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Bill Gross On Football As Investing, And Why Everyone Now Plays Defense

Tyler Durden's picture





 

Bill Gross' monthly letters are always a fresh source of jovial imagery, although the bond king may have outdone himself in his latest monthly letter which collapses the principles of investing onto the football field: "My point about pigskin offense and defense is the perfect metaphor for the world of investing as well. Offensively minded risk takers in the markets have historically been the ones who have dominated the headlines and won the hearts of that beautiful gal (or handsome guy).... Canton, however, has an approximately equal number of defensive in addition to offensively positioned inductees, so there must be a universally acknowledged role for both sides of the scrimmage line. What fan can forget Mean Joe Greene, Deion Sanders or Mike Ditka? The old, now politically incorrect showtune laments that “you gotta be a football hero, to fall in love with a beautiful girl,” but football and any of life’s heroes can play on either side of the line, it seems." And it only gets better. While at its heart Gross' latest is merely yet another lamentation against the confines of the financially suppressive regime that arises from ZIRP and ends with what many expect is a whimper (when in reality they all forget to factor in the facility of hitting the CTRL+P keys as many times as necessary), the flourish of abandon this time around is palpable. We would not be surprised to soon see Gross hang up his offensive (and defensive) jersey, and sit back and enjoy the coming lunacy from a distance (but hopefully not before he allocates just a little to the Ron Paul SuperPAC).

In the meantime, in the context of football, he shares the PIMCO investing approach pre-ZIRP and post-ZIRP:

PIMCO Offensive Strategy 1981 – 2011
 
Ready, Set, Hut 1, Hut 2 –
  1. Recognize downward trend in interest rates and scale duration accordingly.

    A. Emphasize income and capital gains. PIMCO Total Return Strategy.
    B. Utilize prudent derivative structures that benefit from systemic leveraging – financial futures,
    swaps (but no subprimes!)
    C. Combine A and B along with careful bottom-up security selection to seek consistent alpha.

PIMCO Defensive Strategy 2012 – ?

Ready, Set, Hut, Hut, Hut –

  1. Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible.

    A. Emphasize income we believe to be relatively reliable/safe.
    B. De-emphasize derivative structures that are fully valued and potentially volatile.
    C. Combine A and B along with security selection to seek consistent alpha with admittedly lower nominal returns than historical industry examples.

All this and much more below:

Defense (from Bill Gross)

 

  • Over the past 30 years, an offensively minded Federal Reserve and their global counterparts were printing money, lowering yields and bringing forward a false sense of monetary wealth.
  • Successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills.
  • The PIMCO defensive strategy playbook: Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible. Emphasize income we believe to be relatively reliable/safe; seek consistent alpha.
They say defense wins Super Bowls, but the Mannings, Bradys and Montanas of gridiron history are testaments to the opposite. Putting points on the board, especially in the last two minutes, has won more games than goal line stands ever have, even if the scoring has been done by the field goal kickers, the names of whom have been confined to the dustbins of football history as opposed to the Hall of Fame in Canton, Ohio. Canton, however, has an approximately equal number of defensive in addition to offensively positioned inductees, so there must be a universally acknowledged role for both sides of the scrimmage line. What fan can forget Mean Joe Greene, Deion Sanders or Mike Ditka? The old, now politically incorrect showtune laments that “you gotta be a football hero, to fall in love with a beautiful girl,” but football and any of life’s heroes can play on either side of the line, it seems.
My point about pigskin offense and defense is the perfect metaphor for the world of investing as well. Offensively minded risk takers in the markets have historically been the ones who have dominated the headlines and won the hearts of that beautiful gal (or handsome guy). Aside from the rare examples of Steve Jobs and Bill Gates, however, the secret to getting rich since the early 1980s has been to borrow someone else’s money, throw some Hail Mary passes and spike the ball in the end zone as if you had some particular genius that deserved monetary rewards 210 times more than a Doctor, Lawyer or an Indian Chief. Nah, I take that back about the Indian Chief. The Chiefs, at least, have done pretty well with casinos these past few decades.
Still, the primary way to coin money over the past 30 years has been to use money to make money. Although the price of it started in 1981 at a rather exorbitantly high yield of 15% for long-term Treasuries, 20% for the prime, and real interest rates at an almost unbelievable 7-8%, the gradual decline of yields over the past three decades has allowed P/E ratios, real estate prices and bond fund NAVs to expand on a seemingly endless virtuous timeline. Books such as “Stocks for the Long Run” or articles such as “Dow 36,000” captured the public’s imagination much like a Montana to Jerry Rice pass that always seemed to clinch a 49ers victory. Yet an instant replay of these past few decades would have shown that accelerating asset prices weren’t due to any particular wisdom on the part of academia or the investment community but an offensively minded Federal Reserve and their global counterparts who were printing money, lowering yields and bringing forward a false sense of monetary wealth that was dependent on perpetual motion. “Rinse, lather, repeat – Rinse, lather, repeat” was in effect the singular mantra of central bankers ever since the departure of Paul Volcker, but there was no sense that the shampoo bottle filled with money would ever run dry. Well, it has. Interest rates have a mathematical bottom and when they get there, the washing of the financial market’s hair produces a lot less lather when it’s wet, and a lot less body after the blow dry. At the zero bound, not only are yields rendered impotent to elevate P/E ratios and lower real estate cap rates, but they begin to poison the financial well. Low yields, instead of fostering capital gains for investors via the magic of present value discounting and lower credit spreads, begin to reduce household incomes, lower corporate profit margins and wreak havoc on historical business models connected to banking, money market funds and the pension industry. The offensively oriented investment world that we have grown so used to over the past three decades is being stonewalled by a zero bound goal line stand. Investment defense is coming of age.
 
