Bill Gross

After co-founding PIMCO in 1971, Bill Gross has called it quits...

*WILLIAM H. GROSS JOINS JANUS CAPITAL
*JANUS:GROSS TO START MANAGING FUND,RELATED STRATEGIES OCT.6,'14

“I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization,” said Mr. Gross. Full Bill Gross, Dick Weil statements...

With more than $65 billion pulled from PIMCO's funds since May 2013, Bill Gross' firm had been struggling amid spotty performance and it seems, according to The Wall Street Journal, PIMCO (not Allianz) was set to fire the 70-year old bond king this weekend. It seems clear that Mr. Gross move was pre-emptive as sources cite his "increasingly erratic behavior" and ultimatums as factors in the move. Assumptions about Mohamed El-Erian returning to run the company have been denied. Some have estimated PIMCO could see a further 10-30% in fund outflows on the back of Mr. Gross' departure.

Black Swan? Having seen liquidations of a relatively small fund yesterday send the NASDAQ down 2% and credit reeling, world bond and stock markets are reacting aggressively to Bill Gross' move from PIMCO. German stocks (PIMCO's parent Allianz is the 7th largest stock in DAX) are tumbling, European peripheral bond spreads are pushing wider (major holdings of PIMCO) and US credit markets are getting smashed (PIMCO is a major player in CDS markets and obviously a huge holder of US corporate debt) and concerns spread of redemptions triggering the kind of liquidity suck out we described yesterday.

The depression that followed the stock-market crash of 1929 took a turn for the worse eight years later, and recovery came only with the enormous economic stimulus provided by the second world war, a conflict that cost more than 60 million lives. By the time recovery finally arrived, much of Europe and Asia lay in ruins. The current world situation is not nearly so dire, but there are parallels, particularly to 1937. Now, as then, people have been disappointed for a long time, and many are despairing. They are becoming more fearful for their long-term economic future. And such fears can have severe consequences.

This month's Bill Gross letter, notably shorter than usual, is as close to the bond manager discussing an Austrian economics worldview as we will likely ever see him: in brief, it's all about the credit/money creation, with an emphasis on the use of proceeds of said creation under ZIRP, i.e., malinvestment , or as Gross puts it: "credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring."

• Headline of the day: Complacency Breeds $2 Trillion of Junk as Sewage Funded (BBG)
• Israel intensifies Gaza offensive after surge in rocket fire (Reuters)
• Profits plunge at Vatican bank (FT)
• Investors Are Buying Troubled Golf Courses and Giving Them Makeovers (NYT)
• Pimco Dissidents Challenge Bill Gross in ‘Happy Kingdom (BBG)
• That's a new one: Marks and Spencer blames new website for sales drop  (Reuters)
• Iran's Supreme Leader calls for more enrichment capacity (Reuters)
• Boeing Faces Long-Term Credit Risk if Ex-Im Bank Closed, S&P Says (WSJ) not to mention the collapse risk to US durable goods orders
• U.K. Manufacturing Unexpectedly Slumps Most in 16 Months (BBG)
• Some Still Lack Coverage Under Health Law (WSJ)

Investors and speculators face some profound challenges today: How to deal with politicized markets, continuously “guided” by central bankers and regulators? In this environment it may ultimately pay to be a speculator rather than an investor. Speculators wait for opportunities to make money on price moves. They do not look for “income” or “yield” but for changes in prices, and some of the more interesting price swings may soon potentially come on the downside. They should know that their capital cannot be employed profitably at all times. They are happy (or should be happy) to sit on cash for a long while, and maybe let even some of the suckers’ rally pass them by. As Sir Michael at CQS said: "Maybe they [the central bankers] can keep control, but if people stop believing in them, all hell will break loose." We couldn't agree more.

"There's something going on in derivatives land," is the warning from ADM's Andy Ash and as Paul Mylchreest notes the relationship between VIX and SKEW suggests the options market is pricing in the possibility of a major market event. The process enables professionals to maintain the illusion of calmness in VIX while hedging their positions (as they attempt to unwind as we have shown). Whether this 'event' is a crash or melt-up is historically unclear but given the taper and the trend of the last few years, we suspect the former more likely that the latter.

