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Bill Gross' Latest Investment Outlook
From PIMCO:
Lovin’ Spoonful
There’s a surfeit of instructionals on the secret to investing, ranging from Investing for Dummies to The Intelligent Investor.
My bookshelves at home are full of them, and I’ve learned or at least
absorbed something from many. Experience is a great teacher, but the
foundation of civilization, and too investing, is also dependent upon
the capsulization of the experiences of others and that is where books
have played a formative part in my own career. Still, there’s never
been a book called “Common Sense for Dummies,” which would be required
reading in my investment class if either existed. That’s an oxymoron to
begin with, though, which points to the obvious – that common sense
cannot be taught. It’s like sex appeal – you either have it or you
don’t, although both are subject to relative judgments of the observer.
What is commonsensical to one investor may seem ludicrous to someone
else. And even in cases where history has validated the irrationality
of one investment idea or another – the subprime frenzy being perhaps
the most recent – there are questions of timing. Michael Lewis’s book The Big Short
is not only a tale of the validation of common sense, but of its
delicate shelf life. Most of Lewis’s heroes were almost all closed out
by their own clients before their logic blossomed and their profits
multiplied.
I’ve written on this topic before – an Investment Outlook in
November of 2008 spoke to the necessity for a CQ – Common Sense
Quotient – in addition to an IQ in order to succeed in investing.
Actually, if a chef were to concoct a gourmet investment recipe, he
would likely blend a teaspoon of intelligence with a tablespoon of common sense, but the same proportions would probably not apply in other professions. I can visualize the mad scientist irrationally
pursuing an obvious dead-end only to – poof – incredibly discover
penicillin or a cure for the common cold. Not so with investing,
because prices are a delicate combination of mathematical value and
human nature – something that quantitative scholars and practitioners
rejected to their eventual ruin in their pursuit of “efficient”
markets. And human nature, it seems, cannot be so easily modeled nor
intelligently divined. It feeds on itself quite frequently, leading to
accentuated periods of “greed” and “fear” that tend to be labeled
“bubbles” or “black swans,” respectively. It is during those periods
that a tablespoon of common sense is just the recipe for investment
success.
Hanging on the wall above my office credenza is a portrait of
Bernard Baruch, who authored the quotation, “Two plus two equals four
and no one has ever invented a way of getting something for nothing.”
Well, we’ve been there recently, with Dot Coms and subprimes and the
financed-based prosperity of the past several decades. He also said,
“Two plus two equals four, and you can’t keep mankind down for long.”
Been there too, it seems, and the last 12 months are an apt example.
Whatever the future holds, remember that a tablespoon is larger than a
teaspoon, and that CQ beats IQ most of the time in the investment
world. “Two plus two equals four” needs a lot of CQ, but requires only
a second grader’s IQ.
In all of the hullabaloo over Goldman Sachs, a CQ analysis of the
rating services – Moody’s, Standard and Poor’s and Fitch – has escaped
front-page headlines. Not that a number of observers haven’t been on to
them for a few years now, including yours truly. Back in July of 2007
some of you will remember my description of their role in the subprime
crisis. “Many of these good-looking girls are not high-class
assets worth 100 cents on the dollar. You were wooed, Mr. Moody’s and
Mr. Poor’s, by the makeup, those six-inch hooker heels and a ‘tramp
stamp.’” Now, it seems, I was a little long on humor and a little short
on the reality. Tramp stamp and hooker heels do not begin to describe
the sordid, nonsensical role that the rating services performed in
perpetrating and perpetuating the subprime craze, as well as reflecting
the general deterioration of investment common sense during the past
several decades. Their warnings were more than tardy when it came to
the Enrons and the Worldcoms of ten years past, and most recently their
blind faith in sovereign solvency has led to egregious excess in Greece
and their southern neighbors. The result has been the foisting of AAA
ratings on an unsuspecting (and ignorant) investment public who bought
the rating service Kool-Aid that housing prices could never really go
down or that countries don’t go bankrupt. Their quantitative models
appeared to have a Mensa-like IQ of at least 160, but their common
sense rating was closer to 60, resembling an idiot savant with a full
command of the mathematics, but no idea of how to apply them.
But I come not to bury the rating services, but to dismiss them.