This transition is not commonly observed, although it is relatively easy to prove statistically and even commonsensically. Take for instance the rather quizzical notion that lower yields must produce an equal number of winners and losers since there is a borrower for every lender and the net/net therefore should have no effect on the real economy or its financial markets. Chart 1 shows that since 1981, which marks the beginning of the secular decline of interest rates, personal interest income has rather gradually (and now somewhat suddenly) shrunk relative to household debt service payments.
 
 
It is Main Street that has failed to keep up with Wall Street and corporate America in the race to see who can benefit more from lower yields. As the interest component of personal income gradually weakens, the ability of the consumer to keep up its frenetic spending is reduced. Metaphorically, it’s akin to a 4th quarter two minute Super Bowl drill, but one where the receivers haven’t been properly hydrated. They’re a half step slow, their legs are cramping, and it shows. Lower interest rates are having a negative impact on households because their water bottles are filled with 50 basis point CDs instead of Gatorade.
While Wall Street and levered investors have fared better than their Main Street counterparts, it’s not as if they’re in “primetime Deion Sanders” shape either. Conceptualize the historical business model of any financially-oriented firm for the past 30 years and you will see what I mean. Insurance companies, for instance, whether they be life insurance with their long-term liabilities, or property/casualty insurance with more immediate potential payouts, have modeled their long-term profitability on the assumption of standard long-term real returns on investment. AFLAC, GEICO, Prudential or the Met – take your pick – have hired, staffed, advertised, priced and expensed based upon the assumption of using their cash flows to earn a positive real return on their investment. When those returns fall from 7% positive to an approximate 1% negative, then assumptions – and practical realities – begin to change. If these firms can’t cover inflation with historical real returns from their float, then they begin to downsize in order to stay profitable. The downsizing is just another way of describing a transition from offense to defense in a zero bound nominal interest rate world where almost any level of inflation produces negative real yields on investment.
 
Not only insurance companies but banks suffer from this inability to maintain margins at the zero bound. In the process, they close retail branches that once were assumed to be the golden key to successful banking. Defense! And here’s one of the more interesting anecdotal observations on our current zero-based environment, one to which my investment paragon – Warren Buffett – would probably immediately admit. His business model – and that of Berkshire Hathaway – has long benefitted from what he has described as “free float.” Those annual policy payments, whether for hurricane, life or automobile insurance, have long given him a competitive funding advantage over other business models that couldn’t borrow for “free.” Today, however, almost any large business or wealthy individual can borrow or lever up with minimal interest expense. Buffett’s “Omaha/West Coast” offense is being duplicated around the world thanks to central bank monetary policies, placing an increasing emphasis on stock and investment selection as opposed to business model liability funding. Buffett will succeed based upon his continued strong offensive play calling, but the rules of the game are changing.
The plight of Buffett of course is in some respects the plight of PIMCO or any investment/financially-oriented firm in this new age of the zero bound. And it seems to us at PIMCO that successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills. What does that mean? Well, let’s briefly describe PIMCO’s own historical investment offense for the past 30 years in order to provide a defensive contrast:
PIMCO Offensive Strategy 1981 – 2011
 
Ready, Set, Hut 1, Hut 2 –
  1. Recognize downward trend in interest rates and scale duration accordingly.

