1 00:00:03,240 --> 00:00:09,039 Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio. Okay, 2 00:00:09,080 --> 00:00:12,640 Speaker 1: so I am very excited about this week's guest. There's 3 00:00:12,680 --> 00:00:15,680 Speaker 1: a little bit of a backstory. Um, you're gonna hear 4 00:00:15,800 --> 00:00:19,840 Speaker 1: this interview in two parts. This first part, for those 5 00:00:19,880 --> 00:00:22,320 Speaker 1: of you who are either listening on Apple iTunes or 6 00:00:22,320 --> 00:00:25,360 Speaker 1: at Bloomberg dot com, is about an hour. Part two 7 00:00:25,400 --> 00:00:28,080 Speaker 1: will be posted next week or if you're listening to 8 00:00:28,160 --> 00:00:32,720 Speaker 1: this at some point in the future, half an inch down. Um, 9 00:00:32,760 --> 00:00:38,360 Speaker 1: this is really a fascinating interview with a fascinating character. Uh. 10 00:00:38,800 --> 00:00:44,720 Speaker 1: A little backstory to how this interview came about. And 11 00:00:44,760 --> 00:00:47,800 Speaker 1: I'm gonna make a really long story, not as short 12 00:00:47,840 --> 00:00:50,760 Speaker 1: as some people would like, but it's really interesting and 13 00:00:50,800 --> 00:00:54,680 Speaker 1: I like sharing this behind the scenes stuff with with listeners. 14 00:00:55,840 --> 00:01:00,880 Speaker 1: So gross gets fired from Pimco or there's certainly a 15 00:01:00,880 --> 00:01:06,200 Speaker 1: palace coup back in September, and lots of people are 16 00:01:06,240 --> 00:01:09,039 Speaker 1: writing about it, and lots of people are piling on. 17 00:01:09,319 --> 00:01:12,319 Speaker 1: You know, there was a whisper campaign to discredit him. 18 00:01:12,360 --> 00:01:16,759 Speaker 1: Ever since Muhammed Hillarian left Pimco, there was a little 19 00:01:16,800 --> 00:01:21,240 Speaker 1: bit of a sort of change in the air, and 20 00:01:21,280 --> 00:01:24,039 Speaker 1: I think people got a little more bold. Some of 21 00:01:24,080 --> 00:01:26,720 Speaker 1: the people who were the next tier below Gross and 22 00:01:26,800 --> 00:01:32,960 Speaker 1: Hillarian began plotting to essentially depose the king, and effectively 23 00:01:33,000 --> 00:01:37,320 Speaker 1: that's what what happened. But around that time September twenty 24 00:01:37,760 --> 00:01:41,760 Speaker 1: early October, lots of stories came out. Everybody piled on. 25 00:01:42,760 --> 00:01:45,319 Speaker 1: And you know, people sometimes say, hey, why don't you 26 00:01:45,319 --> 00:01:49,040 Speaker 1: write about Bill Gross, And my answer was, I'm not interested. 27 00:01:49,040 --> 00:01:51,760 Speaker 1: I have nothing to add. I think people are just 28 00:01:51,840 --> 00:01:55,120 Speaker 1: ignoring a guy with a forty year track record. Look, 29 00:01:55,840 --> 00:01:59,160 Speaker 1: he built a firm that and he I say this specifically, 30 00:01:59,520 --> 00:02:02,080 Speaker 1: even though he gives credit to other people who worked 31 00:02:02,080 --> 00:02:04,400 Speaker 1: with him and that it was a team effort, and 32 00:02:04,440 --> 00:02:07,880 Speaker 1: there were thousands of people who work at PIMCO. The 33 00:02:07,960 --> 00:02:12,120 Speaker 1: reality is the vast majority of the two trillion dollars 34 00:02:12,280 --> 00:02:17,960 Speaker 1: let me repeat that, to trillion dollars that PIMCO raised 35 00:02:17,960 --> 00:02:22,280 Speaker 1: over forty years came there because of Gross. End of story, 36 00:02:22,720 --> 00:02:25,919 Speaker 1: And so I didn't want to pile on. We don't 37 00:02:26,000 --> 00:02:29,320 Speaker 1: have any PIMCO funds. We don't, we're not a client 38 00:02:29,400 --> 00:02:34,079 Speaker 1: of theirs. I just look at them and say, I don't. 39 00:02:34,120 --> 00:02:36,600 Speaker 1: I don't need to add something if I'm not adding 40 00:02:37,360 --> 00:02:40,560 Speaker 1: some value, And