To tell the truth, they can’t really die – they serve a necessary and
even productive purpose when properly managed and more tightly
regulated. A certain portion of the investment world will always need
them to “justify” the quality of their portfolios. Governments and
regulatory bodies say so – it’s the law. In 1975 the SEC officially
designated the aforementioned three rating agencies as “Nationally
Recognized Statistical Ratings Organizations.” For all intents and
purposes, that meant that regulated financial intermediaries such as
banks, insurance companies and importantly pension funds would be
guided by the sanctity of their ratings.
Such services, however, while necessary in the ongoing scheme of
financial regulation, are overpriced as well as subject to the
influence of the issuer, which in turn muddles their minds and clouds
their judgment to say the least. E-mails from S&P employees have
been cited discussing massaging subprime statistics in order to
preserve S&P’s market share relative to their two competitors.
PIMCO’s Paul McCulley said it as only he can – “[The breakdown of our
financial system] was about the invisible hand having a party, a
non-regulated drinking party, with rating agencies handing out the fake
IDs!”
Still, as future bond issuers belly up to the bar with their
rating agency seals of approval, it is incumbent on the buying public
to treat those IDs with a healthy skepticism. Firms such as PIMCO
with large credit staffs of their own can bypass, anticipate and front
run all three, benefiting from their timidity and lack of common sense.
Take these recent examples for instance: S&P just this past week
downgraded Spain “one notch” to AA from AA+, cautioning that
they could face another downgrade if they weren’t careful. Oooh – so
tough! And believe it or not, Moody’s and Fitch still have them as
AAAs. Here’s a country with 20% unemployment, a recent current account
deficit of 10%, that has defaulted 13 times in the past two centuries,
whose bonds are already trading at Baa levels, and whose fate is
increasingly dependent on the kindness of the EU and IMF to bail them
out. Some AAA!
Now let’s go the other way. GMAC, that only too recently near-bankrupt finance company, carries recently upgraded
B ratings from the rating services. Profiles in courage for all three,
I say! I mean the U.S. government has injected $20 billion of capital
and owns 65% of the company. It’s the auto industry’s equivalent of
FNMA and FHLMC, except those are AAA and GMAC is B with a “positive
outlook!” For that, you can buy a GMAC two-year bond at 6½% (8% with
what are called “smart notes” that Investment Outlook readers can buy through their broker), while you receive only 1.2% at Fannie and Freddie. Vive la différence!
No one or no one company has a monopoly on investment or ratings
expertise. Second grade intelligence and a high CQ are a rare
combination for an individual rating agency or an investment management
firm as well. Still, the rating agencies in recent years have displayed
little of either. In addition, they have brazenly sold their
reputations for unbiased judgment to the very companies they were
standing in judgment upon. Don’t bury them however; like vampires in
the dead of the night they will outlast us all. Those looking to profit
at their expense, however, will dismiss them. They no longer
serve a valid purpose for investment companies free of regulatory
mandates that can think with a teaspoon of IQ and a tablespoon of CQ.
William H. Gross
Managing Director
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Bill Gross is doing his part to produce revisionist history where amazingly his hands are clean and he warned everyone for years about the systemic problems. My hero.
Bill Gross's bull shit CQ is always on a sliding scale.
Ok, so Bill is unambiguously saying the ratings agencies are broken and that all kinds of debt is largely mispriced.
So why is the herd continuing to race to the cliff? Sure, some of this is book talking but c'mon -- PIMCO can't exaclty turn on a dime.
The man can write...
WB7
If you're in Hong Kong, how is it that you haunt the boards during US daylight hours? Unless you're a vampire, which would explain the avatar. :>)
http://en.wikipedia.org/wiki/Mr._Vampire
Sleep is for wimps...
GOLDMAN TRAMP IN HEALS:
http://williambanzai7.blogspot.com/2010/05/tramp-stamp-and-hooker-heals....
"The man can write..."
Yes, if you like long-winded explanations of otherwise simple points. (sigh)
He could have just said rating agencies are a fool's whorehouse. But that would have been less entertaining.
Some people want 60 minutes of foreplay before climax and some just want a climax and a cigarette, not necessarily in that order. :>)
Blather. Gross is a fascist.
Great point, although I disagree with most other things that come out of his mouth.
