News Flash: Bill Gross thinks baseball players are lazy and fat, and he likes to eat Cracker Jack (which he insists should be written in the plural as “Jacks”) for an afternoon snack.
Just one day after Bloomberg reported that Gross lost 14% over four months in the world’s largest mutual fund, the tarnished bond investment star meandered his way through an investment outlook disguised as a boys-of-summer baseball essay, which only in the 12th of 13 long paragraphs advises worried fixed-income market players to invest in front-end yields and longer-dated TIPS.
Gross (left), the founder, managing director and co-CIO of PIMCO, wasted no time discussing the performance of his PIMCO Total Return Fund (PTTRX), and instead crafted an essay that used baseball as an extended metaphor to describe capitalism’s failure to create credit in the five years since Lehman Brothers crashed.
Morningstar estimates that net outflow for the PIMCO Total Return Fund for August was $7.7 billion, or 2.9% of the $262 billion in assets it held at the end of July, with estimated year-to-date outflows of $23.3 billion, or 8.2% of year-end 2012 assets. Bloomberg puts investment losses suffered by the fund at 14% in just the past four months. During that time, investors redeemed $26.4 billion.
Yet in “Seventh Inning Stretch,” Gross spends several paragraphs warming up with thoughts about Cracker Jack as an afternoon snack and modern-day relief pitchers’ “pot bellies that would make a sumo wrestler proud.” When he finally takes a swing at his true subject, it’s not so much an apology for PTTRX’s disappointing four months as an explanation of the disease of capitalistic excess, by way of an examination of the historical work of economist Hyman Minsky.
“During a crisis, Minsky’s solution was for Big Government to generate substantial fiscal deficits which in turn would stabilize corporate profits, financial asset prices and ultimately the real economy,” Gross writes. “In turn, and concurrently, he advocated the growth of Big Bank, by which he meant the ability of a central bank to lower interest rates and reserve requirements in order to stimulate private lending via the monetary channel. In combination, and if large enough, the two could stabilize asset prices and eventually produce an ‘old normal’ 3%–4% real growth rate in developed and presumably developing economies too.”
The problem now, Gross says, is that Minsky couldn’t have conceived of the point at which debt, deficits and interest rates would go to such extremes that the creation of credit itself, “which was and remains the heart of capitalism,” would be threatened. (And so, too, are credit-dependent funds such as PTTRX threatened by such excess.)
“No longer might the seventh inning stretch lead to a Coke, some Cracker Jacks and the resumption of the old ballgame,” Gross writes. “Instead, zero-bound interest rates and debt/GDP ratios in a majority of capitalistic economies would begin to threaten, not heal, the nature of finance and investment in the real economy.”
Debt-laden economies with near-zero-bound interest rates have become victims of their own excess, Gross adds, a condition that is more difficult to stabilize cyclically because Big Government and Big Bank have reached their limits, and private market investors with huge portfolios of their own have begun to leave the ballpark early: “Why invest in financial or real assets if bond prices could only go down, and/or stock prices could no longer be pumped up via the artificial steroids of QE?”
So what can an investor (including Gross himself) do to combat these macro forces?
Cash is no good, he writes, because it returns less than the already low rate of inflation, and he isn’t too thrilled about stocks, either, because “when the Fed stops the QE game, it seems that stocks might be at risk.”
Instead, Gross is putting his money on what he believes will soon be the nearly sole focus of central banks: front-end yields.
“If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark,” he writes. He also recommends longer-dated TIPS as insurance against accelerating inflation at some future time.
Cracker Jacks aside, Gross concludes, “the safer and perhaps most rewarding treat lies at the top with those front-end yields and inflation-protected securities based on our evolving age of central bank ‘forward guidance.’ I have a hunch that even Pete Rose would bet on this one.”
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