just to kick a guy when he's 41 00:02:40,600 --> 00:02:45,400 Speaker 1: down despite a spectacular longtime track record seemed ridiculous to me. 42 00:02:46,480 --> 00:02:49,400 Speaker 1: And I said this to one or two people, And 43 00:02:49,480 --> 00:02:53,680 Speaker 1: sometimes these things travel around, and word gets to a 44 00:02:53,840 --> 00:02:56,240 Speaker 1: friend of a friend of Bill, and we'll call it 45 00:02:56,280 --> 00:02:59,760 Speaker 1: friends of Bill. And the friend of Bill reaches out 46 00:02:59,840 --> 00:03:02,440 Speaker 1: to me, and I know him through other parties, and 47 00:03:03,520 --> 00:03:05,880 Speaker 1: he says, so, I hear you're not interested in writing 48 00:03:05,919 --> 00:03:07,880 Speaker 1: about Gross because you think it's not right to kick 49 00:03:07,919 --> 00:03:10,200 Speaker 1: a guy with his track record when he's down. And 50 00:03:10,240 --> 00:03:14,000 Speaker 1: my answer was yeah. He goes, well, what would happen 51 00:03:14,040 --> 00:03:16,280 Speaker 1: if I shared with you a couple of bullet points 52 00:03:16,320 --> 00:03:18,600 Speaker 1: about his exit? And I'm like, I'm happy to listen. 53 00:03:19,320 --> 00:03:22,040 Speaker 1: And so he proceeds to give me one or two thoughts, 54 00:03:22,280 --> 00:03:25,200 Speaker 1: and I say, you know, he's due to write a 55 00:03:25,200 --> 00:03:28,720 Speaker 1: monthly letter and he left before he sent out is. 56 00:03:29,080 --> 00:03:33,840 Speaker 1: They're called iOS, investment Outlooks. He's been publishing these for decades. 57 00:03:34,920 --> 00:03:38,120 Speaker 1: I think I might want to write a monthly IO 58 00:03:38,200 --> 00:03:40,920 Speaker 1: in the voice of Bill Gross. Now understand I've been 59 00:03:40,920 --> 00:03:44,280 Speaker 1: reading him and Paul McCulley and Muhammad Allarian and the 60 00:03:44,320 --> 00:03:48,400 Speaker 1: rest of the Pimco crew for a long time. Sometimes 61 00:03:48,400 --> 00:03:50,960 Speaker 1: what they write resonates with me. Sometimes it doesn't. But 62 00:03:51,040 --> 00:03:54,520 Speaker 1: I knew it didn't take much to get into the 63 00:03:54,520 --> 00:03:56,520 Speaker 1: head of Bill Gross. All I had to do is 64 00:03:56,560 --> 00:03:59,040 Speaker 1: download a dozen i os and read it on the 65 00:03:59,080 --> 00:04:01,680 Speaker 1: train on the way home. And I did that. And 66 00:04:01,720 --> 00:04:04,680 Speaker 1: after reading a few of these i os, you know, 67 00:04:04,720 --> 00:04:07,880 Speaker 1: whenever they catch a forger of some great artwork, the 68 00:04:07,960 --> 00:04:10,760 Speaker 1: guy says, you know, I had to get this stroke down. 69 00:04:10,840 --> 00:04:12,840 Speaker 1: Once I had that stroke, I can anything I did 70 00:04:13,120 --> 00:04:15,440 Speaker 1: looked like van Go or Picasso or whatever it is. 71 00:04:15,760 --> 00:04:18,080 Speaker 1: Once you get Gross in your head, it's easy to 72 00:04:18,120 --> 00:04:22,080 Speaker 1: write like him. It's easy to adopt his syncopations and 73 00:04:22,120 --> 00:04:24,880 Speaker 1: his tones and his rhythms. And so that's exactly what 74 00:04:24,960 --> 00:04:28,680 Speaker 1: I did, and I wrote this parody. You know, Gross 75 00:04:28,760 --> 00:04:32,440 Speaker 1: is farewell letter, And I imagined, Hey, I built one 76 00:04:32,440 --> 00:04:36,960 Speaker 1: of the most fantastic firms in the world, two trillion dollars. 77 00:04:37,560 --> 00:04:42,160 Speaker 1: Less people have put um raised two trillion dollars and 78 00:04:42,240 --> 00:04:46,640 Speaker 1: have hit five home runs in the in the major leagues. 