Here's where "the smart money" goes after getting those big Wall St bonuses. They really are out to save the world with their mass fortunes. Feed the hungry, help the sick and provide new jobs? Or just sit and stare at the wall?
http://news.yahoo.com/s/ap/20100505/ap_on_en_ot/us_picasso
While I'm certain there are art lovers everywhere who could expound on the virtues of this or that piece of art, much (not all but much) expensive art of this caliber, when bought by private collectors, is bought for the "look-at-my-pretty-(expensive)-dick" value.
The real reason for these purchases usually comes out during the divorce.
Fraud and greed will trump common sense every time.
Common sense is belittled because being connected is the only thing that matters. Gross wants people to thinks he's made it on savvy, yeah, right. He's plugged into the fascist machinery.
He's certainly up ther pretty high on the Ponzi food chain.
and the greatest example of Common Sense is when you realize that no one else has any, and you ride with the herd, or you get trampled.
The conundrum is that in everyday life, common sense lets you see things as they are , and act accordingly. With trading you must see things as you think other people without common sense see it , and act accordingly.
Exactly, the market can be irrational longer than you are solvent. This is a hard lesson for those of us who are always right but are a couple years too early!!!
the trick is to be just in front of the herd w/out being trampled.
I've been reading Intelligence for Dummies and getting a lot out of it.
I was going to write "procrastination for dummies" when I get around to it. I'm in no hurry because most people will put off the purchase.
+100
Tommy: Let's think about this for a sec, Ted. Why would somebody put a guarantee on a box? Hmmm, very interesting.
Ted Nelson, Customer: Go on, I'm listening.
Tommy: Here's the way I see it, Ted. Guy puts a fancy guarantee on a box 'cause he wants you to feel all warm and toasty inside.
Ted Nelson, Customer: Yeah, makes a man feel good.
Tommy: 'Course it does. Why shouldn't it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted?
[chuckles until he sees that Ted is not laughing]
Ted Nelson, Customer: [impatiently] What's your point?
Tommy: The point is, how do you know the fairy isn't a crazy glue sniffer? "Building model airplanes" says the little fairy; well, we're not buying it. He sneaks into your house once, that's all it takes. The next thing you know, there's money missing off the dresser, and your daughter's knocked up. I seen it a hundred times.
Ted Nelson, Customer: But why do they put a guarantee on the box?
Tommy: Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I got spare time. But for now, for your customer's sake, for your daughter's sake, ya might wanna think about buying a quality product from me.
Wait... didn't Goldman trick us all into thinking that real estate was going to keep going up forever?
Is there really a government protected oligopoly of debt ratings firms that most institutional pension fund holdings are required to be blessed by?
Lewis's book about investors who bet against large the RMBS bubble is "a tale of the validation of common sense"?
Did "Tyler" actually read this crazy talk?
Mildred, the smelling salts!
Bill Gross doesn't go down, he goes down under....
http://www.youtube.com/watch?v=ZSvBLPcvs84
"Women to the left of me, women to the right."
Back when I was much younger I didn't have much money but I had plenty of women for company. Now that I'm much older I need plenty of money to have some women for company. And the slope of this curve is down. :>)
There is a blue pill you can take which will cure that down sloping curve. So I've been told.
He can write--but it's not easy for "the Buddist" to "Go Rogue." Obviously double digit interest rates are the "new AAA" in Europe. Only a bond trader would complain about that. Damn coupon clippers....Why not just come out and say "let them eat cake"?
You have to admit, there's no one better than Gross at gift wrapping wisdom and a pretty bow around selling his own book. Regardless... He's right about GMAC 'smart bonds' being one hell-of-a buy.
Bill's just being the Apostle of the Obvious.
Caveat Emptor...
Not a lot new here, but he does highlight an issue that ought to be getting more attention in light of the financial reform legislative debate: that perverse incentives created by half-baked regulations helped blow the subprime bubble. When the government designates a handful of companies as officially sanctioned gatekeepers between regulated pension funds and the entire universe of investment options, those handful of companies have an overwhelming incentive to sell access through their gate corruptly. Washington loves to write regulations; it's just not much for thinking through how those regulations will steer market participants, or for peristent monitoring of their regulations' effects.