Big Bill Takes A Walk

Bill Gross leaving PIMCO is beyond newsworthy.  While one expects to see successful founders, particularly billionaires, decide to hang it up and go do something different, Big Bill didn’t do that.  Big Bill dropped a bombshell: he’s moving to Janus.

Big Bill was not a superstar in money management; he is a supernova.  Like Peter Lynch of Fidelity’s Magellan mutual fund, Big Bill became a brand, the face of an entire asset class.  And because everything is bigger in Bonds, Big Bill brought in big money, as in a trillion dollars or two.  Big Bill is considered The Bond King!

Never before has a money manager walked away from running so much money.  Big Bill didn’t get hit by a bus, nor did he retire into the sunset or hand the reins over to a successor.  Big Bill walked, leaving hundreds of billions he managed and trillions with his face on it.

PIMCO is not Fidelity nor is it Vanguard or any other multi-trillion dollar firm.  As the money management industry grew from a relatively tiny base in the 1970s, the perils of a money management “star” system were playing out before the world at Fidelity.  Fidelity needed to prove it was more than Peter Lynch and more than Magellan.  Thankfully for Fidelity (and the entire money management industry), a bull market in both Stocks and Bonds provided an incredible tail wind in which to grow.  Fidelity was successful in its diversification effort but more important was the corporate branding (vs. personal coronation) model they brought to the entire money management industry.

Not so at PIMCO.  Big Bill is PIMCO.  He is the man and he has built and reinforced his brand through tremendous exposure.  The king speaketh and who wouldn’t want to hear what he has to say?  He even built a television studio at his office so that he and his heir apparent, Mohamed El-Erian, could appear regularly, even daily, or any time he wanted.

To say that Bonds became popular in the years following Big Bill’s founding of PIMCO in 1971 is gross understatement.  According to SIFMA the US Bond market totaled a mere $2.5 trillion in 1980 and $37.8 trillion in 2013.  Those figures are only for the US.  Big Bill played on the world stage helping to make Bonds a household word and making his name synomous with bond market genius.

The dollars invested in Bonds are so tremendous today.  The numbers are massive and this is why I continue to hammer you that the great bull market for Bonds is over.  2012 marked the end of a wonderful thirty year stretch for bonds but now it is O-V-E-R.  And the number one reason why you should care is because this is a market that went from $2.5 to 37.8 trillion dollars.  There is more money on the line: your money, pension money and institutional money.  This money has largely never seen a bear market.

PIMCO and Big Bill’s last year or so reflects the beginning of this bear market.  When performance dips, money walks, your would-be successor walks so perhaps walking is an option for you as well.  And when you do walk, the press focuses on your wearing of sunglasses to a meeting and your ramblings about your dead cat…and, oh yeah, you are (or were) The Bond King.

Timing-wise, Big Bill’s walk could not have come at a more crucial time.  US Treasury bonds spent most of 2014 correcting the dismal performance of 2013, the source of Big Bill’s woes.  The falling bond prices of 2013 were followed by rising prices, but now, in the month of September, it appears to me that we are setting the stage for ten year US Treasury notes to resume their rise over 3% and for long-term bonds to suffer formidable losses.  Perhaps this is another reason Big Bill walked.  Jumping off an aircraft carrier in favor of a cruiser looks smart.

This begs the question of what will happen to the hundreds of billions invested in Bonds over at PIMCO?  The bond industry, albeit the entire money management industry, operates under the assumption that more money will always be coming in.  From $2 to $37 trillion!  The market is growing, our firm is growing, of course this will continue…until one day it does not.

Firms may face withdrawals for a time, but for the most part, every bond management firm has more money coming in , month-in, month-out, for the past thirty years.  This is their normal.  When redemptions exceed normal, which of course they likely never do, you have Long Term Capital Management, a supposed one-off.

For us, we are experiencing cash flow from our portfolio and do not have to rely on the promise of redemptions in order to meet liquidity needs.  We have long expected another liquidity crunch in Bonds because that’s what happens: 1987, 1994, 1998, 2008.  The difference is that those crunches occurred in a bull market.  I believe the next crunch, when it happens, will be much more formidable as it will be the first to occur in a bear market.  This is why we believe your CASH and your short-term bond portfolio is so important right now.

PIMCO is not Long Term Capital Management but neither is PIMCO ordinary.  As I pointed out, sizable redemptions in the mutual fund industry are almost unheard of and non-existent.  This trend, I believe, is over.  In a bear market assets walk.  Assets have walked out of PIMCO of late and now the face of PIMCO, literally the face of Bonds, has walked as well.

I wish we didn’t have bear markets and for thirty years we were blessed in the bond markets.  I wish PIMCO the best.  I wish bond money management firms the best.  But none of them are a match for a long, sustained, multi-year bear market that is ready to accelerate again right now.

In Bonds the money is too big and the management is too corporate or by committee.  The stakes are extremely high while the approach of almost every bond manager out there is to do just a little better than the market.  While this may be a great money making strategy in a bull market (especially for the manager), a bear market is a different animal.  In a bear market assets walk as PIMCO experienced.  But mostly investors tend to do nothing because doing nothing has worked so well for the past thirty years.  The risks today, the money today, is much greater than at any time…ever.

Congratulations Big Bill on your new adventure.  I hope you walked because you recognize your problems are due to the bear market and Janus is your answer.  Thank you for bringing the Bond bear market grumblings to the front pages of the papers.  I hope more investors are paying attention now.