79 00:04:46,640 --> 00:04:50,480 Speaker 1: And so I thought I would parody that perspective. And 80 00:04:50,839 --> 00:04:53,599 Speaker 1: apparently I did too good a job, because we got 81 00:04:53,600 --> 00:04:56,599 Speaker 1: panicked phone calls. Hey is this real? People are upset 82 00:04:56,880 --> 00:04:59,240 Speaker 1: Pimco is upset this one, screaming how did you guys 83 00:04:59,279 --> 00:05:03,640 Speaker 1: get this letter? Astonishingly, it was on Bloomberg View. People 84 00:05:03,680 --> 00:05:05,599 Speaker 1: didn't realize it was a joke, or at least some 85 00:05:05,600 --> 00:05:07,680 Speaker 1: people didn't realize it was a joke. I got a 86 00:05:07,760 --> 00:05:10,279 Speaker 1: lot of emails. But because of that, and I'm told 87 00:05:10,279 --> 00:05:15,320 Speaker 1: through the grape vine that the parody farewell letter from 88 00:05:15,360 --> 00:05:19,279 Speaker 1: Bill Gross amused the real Bill Gross, and so he 89 00:05:19,320 --> 00:05:21,479 Speaker 1: reached out at a certain point and said I thought 90 00:05:21,520 --> 00:05:24,920 Speaker 1: that was kind of interesting, as did other friends of Bill, 91 00:05:25,480 --> 00:05:28,440 Speaker 1: other people who were still at Pimco when not happy 92 00:05:28,480 --> 00:05:33,120 Speaker 1: with his being deposed. Eventually led to my getting my 93 00:05:33,240 --> 00:05:38,200 Speaker 1: hands on a copy of a uh set of bonuses, 94 00:05:38,279 --> 00:05:41,159 Speaker 1: a spreadsheet of all the bonuses that went out to Pimco. 95 00:05:41,320 --> 00:05:44,720 Speaker 1: And I wrote a column that talked about Gross is 96 00:05:44,760 --> 00:05:49,680 Speaker 1: two million dollar bonus and and and then allarians and 97 00:05:49,720 --> 00:05:51,880 Speaker 1: everybody else is down the road. It was a billion 98 00:05:52,000 --> 00:05:55,800 Speaker 1: five in Pimco bonuses. And I got an email from 99 00:05:55,839 --> 00:05:58,760 Speaker 1: Gross who doesn't say anything about the bonus, but says, 100 00:05:59,240 --> 00:06:02,520 Speaker 1: you know, you guys keep misrepresenting my track record in 101 00:06:02,520 --> 00:06:07,240 Speaker 1: in total returns. It's much better than is claimed. And 102 00:06:07,520 --> 00:06:09,680 Speaker 1: I as well as the same as true for the 103 00:06:09,720 --> 00:06:12,600 Speaker 1: closed end funds, and so I said, send me the data, 104 00:06:12,720 --> 00:06:15,760 Speaker 1: I'll end research and independently and if it's correct, I'll 105 00:06:16,839 --> 00:06:19,400 Speaker 1: pony up in a minute. Was correct, and it turns 106 00:06:19,400 --> 00:06:23,640 Speaker 1: out that he was more or less right, absolutely right 107 00:06:23,680 --> 00:06:27,200 Speaker 1: about the closed end funds there were. The performance was spectacular. 108 00:06:27,480 --> 00:06:29,920 Speaker 1: According to morning Star, there were one to three, four 109 00:06:29,920 --> 00:06:33,760 Speaker 1: and six in the universe of multisector fixed income funds. 110 00:06:33,800 --> 00:06:37,200 Speaker 1: That's just, you know, just swept the It's like winning 111 00:06:37,279 --> 00:06:40,560 Speaker 1: Laman's one, two and three e race team takes all 112 00:06:40,880 --> 00:06:45,000 Speaker 1: three pole positions and and amazing set of numbers. He 113 00:06:45,160 --> 00:06:48,520 Speaker 1: was kind of right about total returns. It wasn't nearly 114 00:06:48,560 --> 00:06:52,719 Speaker 1: as bad as people had depicted. He had been top ten, 115 00:06:53,240 --> 00:06:56,359 Speaker 1: top desk isle and often top one percent. And in 116 00:06:56,360 --> 00:06:59,200 Speaker 1: the years that followed he had a bad year after 117 00:06:59,240 --> 00:07:02,599 Speaker 1: two thousand eleven was he underperformed two thousand twelve, he 118 00:07:02,640 --> 00:07:07,080 Speaker 1: did really well about flat relative to the benchmark. Underperformed 119 00:07:07,120 --> 00:07:12,920 Speaker 1: a little bit about points uh fourteen until until the 120 00:07:13,000 --> 00:07:17,000 Speaker 1: end of September, but he essentially didn't put in the 