    A. Emphasize income and capital gains. PIMCO Total Return Strategy.
    B. Utilize prudent derivative structures that benefit from systemic leveraging – financial futures,
    swaps (but no subprimes!)
    C. Combine A and B along with careful bottom-up security selection to seek consistent alpha.

PIMCO Defensive Strategy 2012 – ?

Ready, Set, Hut, Hut, Hut –

  1. Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible.

    A. Emphasize income we believe to be relatively reliable/safe.
    B. De-emphasize derivative structures that are fully valued and potentially volatile.
    C. Combine A and B along with security selection to seek consistent alpha with admittedly lower nominal returns than historical industry examples.

So there you have it – the PIMCO playbook. I suppose if I had any common sense I would hold up that clipboard to the front of my mouth like sideline coaches do during big games. Don’t want to chance any of the competition reading our lips to get a heads up on PIMCO’s next offensive play call. But then that’s never been my or Mohamed’s style, given the importance of informing you, our clients, of what we are thinking when it comes to investing your hard-earned capital. Go ahead competitors and read our lips, we’ll just pound that pigskin down the field anyway. Besides, as I’ve pointed out, the emphasis these days should be on the defensive coach. Leveraging has turned into deleveraging. 15% yields have turned into 0% money. The Super Bowls of the future will have their Mannings and Bradys, but the defensive line may record more sacks and make more headlines than ever before.

 


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Tue, 02/28/2012 - 09:07 | Link to Comment kito
kito's picture

Speaking of football records, Bill gross 0, big ben 2..............

Tue, 02/28/2012 - 09:11 | Link to Comment Theta_Burn
Theta_Burn's picture

Fade Bill Gross at your own peril....

Tue, 02/28/2012 - 09:15 | Link to Comment MillionDollarBonus_
MillionDollarBonus_'s picture

The only "defensive" strategy against total annihilation in the event of an economic catastrophe is LONG TREASURIES. US debt has ALWAYS been a SAFE-HAVEN, and this is not going to change anytime soon. Doomer libertarians need to wake up to this, or their portfolios will go the way of their discredited theories on economics. Investors consistently flock to the dollar and to US debt during troubled times, as they know they can rely on the sound responsible governance of our congress and the measured and sensible analysis of our economic advisors.

Tue, 02/28/2012 - 09:17 | Link to Comment francis_sawyer
francis_sawyer's picture

responsible governance of our congress and the measured and sensible analysis

You mean like Nancy Pelosi who got bitch slapped by 50,000 ZH'ers here the other day?

Tue, 02/28/2012 - 09:22 | Link to Comment Problem Is
Problem Is's picture

+1... Nice one...

Do you think those bitch slaps bounced off that turbo-tight facelift???

Tue, 02/28/2012 - 10:14 | Link to Comment trav7777
trav7777's picture

wtf is gross talkin about with that "handsome guy" shit?  Ewwwww

Tue, 02/28/2012 - 09:24 | Link to Comment BeetleBailey
BeetleBailey's picture

You are on drugs......and I don't even want to know what kind, or if you have any to share, as the kind of drugs you're on are fucking dangerous. They've melted your brain. It is amazing that you typed the above without multiple errors.

Tue, 02/28/2012 - 09:43 | Link to Comment Overflow-admin
Overflow-admin's picture

Yeah, tell that to Weimar Republic ^^

Tue, 02/28/2012 - 10:33 | Link to Comment bernorange
bernorange's picture

The defense wins when the offense fumbles the ball.  You can't expect them to force a 3 and out every series.

Tue, 02/28/2012 - 11:53 | Link to Comment Xkwisetly Paneful
Xkwisetly Paneful's picture

The guy only sold out before the biggest bond rally in years and years.

 

Tue, 02/28/2012 - 09:22 | Link to Comment francis_sawyer
francis_sawyer's picture

Bill Gross probably knows as much about football as I do about doily crocheting...

The only thing investing has in common with football is that if you're a bookie (& pay the right people off), you can make sure your bet comes out a winner)...

