gets paid on Assets Under Management, so these documents are marketing to get
more money to invest.

~~~
stocktech
>The more people who pile in to his investments, the better the returns look

That's not how it works.

~~~
michaelt
If you have a fund investing in foo, and you attract enough investors that
demand for foo increases the price by 10%, your fund posts a 10% return.

Of course, if all your investors tried to realise those gains by selling their
investments, the price of foo would drop again.

~~~
stocktech
Are you arguing that investors will sidestep Bill and invest directly in the
bonds? If that was the case, I don't know how PIMCO manages trillions.

The reality is that he wants to attract investors to his fund. Obviously,
accounting doesn't include that in his returns.

~~~
mathattack
It's both. He wants people to invest in Janus, and he wants other large money
managers to copy his idea with a slight lag. (Drive up the price of his
positions after he's in, and leave slightly after he gets out)

------
roymurdock
_The secret in a negative interest rate world that poses extraordinary
duration risk for AAA sovereign bonds is to (1) keep bond maturities short and
(2) borrow at those attractive yields in a mildly levered form that provides a
yield (and expected return) of 5-6%. Janus unconstrained portfolios attempt to
do that and are inching to the head of its asset universe day by day. No
guarantees. The advice about borrowing at low yields above obviously has to be
matched with investments that are less volatile and least affected by the
evolving changes of our monetary system. But it can be done. Closed end funds
at deep discounts, highly certain acquisition arbitrage stocks, as well as
volatility sales at tails are general examples._

Gross spends 5 pages exposing the flaws of the current financial/economic
investing climate, then does a 180 and says the model is fine, and that Janus
has some vague advantage in reliably finding a) discounts b) arbitrage and c)
tail-end volatility - short term profit centers that all banks are searching
frantically for right now.

Seems like a rather strange and disconcerting investment outlook, with Gross
ultimately resigning to do his best within a broken system. Does not bode well
as an outlook for actual reformation of the system or a call to action in this
direction.

~~~
mathattack
It's called "Talking your book". :-)

The idea of borrowing cheap in one place and investing for higher yield isn't
new. Banks and investors borrowed German bonds to invest in Greek bonds, and
investors borrowed in Japan to invest in Iceland. It works for a while until
it doesn't. When you're levered the end goes from bad to worse, and usually
has cyclical implications. (Forced sales to make margin calls depresses the
stocks even more as people rush the exits)

~~~
fensterblick
"Talking your book" == putting money where your mouth is. Bill Gross,
especially when he was at PIMCO running the world's largest bond fund, had to
invest in what he believed in. They couldn't market themselves out of a losing
position.

~~~
mathattack
I respectfully think you have it backwards. Generally financiers put their
mouth where their money is, not the other way around. (They talk up where they
are investing, not choosing to back their ideas up with investments) They're
in the investment business, not the talking business. This isn't a comment on
their ethics, just their incentives. Talking their book helps them in winning
positions too - it can provide greater liquidity.

If it was positive NPV for them to keep quiet, every investor would.

~~~
drumdance
Maybe if you're Bill Gross this is true, but the vast majority of fund
managers never get on TV to talk their book in the first place. Just like
(good) VCs have an investment thesis, most fund managers do too.

~~~
mathattack
Going public can be a risky strategy. You only want to do it when you benefit
from the exposure. You do it after you're already in the position and won't
want to get more. (For instance, "I am long High Yield credit") If you're
still accumulating something harder to access ("I'm buying Inverse Mortgages")
then you don't want to be public. You also hold yourself up to be second-
guessed. It's a tradeoff.

CNBC and Bloomberg TV are full of talking heads all day long, though they only
scratch the surface on potential fund managers.

------
hackuser
_The recent collapse in worldwide bank stock prices can be explained not so
much by potential defaults in the energy /commodity complex, as by investor
recognition that banks are now not only being more tightly regulated, but that
future ROE’s will be much akin to a utility stock. Observe the collapse in
bank stock prices ... Banking/finance seems to be either a screaming sector
ready to be bought or a permanently damaged victim of write-offs, tighter
regulation and significantly lower future margins. I’ll vote for the latter._

I don't want to make one paragraph representative of an industry, but it
matches some other things I've read: He's omitting the massive fraud and
incomptence by that sector - on an historic scale - which caused the largest
economic calamity in several generations, the Great Recession of 2008 (and
they and we were saved from a much worse calamity by central bankers and tax-
payers). Yet he seems to forget that minor detail and calls the financial
sector a "victim" and blames the regulation that will prevent another
catastrophe!

It's as if the first catastrophe never happened. Perhaps that psychology, as
much as anything, explains the financial sector's problems. You also see it
when people in that industry complain about being 'demonized', as if they
totally deny the reality for which they are criticized (and for which they've
gotten off easy: bailed out by the taxpayers ad government, nobody in jail,
few went out of business, and since then have returned to record profits while
much of the economy stagnates).

------
bwanab
In my first job in finance, I worked for a professor who was developing what
at the time became the first model to accurately price bond options. As we
visited potential clients, one of the common complaints from their quants was
that the model allowed for the possibility of negative interest rates. Alas,
that was back in the days of 10+% rates in the US so I guess negative rates
seemed like a pretty remote chance.