121 00:07:17,080 --> 00:07:19,840 Speaker 1: sort of numbers that leads to, you know, a founder 122 00:07:19,840 --> 00:07:24,240 Speaker 1: getting deposed. And so I ran the story and but 123 00:07:24,800 --> 00:07:28,760 Speaker 1: along the course of having this conversation with him, said, 124 00:07:28,840 --> 00:07:30,880 Speaker 1: you know, I would love to have you sit down 125 00:07:30,920 --> 00:07:33,880 Speaker 1: and just you tell your story. I'll throw some questions 126 00:07:33,920 --> 00:07:37,520 Speaker 1: at you, but you say what happened. And and I 127 00:07:37,560 --> 00:07:39,440 Speaker 1: know you don't trust people in the media, and I 128 00:07:39,520 --> 00:07:44,360 Speaker 1: know you are fearful of filters and and spin. This 129 00:07:44,400 --> 00:07:46,240 Speaker 1: is pretty and varnished. You get to say whatever the 130 00:07:46,280 --> 00:07:48,960 Speaker 1: heck you want to say. And so for two hours 131 00:07:49,000 --> 00:07:51,520 Speaker 1: we spoke and he said whatever the heck he wanted 132 00:07:51,560 --> 00:07:54,600 Speaker 1: to say. So this is the first hour of the interview. 133 00:07:54,680 --> 00:07:59,360 Speaker 1: It's essentially him describing the creation of PIMCO. What it 134 00:07:59,440 --> 00:08:02,720 Speaker 1: was like, was early mentors were, how things developed, what 135 00:08:02,760 --> 00:08:05,560 Speaker 1: it was like running money in the flashnary periods of 136 00:08:05,560 --> 00:08:09,040 Speaker 1: the nineteen seventies, uh the seven crash. He talked about 137 00:08:09,080 --> 00:08:12,360 Speaker 1: a lot of really fascinating things. And I've now babbled 138 00:08:12,360 --> 00:08:16,000 Speaker 1: for over five minutes, So let me stop now and 139 00:08:16,120 --> 00:08:24,120 Speaker 1: with no further ado, Bill Gross, this is Masters in 140 00:08:24,200 --> 00:08:28,360 Speaker 1: Business with Barry Ridholts on Bloomberg Radio. Today. We have 141 00:08:28,440 --> 00:08:32,440 Speaker 1: a very special guest. You probably have heard his name 142 00:08:32,480 --> 00:08:35,359 Speaker 1: once or twice if you're involved in the world of investing. 143 00:08:36,240 --> 00:08:39,360 Speaker 1: His name is Bill Gross, perhaps the most famous bond 144 00:08:39,400 --> 00:08:43,240 Speaker 1: investor in history. A quick background on who he is. 145 00:08:43,400 --> 00:08:48,520 Speaker 1: Born in Middletown, Ohio, moved to San Francisco ten years later, 146 00:08:48,840 --> 00:08:53,480 Speaker 1: ended up going to Duke University as a Duke scholar 147 00:08:53,760 --> 00:08:58,400 Speaker 1: with a degree in psychology, which is quite fascinating. And 148 00:08:58,600 --> 00:09:01,960 Speaker 1: UM served during the Vietnam War in the navy. Is 149 00:09:01,960 --> 00:09:05,840 Speaker 1: that correct? Unfortunately, that is correct, and thank you for 150 00:09:05,880 --> 00:09:08,920 Speaker 1: having me very oh my pleasure, sons long a long 151 00:09:08,960 --> 00:09:11,840 Speaker 1: time ago, not not really, not not too long, just 152 00:09:11,920 --> 00:09:16,120 Speaker 1: long enough to have developed some wisdom and experience. So 153 00:09:16,120 --> 00:09:19,240 Speaker 1: so let's we're gonna cover a lot of different material, 154 00:09:19,240 --> 00:09:23,080 Speaker 1: a lot of of um areas. But I really want 155 00:09:23,080 --> 00:09:27,880 Speaker 1: to start out with your backgrounds in the early days, 156 00:09:27,920 --> 00:09:31,040 Speaker 1: because you mentioned you've been doing this for forty years. 