If it looks like insanity, smells like insanity, tastes like insanity, feels like insanity and struts about barking, “This is insanity”, then perhaps it might just be insanity.

Borrowing heavily from Albert Edwards "Ice Age" analogy of our new normal, PIMCO's Bill Gross, after explaining why he does not have a cell phone, discusses the "frigidly low" levels of "The New Neutral" in this week's letter. Confirming Ben Bernanke's "not in my lifetime" promise for low rates and a lack of normalization, Gross explains that the "the new neutral" real policy rate will be close to 0% as opposed to 2-3% (just as in Japan) leaving an increasingly small incremental rise in rates as potentially responsible for popping the bubble. Gross concludes, "if 'The New Neutral' rates stay low, it supports current prices of financial assets. They would appear to be less bubbly," clearly defending the valuation of bonds knowing that he can't expose stocks as 'bubbly' without exposing his firm to more outflows.

It was interesting over the last couple of days to watch a series of both hosts and analysts scratching their heads and fumbling for answers over the recent decline in interest rates. After all, how could this be with inflation creeping up due to much stronger economic growth? More importantly, asset prices are clearly telling investors to get out of bonds as the "great rotation" is upon us as we launch into this new secular bull market, right? The recent decline in interest rates should really not be a surprise as there is little evidence that current rates of economic growth are set to increase markedly anytime soon. Consumers are still heavily levered, wage growth remains anemic, and business owners are still operating on an "as needed basis." This "economic reality" continues to constrain the ability of the economy to grow organically.

Four years after he left the firm, PIMCO is hiring back Paul McCulley to save its brand and provide just enough ammo to defend its bullish/bearish positions now that El-Erian's disagreements have left. Unlike some firms who believe that 'chief economists' must be full-time - adding value each and every day with their extrapolations of every macro tick - McCulley will spend up to 100 days per year working in PIMCO offices. Bearing in mind McCulley's previous lazer-like focus on Capex (which is dismally flat still) and his belief in a "W" shaped recovery not a "U" or a "V", we suspect the bearded prognosticator will have a bullish bond bias - especially as the trillions of ticking time bombs in the shadow banking system remain as incendiary as ever.

Last month it was a tribute to his cat. This month, the manager of the world's largest bond fund discusses sneezing: "A sneeze is, to be candid, sort of half erotic, a release of pressure that feels oh so good either before or just after the Achoo! The air, along with 100,000 germs, comes shooting out of your nose faster than a race car at the Indy 500. It feels sooooo good that people used to sneeze on purpose." He also discusses the aftermath: "The old saying goes that when the U.S. economy sneezes, the world catches cold. That still seems to be true enough, although Chinese influenza is gaining in importance. If both sneezed at the same time then instead of “God bless you” perhaps someone would cry out “God have mercy.” We’re not there yet, although in this period of high leverage it’s important to realize that the price of money and the servicing cost of that leverage are critical for a healthy economy. " He also talks about some other things, mostly revolving around long-term rates of return assumptions and what those mean for investors.

We realize the future for blogging was bright, but this bright? Moments ago, Bloomberg View, Bloomberg's in house blogging operation, announced that El-Erian had joined it as a columnist. And just like that Mohamed has his own unedited venue in which to spill all the dirt on his former employer.

Add a 70s style moustache (and a red Ferrari) and BusinessWeek's Bill Gross cover is the spitting image of Tom Selleck's infamous investigator... but the analogies run deeper as the PIMCO front-man continues to search for his next steps and figure out the past

*GROSS ON EL-ERIAN: "I THOUGHT I KNEW HIM BETTER"
*GROSS SAYS FOR MOST PART, "I'M THE PERSON I THOUGHT I WAS"

Very philosophical - but as the cover asks "is he really such a jerk?"