~~~
chollida1
My email is in my user details. I'd love to hear about the models you helped
develop.

I wasn't in the industry in the 80's due to being way too young, but I've gone
through the early work that was done in the early 80's on bond option pricing
and some of the newer papers that have come out in the mid 2000's.

Would love it if you could point me to the research you worked on.

------
chishaku
A few commenters are noting that Gross is just talking his book with this
pessimistic outlook.

To be fair, he's had a consistently pessimistic long view over the years.

2010:

Several months ago I rhetorically asked whether it was possible to get out of
debt crisis by increasing debt. Yes – was the answer, but it was a qualified
yes. Given that initial conditions were favorable – relative low debt as a %
of GDP, with the ability to produce low/negative short-term policy rates and
constructively direct fiscal deficit spending towards growth positive
investments – a country could escape a debt deflation by creating more debt.
But those countries are few – the U.S. among perhaps a handful that have that
privilege, and investors, including PIMCO, have strong doubts about U.S.
fiscal deficits leading to strong future growth rates.

[https://www.pimco.com/insights/economic-and-market-
commentar...](https://www.pimco.com/insights/economic-and-market-
commentary/investment-outlook/three-will-get-you-two-or-two-will-get-you-
three)

2011:

Bond yields and stock prices are resting on an artificial foundation of QE II
credit that may or may not lead to a successful private market handoff and
stability in currency and financial markets. 15% gratuities may lie ahead, but
more than likely there is a negative two-bit or even eight-bit tip lying on
the investment table. Like I did 45 years ago, PIMCO’s not sticking around to
see the waitress’s reaction.

[https://www.pimco.com/insights/economic-and-market-
commentar...](https://www.pimco.com/insights/economic-and-market-
commentary/investment-outlook/two-bits-four-bits-six-bits-a-dollar)

2012:

We are in a “New Normal” world where the negative effects of private sector
deleveraging are only being weakly addressed by monetary and fiscal
authorities. If so, then Treasury yields should stay low and my money market
fund should continue to read “.01%.” The “cult” of equity – or better yet the
cult of “total return” – for both bonds and stocks – is over, if that
definition presumes a resumption of historical patterns anywhere close to
double digits. The era of financial repression continues.

[https://www.pimco.com/insights/economic-and-market-
commentar...](https://www.pimco.com/insights/economic-and-market-
commentary/investment-outlook/three-will-get-you-two-or-two-will-get-you-
three)

2013:

What if zero-bound interest rates define the end of a total return epoch that
began in the 1970s, accelerated in 1981 and has come to a mathematical dead-
end for bonds in 2012/2013 and commonsensically for other conjoined asset
classes as well? What if a future epoch favors lower than index carry or
continual bouts of 2008 Lehmanesque volatility, or encompasses a period of
global geopolitical confrontation with a quest for scarce and scarcer
resources such as oil, water, or simply food as suggested by Jeremy Grantham?
What if the effects of global “climate change or perhaps aging demographics,”
substantially alter the rather fertile petri dish of capitalistic expansion
and endorsement? What if quantitative easing policies eventually collapse
instead of elevate asset prices? What if there is a future that demands that
an investor – a seemingly great investor – change course, or at least learn
new tricks? Ah, now, that would be a test of greatness: the ability to adapt
to a new epoch.

[https://www.pimco.com/insights/economic-and-market-
commentar...](https://www.pimco.com/insights/economic-and-market-
commentary/investment-outlook/a-man-in-the-mirror)

2015:

This is all ending. The successful portfolio manager for the next 35 years
will be one that refocuses on the possibility of periodic negative annual
returns and miniscule Sharpe ratios and who employs defensive choices that can
be mildly levered to exceed cash returns, if only by 300 to 400 basis
points....

I wish to still be active in say 2020 to see how this ends. As it is, in 2015,
I merely have a sense of an ending, a secular bull market ending with a
whimper, not a bang. But if so, like death, only the timing is in doubt.
Because of this sense, however, I have unrest, increasingly a great unrest.

[https://www.janus.com/bill-gross-investment-
outlook/may](https://www.janus.com/bill-gross-investment-outlook/may)

------
draw_down
Translation: tough shit, younger folks. Old folks get the wealth and the land,
we get debt repayments and unemployment.

------
dopamean
Bill Gross has lost the plot.

------
pfortuny
So now that the basic "obvious" assumption that interes rates are nonnegative
(an assumption of every financial model until 3 years ago) has been proved
wrong, we all cry "foul".

Just another finance "axiom" going burst because human beings are complicating
things... Like in physics... oh, wait! It took 150 years to improve Newton
(not precisely debunk him).

