Bill Gross, the founder of the world’s largest bond fund, PIMCO, is out with his new monthly market commentary. His subject: government involvement in the world of finance and investment. Below is a little of what he had to say. I have highlighted in bold the bits I feel most important.
A photograph of Bernard Baruch looms ominously on the far corner of my PIMCO office wall. Vested, with pocket watch and protruding chin thrust prominently toward the observer, this well-known financier of the early 20th century at times appears almost alive. It was Baruch who almost schizophrenically cautioned investors during the stock market’s speculative blow-off in the late 20s that “two plus two equals four and no one has ever invented a way of getting something for nothing.” Three years later during the depths of economic and financial gloom he opined just the opposite: “Two plus two still equals four,” he said, “and you can’t keep mankind down for long.” Homo sapiens, as it turns out, stayed on the deck for much longer than Baruch envisioned – some historians having suggested that it was only war and not the rejuvenating economic spirits of a capitalistic peace that eventually turned the tide – but his words, first of caution and then of optimism, typify the way that fortunes were, and still are, made in the financial markets: Get your facts straight, apply them to the current valuation of the market, take decisive action, and then hold on for dear life as the mob hopefully comes to the same conclusion a little way down the road.
I stare into Baruch’s eyes almost every day – not that we are simpatico or kindred spirits of any sort – but when I do, it’s as if I can hear him almost whispering to me over the portals of time: “Two plus two,” he commands, “two plus two, two plus two.” The message – fortunately, I suppose – ends there. If you thought I was receiving market calls from the ghost of Bernard Baruch I suspect PIMCO would have far fewer clients than we do today. But his lesson nonetheless remains clear: separate reality from exuberance either on the up or the downside and you have the ingredients for a successful market strategy.
Through my years here at PIMCO there have been numerous demarcation points where Baruch’s whispers almost turned into screams. Two plus two screamed four in September of 1981 with long-term Treasury yields approaching 15%, and two plus two boomed four in 2000 when the Dot Coms rose to prices that discounted the hereafter instead of the next 30 years. Similarly, 2007 was a screaming mimi with the subprimes – if only because the liar loans and no-money-down financing were reminiscent of a shell game, Ponzi scheme, or some other type of wizardry that was bound to lead to tears.
2009 is a similar demarcation point because it represents the beginning of government policy counterpunching, a period when the public with government as its proxy decided that private market, laissez-faire, free market capitalism was history and that a “private/public” partnership yet to gestate and evolve would be the model for years to come. If one had any doubts, a quick, even cursory summary of President Obama’s comments announcing Chrysler’s bankruptcy filing would suffice. “I stand with Chrysler’s employees and their families and communities. I stand with millions of Americans who want to buy Chrysler cars (sic). I do not stand…with a group of investment firms and hedge funds who decided to hold out for the prospect of an unjustified taxpayer-funded bailout.” If the cannons fired at Ft. Sumter marked the beginning of the war against the Union, then clearly these words marked the beginning of a war against publically perceived financial terror.
Make no mistake, PIMCO had no dog in this fight, and has infinitesimally small holdings of GM bonds as well. In turn, the rebalancing of wealth from the rich to the “not so rich” is a long overdue reversal, one that I have encouraged in these Outlooks for at least the past several years. But promoting and siding with the majority of the American public in their quest for change does not mean that as investors, we at PIMCO stand star-struck like a deer in front of the onrushing headlights, doing nothing to protect clients. Our task is to identify secular transitions and to preserve and protect capital if indeed it is threatened. Now appears to be one of those moments.
This is a new era of big government and re-regulation. What does all this portend for the economy and investing. Gross says it means slower growth and higher risk premia for financial assets in the U.S. But, Gross does not believe this is a bad thing at all – it is a necessary change. I agree 100% (see my June post making exactly the same argument). One could see this train coming from a mile away.
The full text of his missive is available at the link below.
Source 2 + 2 = 4 – Pimco Investment Outlook, May 2009
Originally published at Credit Writedowns and reproduced here with the author’s permission.