157 00:09:31,520 --> 00:09:34,600 Speaker 1: You have some history and some perspective. But what I 158 00:09:34,720 --> 00:09:38,640 Speaker 1: find fascinating is that you essentially began as a c 159 00:09:38,920 --> 00:09:42,640 Speaker 1: f A at Pacific Life, at an insurance company. How 160 00:09:42,679 --> 00:09:46,600 Speaker 1: did you go from being an analyst to saying I 161 00:09:46,679 --> 00:09:48,680 Speaker 1: have an idea, let's set up a bond shop in 162 00:09:49,440 --> 00:09:53,079 Speaker 1: v one or so. Well, it was serendipity. Perhaps I 163 00:09:53,920 --> 00:09:57,640 Speaker 1: did private placements for Pacific Mutual life insurance companies. A 164 00:09:57,640 --> 00:10:00,760 Speaker 1: matter of fact, I made two private placements to the 165 00:10:00,800 --> 00:10:04,480 Speaker 1: eventual too richest people in the world, Sam Walton and 166 00:10:04,520 --> 00:10:08,720 Speaker 1: Warren Buffett unbeknownst to me, and Pacific Mutual at the time. 167 00:10:08,760 --> 00:10:11,400 Speaker 1: But that's how I got started making five and ten 168 00:10:11,440 --> 00:10:16,480 Speaker 1: million dollar loans. At time, downtown Los Angeles, there was 169 00:10:16,520 --> 00:10:23,559 Speaker 1: a budding development of bond trading. UM Traders actually put 170 00:10:23,600 --> 00:10:27,800 Speaker 1: their bonds physical bonds in a box UH, the ones 171 00:10:27,880 --> 00:10:30,240 Speaker 1: that they wanted to trade, and when they sold them, 172 00:10:30,240 --> 00:10:32,640 Speaker 1: they would shift them up by career and then they 173 00:10:32,679 --> 00:10:36,480 Speaker 1: get some new bonds in to the box US that 174 00:10:36,559 --> 00:10:38,520 Speaker 1: they would be trading on a weekly basis. So it 175 00:10:38,600 --> 00:10:41,600 Speaker 1: was very rudimentary and fundamental. And as a matter of fact, 176 00:10:41,679 --> 00:10:45,600 Speaker 1: Pacific Mutual bonds were held in a vault down below 177 00:10:45,600 --> 00:10:48,240 Speaker 1: in a basement, and one of my first assignments was 178 00:10:48,320 --> 00:10:51,880 Speaker 1: to go down and clip coupons, to send those coupons 179 00:10:51,880 --> 00:10:54,960 Speaker 1: and get the interest and UH and earned Pacific Mutuals 180 00:10:55,000 --> 00:10:59,640 Speaker 1: some some premiums. So you started and as an analyst, 181 00:11:00,000 --> 00:11:04,079 Speaker 1: literally clipping bond coupons. But how do you go from 182 00:11:04,120 --> 00:11:07,360 Speaker 1: that too? Here's an idea. Let's set set up a 183 00:11:07,400 --> 00:11:11,400 Speaker 1: standalone bond shot. Well, there was a setup, and at 184 00:11:11,679 --> 00:11:15,160 Speaker 1: the setup was basically developing inflation. In the early seventies, 185 00:11:15,200 --> 00:11:19,960 Speaker 1: after the the Vietnam War, um, you know, became apparent 186 00:11:20,040 --> 00:11:22,120 Speaker 1: that bonds could go down in price as well as up. 187 00:11:22,160 --> 00:11:24,400 Speaker 1: A matter of fact, I've been going down for ten 188 00:11:24,520 --> 00:11:27,680 Speaker 1: or fifteen years. And uh, there came a time when 189 00:11:27,720 --> 00:11:30,360 Speaker 1: someone thought, and there were some early people. I was 190 00:11:30,440 --> 00:11:33,520 Speaker 1: one of them, that thought that perhaps some bonds down 191 00:11:33,520 --> 00:11:37,800 Speaker 1: in those vaults should be sold in order to preserve principle. 192 00:11:37,960 --> 00:11:41,760 Speaker 1: And so uh in Los Angeles, and I'm sure to 193 00:11:41,880 --> 00:11:45,000 Speaker 1: some extent in New York and Chicago and Detroit, which 194 00:11:45,000 --> 00:11:48,040 Speaker 1: were the hubs back then. You know, some early young 195 00:11:48,360 --> 00:11:53,600 Speaker 1: individuals like myself began trading and selling bonds primarily in 196 00:11:53,679 --> 00:11:57,400 Speaker 1: order to keep them from going from a hundred to 197 00:11:57,760 --> 00:12:00,319 Speaker 1: sixty five and sixty and some of was a T 198 00:12:00,440 --> 00:12:02,840 Speaker 1: and T buns in the seventies actually with the two 199 00:12:02,880 --> 00:12:05,760 Speaker 1: and three eights coupons got as low as thirty three 