Tue, 02/28/2012 - 09:52 | Link to Comment slaughterer
slaughterer's picture

Bill Gross does yoga in LuLuLemon leotards every day.  What is he doing using football metaphors?     

Tue, 02/28/2012 - 10:26 | Link to Comment azzhatter
azzhatter's picture

you callin' me a fag?

 

Bill

Tue, 02/28/2012 - 10:03 | Link to Comment Widowmaker
Widowmaker's picture

This example is total garbage. Football has rules, and when someone screws up there are consequences, not record bonuses.

WWF or WCW wrestling is much more appropriate - the league of selling scripted bullshit and calling it whatever you want. They even had a NWO.

Banking is a fucking joke, a bad act that would last less than a game as fans are punished for the players and officials bullshit, incompetence, and negligence.

The best thing Gross can do is exit, just like the rest.

Nice try though.

Tue, 02/28/2012 - 09:21 | Link to Comment Problem Is
Problem Is's picture

"equal number of defensive... positioned inductees, Mean Joe Greene, Deion Sanders or Mike Ditka?"

Any Bears Fan Will Tell You
Mike Dickhead was a tight end... Nice market research there Gross...

Tue, 02/28/2012 - 09:23 | Link to Comment francis_sawyer
francis_sawyer's picture

...not to mention that Deion Sanders moonlighted as a punt returner (which is 'technically' defensive, yes, but goes against the implication)...

Tue, 02/28/2012 - 09:44 | Link to Comment ATM
ATM's picture

Or any Packers fans like me. I think he meant to say Ray Nitschke not Mike Dick-A.

Tue, 02/28/2012 - 09:48 | Link to Comment francis_sawyer
francis_sawyer's picture

It is clear to me that the only people that Gross knows in the football universe are the poster boys they put on TV for gags &/or do ads...

Like John Travolta (in Saturday Night Live) knowing about Lawrence Olivier because of the 'Polaroid' commercials...

 

Tue, 02/28/2012 - 09:22 | Link to Comment Pizza man
Pizza man's picture

The mixed message of recorded history and Ron Paul: He is the only candidate with the ideas resolute enough to kill the government beast hunting us down like dogs. He is also the only candidate whose foreign policy stance will unleast the most vile creatures on the globe and ensure the murder of 10's of millions, besides the destruction of global assets.

Conundrum of epic proportions.

 

And please look at world history..the fall of Persia, Greece and Rome and the global consequences before you get your panties in a wad.

 

There is a reason Ron Paul will never be elected president. This is it.

Tue, 02/28/2012 - 09:49 | Link to Comment ATM
ATM's picture

I think you got it completely wrong on Paul's foreign policy stance. He is the only one that requires the rest of the world to finally become responsible for their own safety and not take the stupid stance that the police (the US) are just one call away.

The world needs to stand on it's own and police it's own backyard. IMO the US is creating the very things you say will be inleashed by trampling across the globe, bombing indiscriminately, funding insurrection, proppig up dictators and rival groups.

Paul's stance requires active responsiblity. That is a far better solution than what we have today and makes us all far safer.  

Tue, 02/28/2012 - 10:28 | Link to Comment Pizza man
Pizza man's picture

It's the perfect solution, ATM..but it has never happened and will never happen. There will alsways be the weak and easily exploited.

 

Not saying our foreign policy is anywhere near perfect, but exiting stage left and expecting the good and smart and willing (mythical beasts all) to fill the vacuum we leave is...naive.

 

 

Tue, 02/28/2012 - 09:37 | Link to Comment Mercury
Mercury's picture

Too much central planning in football for my tastes.

One of the few sports that is almost as boring to play as it is to watch too by the way (for most positions anyway).

Investing, like football has become all about the coaches Mr. Gross. And while many investors may be focusing on defense, a lot more are simply turning off the game.

Tue, 02/28/2012 - 09:50 | Link to Comment ATM
ATM's picture

Then you don't get it.

Tue, 02/28/2012 - 12:59 | Link to Comment Fedaykinx
Fedaykinx's picture

yeah, i know what you mean, i played both sides in HS, linebacker and guard.  trying to take some dude's head off every play while avoiding getting your own cap peeled really gets boring.  frankly i don't know how i stayed awake half the time.  i should have joined the lawn dart team, they got all the chicks.

