If you follow the financial news, you are well aware that Bill Gross has left Pimco. In general, I do not follow the financial news, because it makes my brain hurt. But I’m well aware of Bill Gross. He’s a big bond trader with a huge reputation. I’ve never really understood it. People like him are never wizards. They are smart people, but usually depended upon a huge amount of luck. Let’s consider that for a moment, shall we?
The way bonds work is kind of weird because they work the opposite of the way that stocks do. Let’s suppose you have a stock and you think the stock price is going to go up. Then you hold onto it so that when it is worth more, you can sell for the higher price. But a bond just pays you a set amount of money. So if you think bond rates will go up, you want to sell. Let’s suppose you have a bond that pays you 2%. If you think the rate of new bonds will go up to 4%, you should sell your 2% bond now so that you can buy the new higher paying bonds when the rate goes up. That’s the kindergarten overview, which is about as much as I know. But it is enough to understand the politics.
Back in February 2011, Bill Gross decided that all of our government debt and the end of quantitative easing was going to cause US Treasury bond rates to go way up. If you follow economics at all, this must sound very familiar. Ever since Obama moved into the White House, conservatives have been screaming that the government is going to have to pay oh so much more to borrow money because… Well, to be honest, no one really has any good reasons for why this would be the case. For most people, it is just an excuse to do what they always want to do: cut Social Security. Bill Gross may be a smart guy, but I’m sure that he heard all of this. Or maybe he listens to Rush Limbaugh every day. I don’t know.
Regardless, at that time, Pimco’s Total Return fund had as much as 22% of its money invested in US Treasuries. Gross got rid of it all. The 10-year rate was then 3.7%. So Gross was betting big time that the rate was going to go up. It didn’t. Within eight months, the rate was down to 1.8%. (These are straight rates, not inflation adjusted.) It was around this time that Bill Gross wrote his angry column, The Ugly Side of Ultra-Cheap Money. You see, the problem wasn’t with his lack of understand of economics, it was those meanies at the Federal Reserve were keeping money too cheap.
This makes no sense. People either buy bonds or they don’t. And the quantitative easing that the Fed was doing was having at best a marginal effect on the economy anyway. But no matter. What’s really interesting is that Gross seems to think it is more important that people like him continue to make ridiculous sums of money rather than people like you and me have actual jobs. That is after all the trade-off. Most people would rather have jobs. But the super rich would rather get a great return on their bonds. Tighten that money supply so that people who already own things can make even more money off them!
But I was really struck by a couple of things in a column by Michael Hiltzik today, How Bill Gross and Pimco Got Too Big for Each Other. The first is just that what Gross did with Pimco is not that surprising, if you look at what happened to US Treasuries, “Since its launch in May 1987, the yield on the 10-year US Treasury bond has fallen from 8.61% to 2.52% and bond prices have risen commensurately.” Again, I don’t doubt that he’s smart and very good at his job. But as with most things, aren’t there at least a million people on the planet who would have done as well or better given his opportunities? That isn’t something I say because he works in finance. I’d say the same thing of just about every job.
More interesting is just what a weird person Gross has turned into:
At Pimco, the peculiarities of the 70-year-old Gross’ personal management style were beginning to overshadow his storied success as an investment manager. This was exposed by his widely remarked squabbling with Mohamed El-Erian, the economist who served as co-chief executive and co-chief investment officer with Gross and was once regarded as the latter’s heir-presumptive. El-Erian left Pimco earlier this year.
In the wake of El-Erian’s departure, stories leaked out about Gross’ imperious behavior — traders were forbidden to speak to him or even make eye contact on the trading floor, the Wall Street Journal reported. He brooked no discussion or debate about his trading strategies and became hostile to rising talents on the floor.
He didn’t want the little people making eye contact with him? That’s disgusting, but entirely typical of the super-rich. Gross was apparently paid $200 million per year. He has a net worth of over $2 billion. Here in the United States, we don’t have an aristocracy. He have “job creators.” Except they don’t create any jobs. And those like Bill Gross do everything they can to destroy jobs.