200 00:12:05,800 --> 00:12:07,920 Speaker 1: cents on the dollar. Oh my god. And what was 201 00:12:07,960 --> 00:12:10,400 Speaker 1: the net So if anybody bought that, what sort of 202 00:12:11,200 --> 00:12:15,160 Speaker 1: yield are they looking at? Practically nine percent at the time. Well, yes, 203 00:12:15,559 --> 00:12:18,360 Speaker 1: you know, at the peak in one with the Volker 204 00:12:18,440 --> 00:12:22,280 Speaker 1: peak um long treasuries for fourteen and a half percent, 205 00:12:22,360 --> 00:12:24,439 Speaker 1: and so a T and T was probably trading at 206 00:12:24,480 --> 00:12:27,199 Speaker 1: sixteen sixteen and a half percent. And um they had, 207 00:12:27,320 --> 00:12:29,599 Speaker 1: believe it or not, some Gennu May mortgages with a 208 00:12:29,840 --> 00:12:34,079 Speaker 1: twenty percent coupon. So really for two of his timing, 209 00:12:34,240 --> 00:12:38,160 Speaker 1: when you you began right with the right call and 210 00:12:38,240 --> 00:12:40,280 Speaker 1: at the right moment more or less, yeah, I think so. 211 00:12:40,320 --> 00:12:41,960 Speaker 1: When I came out of u c l A. With 212 00:12:42,000 --> 00:12:44,640 Speaker 1: my master's degree having done a thesis on a book 213 00:12:44,679 --> 00:12:47,680 Speaker 1: called Beat the Market by Ed Thorpe, but I had 214 00:12:47,720 --> 00:12:52,400 Speaker 1: studied black jack. You were sort of professional black jack player, 215 00:12:52,559 --> 00:12:54,360 Speaker 1: well was for three or four months, not a big 216 00:12:54,440 --> 00:12:57,160 Speaker 1: hitter like Ed Thorpe. But I proved that the system 217 00:12:57,240 --> 00:12:59,240 Speaker 1: could work, and I went to u c l A. 218 00:12:59,320 --> 00:13:03,080 Speaker 1: Did my master is on Beat the Market, which was 219 00:13:03,120 --> 00:13:07,360 Speaker 1: a book on hedging, warrants and convertible bonds, and that's 220 00:13:07,360 --> 00:13:10,120 Speaker 1: how I got my job at Pacific Mutual. And um, 221 00:13:10,200 --> 00:13:14,520 Speaker 1: so there was just the beginnings, um of option types 222 00:13:14,559 --> 00:13:20,400 Speaker 1: of theories and and arbitrage types of trades that you know, 223 00:13:20,480 --> 00:13:23,400 Speaker 1: somebody like myself that had studied it usually had done 224 00:13:23,400 --> 00:13:26,520 Speaker 1: a master's you could could begin to take advantage of 225 00:13:26,520 --> 00:13:29,079 Speaker 1: a trading atmosphere in which you could compare a value 226 00:13:29,080 --> 00:13:32,480 Speaker 1: of one bond versus another. Back in those days, mostly 227 00:13:32,640 --> 00:13:35,160 Speaker 1: utility bonds, but there'd be a Detroit five and a 228 00:13:35,240 --> 00:13:38,120 Speaker 1: Detroit six, and the Detroit six would be trading at 229 00:13:38,120 --> 00:13:41,520 Speaker 1: a yield of the fifteen basis points less than the 230 00:13:41,600 --> 00:13:44,880 Speaker 1: Detroit five. And uh so, some of the early trades 231 00:13:44,880 --> 00:13:47,480 Speaker 1: were easy trades in which you could just clip ten 232 00:13:47,559 --> 00:13:50,040 Speaker 1: or fifteen basis points. But you didn't have the same 233 00:13:50,080 --> 00:13:53,920 Speaker 1: technology we had today. It was much harder to do 234 00:13:53,960 --> 00:13:55,760 Speaker 1: the compare. It's not like if you just punched something 235 00:13:55,760 --> 00:13:58,760 Speaker 1: into the terminal and say, all right, here's the expected 236 00:13:58,800 --> 00:14:03,800 Speaker 1: returns for these similarly graded bonds. It was really interesting 237 00:14:03,840 --> 00:14:07,080 Speaker 1: and really different. Um. The first time I saw a 238 00:14:07,120 --> 00:14:10,800 Speaker 1: tolerate machine was in nineteen seventy five. I came back 239 00:14:10,840 --> 00:14:13,840 Speaker 1: to New York to do a speech and uh at 240 00:14:13,840 --> 00:14:16,920 Speaker 1: the Hilton they had this fabulous machine that showed ongoing 241 00:14:16,960 --> 00:14:19,200 Speaker 1: prices for treasuries. I said, we've got to get one 242 00:14:19,240 --> 00:14:23,160 Speaker 1: of those, and barely could convince my boss at the 243 00:14:23,200 --> 00:14:26,240 Speaker 1: time in terms of private placements, to to do one. 244 00:14:26,280 --> 00:14:30,760 Speaker 1: But yeah, you know, very few screens and very little technology. 