GURU OUTLOOK: THE BOND KING
James Carville, the famed political strategist once said:
” I used to think if there was reincarnation, I wanted to come back as the President, or the pope, or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”
In today’s world, the bond market runs through Bill Gross, the Founder and CEO of PIMCO. The soft spoken Californian, former professional blackjack player and billionaire, oversees over one trillion (with a T) dollars in assets under management. He has been referred to as the 4th branch of the U.S. government and with the bond market under his thumb it’s not a stretch to say that he is the most powerful man in the United States.
His current outlook for the U.S. economy is not particularly rosy (read his latest outlook here). Gross recently coined the term “the new normal” when talking about the post-crisis economy. He believes the global economy has been effectively reset as investors take on less risk, de-leverage the mountain of debt, regulation hampers growth and de-globalization takes hold. He believes this is best presented by the low expectations in the bond market where 10 year treasuries, at 3.5%, are still positioned for very meager economic growth. He says we are entering a sustained period of low growth and low inflation.
A year ago, Gross was seen as a co-conspirator of sorts in the government bailouts. As the U.S. government began to take stakes in financial institutions Gross jumped in head first with them. He piled his firm’s assets into the riskiest of risky assets in what turned out to be a brilliantly simple bet – the U.S. government won’t let these assets fail therefore, we are wise to invest along side them. It couldn’t have worked out much better for the bond king. He is rumored to have netted $1.7B alone on the day of the Fannie and Freddie bailouts. Some saw it as talking his book and asking for his own bailout. Others see it as unrivaled power and brilliance.
Gross believes the U.S. economic recovery has been largely based on the stimulus and that the economy could suffer a relapse when the stimulus is finally removed. In preparation he says investors are wise to move money into stable, conservative income generating assets. He also says assets are likely to move from debt-laden governments such as the U.S and U.K. into those who were more fiscally responsible such as Germany and China.
So where is an investor to look for high quality, stable and conservative fixed income assets in this low yield, high risk environment? At the 2010 Barron’s roundtable Gross made a number of suggestions. He currently likes the Reaves Utility Income fund (ticker: UTG) which is a stable utility fund yielding 7.25%. He also likes the PIMCO Corporate Opportunity a high yield corporate bond fund that Gross himself manages. It yields a juicy 13%. In terms of specific bonds Gross still likes to trade along side the government. He recommends investors look into the GMAC 8% due 2031 and the AIG 8.25% due 2018.
Hey TPC,
Don’t mean to be a stick in the mud, but according to my (fleeting) research Big Bill was the creator of the term “the New Normal”. I give the points to McKinsey’s CEO from February 2009 – give the consultants their time in the sun I say.
For what it is worth here are my findings from October:
http://www.datadiary.com.au/2009/10/19/memecheck-the-new-normal/
Cheers as always,
PM
Perhaps its more appropriate for me to say that Gross made the term famous?
I fervently hope Bill stays healthy, and right. I’ve got half our 401k in PTTRX!
“He recommends investors look into the GMAC 8% due 2031 and the AIG 8.25% due 2018.”
i think these picks are too late and too dangerous. i have done the shake hands with the government investment, buying eg MS and COF notes 6.5% notes due 3-4 years out at a YTM of 10-12% just after the TARP investments were announced. there the US was telling you that the banks would not be nationalized but rather supported and they would survive. this window has closed and there is nothing left but junk that the U may very well have to resolve (gmac) and liquidate (aig), with results still very much u in the air.
why does gross think aig or gmac will survive? these are very different situations from the banks of last year. as far as i can tell debt is at risk for both of them, and i don’t think you are being compensated sufficiently for the risks.
he writes a nice letter though.
His thinking is simple here – the government is not going to let them fail after having invested so much money into them. So, they’re still a high yield way to play relatively safe bonds. I have to agree with him there.
i understand the thinking and i think anyone who buys debt in fannie, freddie, aig and gmac is speculating, not investing. in my example with ms and cof, there was a much bigger margin of safety. the shake hands with the government investment play has passed.
in particular, if you do a liquidation scenario on aig, whether the liquidation proceeds results in covering your debt depends on mister merger market, not on uncle sam. as for gmac, freddie and fannie, they are no longer viable enterprises; someone is going to have to take the shovel away from them before they reach china.
sorry, just one more thought…the treasury is now saying that they expect they will not be repaid $90B from TARP, hence the bank fee.
this excludes fannie and freddie. where does gross think the treasury is looking when it sees a shortfall? hello aig? hello gmac?
Don’t forget the GM (not GMAC) bondholders in bankruptcy. The gov may be more unpredictable given the current political climate.
Gross was a professional blackjack player. He still is, except he is now the dealer. The House sets the rules to give the House the advantage. The dealer only shows one card and plays his hand after the punters. Is there any reason to belive that anything revealed by PIMCO (Gross or El-Erian) is anything other than a headfake? Public comments by El-Erian indicate an uncertain future that can be managed by giving your money to PIMCO to manage.