Tue, 02/28/2012 - 09:40 | Link to Comment chindit13
chindit13's picture

Other than Bill Gross, whose logical mind forced him to miss the bond rally, nobody is playing defense.  Bondbuyers continue to sponge up whatever anybody offers, save for perhaps Greece in default.  That bondholders are now proven by events to have absolutely no rights whatsoever doesn't seem to phase anyone in the least.  With Greece, CACs that did not exist when any of the bondholders bought, and are being retroactively and unilaterally applied, have changed every single term of the original supposed contract.  The term is changed, the principle changed (yet euphemistically called a haircut, like a nice clean-up with a head massage), and the interest rate changed, and the CACs will be made at whatever trigger level is necessary to get "voluntary" approval forced upon the entire universe of holders.

Beaten and whipped, bond investors are not playing defense, they are saying "Hurry up and give me the new bond;  I've got to run over and buy some Italian debt before it's gone".

The so-called Bond Vigilantes are now to the debt market what The Village People were to policemen, cowboys and construction workers.

Tue, 02/28/2012 - 10:06 | Link to Comment kill switch
kill switch's picture

 That bondholders are now proven by events to have absolutely no rights whatsoever doesn't seem to phase anyone in the least.

+1

Are you ready for this!! What the hell are they thinking?,,apparently they don't think much!!

Tue, 02/28/2012 - 09:47 | Link to Comment Shizzmoney
Shizzmoney's picture

In a sense, the balls-to-the-wall actions of big investment houses that are infecting our entire society is alot like the transition of football on offense within the last ten years.

Generally, offenses always had a good mix of run and pass.  Probably more of a running game to limit turnovers, control the clock, and keep your QB for getting hit. 

But, some of the teams (mostly, the spread offense ones, like the Colts) changed the rules so you couldn't chuck recievers past 5 yards, which opened up the passing game.

Now EVERYONE is using 4, 5 wide reciever sets, and drafting TEs who are more basketball player type than just offensive lineman who can run a bit.  It's high risk, high reward.....and it takes advantage of the rules.

The problem is, as the games get into Jan/Feb, and the weather gets colder and the defensive pass rushes and secondaries get better, and things condense.  You suddenly can't throw the ball as much as you want to.  Scoring becomes harder, and this puts more pressure on your defense, which is usually suspect to begin with (as you are spending more of your money on offense, instead of being well rounded, to take advantage of the rules.  It's also easier to draft offense, IMO).

Bascially, the "high flying" offensive style puts points on the board, and it looks pretty.....but when it comes to nut cutting time, convservative and well rounded attacks usually rue the day. 

Sort of like....printing money to go into debt, instead of saving, making wise and disciplined decisions.

Tue, 02/28/2012 - 09:41 | Link to Comment miker
miker's picture

Gross probably meant Dick Butkus, not Mike Ditka. 

Tue, 02/28/2012 - 09:50 | Link to Comment francis_sawyer
francis_sawyer's picture

Is that like... "Oh, I meant to buy a PUT, not a CALL, sorry!"... Look ~ How can anybody take anyone seriously if they can't even come up with a proper analogy to present a position paper?...

Tue, 02/28/2012 - 10:13 | Link to Comment Theta_Burn
Theta_Burn's picture

Dude, ok the mis is weak, but put/call white/black weak?

Read Chindt13's post above, common sense tripped up BG. his timing is off, not his sense of direction.

How many Billions does Gross manage again?

 

 

Tue, 02/28/2012 - 09:54 | Link to Comment Theta_Burn
Theta_Burn's picture

Mike was actually a pretty good player back in the 60-70's

 

Tue, 02/28/2012 - 10:04 | Link to Comment Flakmeister
Flakmeister's picture

Considerin' Ditka was a TE and mentioned in the same breath as two defensive players....

Tue, 02/28/2012 - 10:02 | Link to Comment ArrestBobRubin
ArrestBobRubin's picture

Can somone tell me why ZH sucks this guys dick so often?

It's pretty simple really: don't suck Gross dick.

Tue, 02/28/2012 - 11:14 | Link to Comment Seize Mars
Seize Mars's picture

I can't read it. I started to, but the phoney sports bull crap, delivered by a member of the system, nah, I just can't read it. I liked the piece about Penn Telelr, or whatever his name is though.

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