245 00:14:31,080 --> 00:14:35,160 Speaker 1: Everything was done by phone, which was interesting because if 246 00:14:35,240 --> 00:14:38,160 Speaker 1: if although don't I don't have a great phone voice, 247 00:14:38,200 --> 00:14:40,880 Speaker 1: I have a great trader demeanor on the phone, and 248 00:14:40,960 --> 00:14:44,720 Speaker 1: I can get the best price frequently, or could in 249 00:14:44,760 --> 00:14:47,520 Speaker 1: my early days. And so the ability to deal by 250 00:14:48,320 --> 00:14:51,560 Speaker 1: phone back and forth was much different, I think than 251 00:14:51,600 --> 00:14:54,520 Speaker 1: it is today with electronic trading. So you had to 252 00:14:54,600 --> 00:14:58,760 Speaker 1: sell your bosses on the idea of a toll rate machine. 253 00:14:59,160 --> 00:15:02,120 Speaker 1: How did you sell them on the idea of let's 254 00:15:02,160 --> 00:15:05,880 Speaker 1: spin out a fixed income division and this way we 255 00:15:05,920 --> 00:15:08,480 Speaker 1: can attract other clients and other capital. And hey, you 256 00:15:08,520 --> 00:15:10,240 Speaker 1: own most of it anyway, so what do you care. 257 00:15:10,600 --> 00:15:12,960 Speaker 1: There was a chairman of the board, Walter Girkin. He's 258 00:15:12,960 --> 00:15:17,320 Speaker 1: still alive. He's five miles away from Newport Beach up 259 00:15:17,320 --> 00:15:22,120 Speaker 1: in the hills. UH. I revere him because of his 260 00:15:23,880 --> 00:15:28,400 Speaker 1: UH Walter Walter came from Northwestern Mutual, came out to 261 00:15:29,400 --> 00:15:33,240 Speaker 1: Pacific Mutual about the same time I came to Pacific Mutual. 262 00:15:33,280 --> 00:15:37,080 Speaker 1: But he had this attitude, this aggressive attitude that um 263 00:15:37,560 --> 00:15:40,160 Speaker 1: was expressed I think in our building in Newport Beach. 264 00:15:40,240 --> 00:15:43,160 Speaker 1: They moved a year later from downtown l a to 265 00:15:43,600 --> 00:15:47,120 Speaker 1: Newport Beach with his fabulous new building and expressed an 266 00:15:47,120 --> 00:15:51,840 Speaker 1: attitude towards the future. Um we and when I say 267 00:15:51,880 --> 00:15:55,720 Speaker 1: we've Jim Muzzy who is the marketing person, and Bill Publick, 268 00:15:55,800 --> 00:16:00,280 Speaker 1: who is the the business person. We three the uh 269 00:16:00,520 --> 00:16:03,800 Speaker 1: we three kings of um not orient Are but the 270 00:16:03,800 --> 00:16:08,160 Speaker 1: Newport Beach got together and said, hey, um, yeah, that 271 00:16:08,320 --> 00:16:10,960 Speaker 1: we've got the potential here for a business. And we 272 00:16:11,080 --> 00:16:15,960 Speaker 1: walked into the chairman's office scared as uh baby ducks 273 00:16:16,480 --> 00:16:20,440 Speaker 1: and um with with leg shaking, said we'd like to 274 00:16:20,480 --> 00:16:23,760 Speaker 1: start a company called Pacific Investment Management, and we'd like 275 00:16:23,840 --> 00:16:27,560 Speaker 1: a piece of the action. Um. He didn't kick us out. 276 00:16:28,200 --> 00:16:30,880 Speaker 1: He thought about it. Uh he said, it sounds like 277 00:16:30,960 --> 00:16:34,200 Speaker 1: a good idea, even though within twelve months we were 278 00:16:34,200 --> 00:16:37,320 Speaker 1: making more than he was, and and on and on 279 00:16:37,400 --> 00:16:40,080 Speaker 1: and on it it went. We we started with our 280 00:16:40,080 --> 00:16:43,600 Speaker 1: first client, the Southern California Edison, which to be fair, 281 00:16:43,720 --> 00:16:49,840 Speaker 1: was a local board related um win so to speak. 282 00:16:50,560 --> 00:16:53,320 Speaker 1: We uh got a second client, A T and T, 283 00:16:53,560 --> 00:16:56,680 Speaker 1: which was the the beginning of it all because at 284 00:16:56,720 --> 00:16:58,680 Speaker 1: the time H T n T was the biggest of 285 00:16:58,720 --> 00:17:03,120 Speaker 1: the big and they chose us. The young kids we 286 00:17:03,160 --> 00:17:06,720 Speaker 1: were still in our twenties as the their first West 287 00:17:06,760 --> 00:17:12,000 Speaker 1: Coast manager. At the time, Bury there was this legislation 288 00:17:12,040 --> 00:17:17,720 Speaker 1: called Arissa in which pension funds were being nudged, forced, 289 00:17:18,080 --> 00:17:22,800 Speaker 1: you know, basically to open u their choices for managers. 290 00:17:22,840 --> 00:17:26,359 Speaker 1: Typically they've been Chicago Banks, Detroit Banks, New York Banks, 291 00:17:26,400 --> 00:17:29,320 Speaker 1: but now they had to choose amongst the different set 292 00:17:29,440 --> 00:17:35,320 Speaker 1: and so PIMCO became their first West Coast independent investment manager. 293 00:17:35,359 --> 00:17:38,000 Speaker 1: And boy, once you get a ten T, your your 294 00:17:38,359 --> 00:17:42,600 Speaker 1: on and up. So you start out, you garner a 295 00:17:42,640 --> 00:17:45,760 Speaker 1: few clients. Did you have any clue when you first 296 00:17:45,840 --> 00:17:50,160 Speaker 1: launched the shop what the future held or did you think, hey, 297 00:17:50,200 --> 00:17:52,399 Speaker 1: we can make a nice living doing this. No, we 298 00:17:52,440 --> 00:17:56,960 Speaker 1: thought we could. I I thought unbelievably And I told 299 00:17:57,080 --> 00:18:00,480 Speaker 1: my parents, Uh, when they came down the shin Via, 300 00:18:00,720 --> 00:18:04,760 Speaker 1: which about twenty miles south of the Newport Beach. First 301 00:18:04,800 --> 00:18:09,040 Speaker 1: house was a thirty one tho dollar house. UM, so 302 00:18:09,119 --> 00:18:13,800 Speaker 1: we weren't making much um. But I told my parents 303 00:18:13,880 --> 00:18:16,600 Speaker 1: about the bond business. They didn't know what a bond was, 304 00:18:16,680 --> 00:18:18,439 Speaker 1: but I told them that I was going to be 305 00:18:18,520 --> 00:18:23,160 Speaker 1: the best bond manager in the world. Um. At age 306 00:18:23,160 --> 00:18:27,119 Speaker 1: twenty something, at age twenty eight. They looked at me quizzically. 307 00:18:27,480 --> 00:18:31,320 Speaker 1: UM weren't quite sure whether I had gone up to 308 00:18:31,400 --> 00:18:34,320 Speaker 1: deep end, but in any case, that was my goal. 309 00:18:34,480 --> 00:18:38,560 Speaker 1: And UM, I think by that time my mom passed 310 00:18:38,600 --> 00:18:42,560 Speaker 1: in two thousand and two, that I was UM pretty 311 00:18:42,600 --> 00:18:48,000 Speaker 1: well in that direction. That that's quite fascinating. Um. Initially, 312 00:18:48,160 --> 00:18:51,560 Speaker 1: you guys began with twelve million dollars. Is that urban 313 00:18:51,680 --> 00:18:54,960 Speaker 1: legend or is that accurate now that it is twelve million? 314 00:18:55,080 --> 00:18:58,080 Speaker 1: So the early days is the three of you, when 315 00:18:58,119 --> 00:19:02,000 Speaker 1: did you start inning employee ease at a rapid clip? 316 00:19:02,200 --> 00:19:04,800 Speaker 1: I mean it was it was it a small three 317 00:19:04,840 --> 00:19:06,840 Speaker 1: man shop for a while? Or how soon will you 318 00:19:07,400 --> 00:19:11,480 Speaker 1: adding analyst, traders, bodies, etcetera. It took three or four years, 319 00:19:11,560 --> 00:19:14,400 Speaker 1: and we were stelling in a little wing of the 320 00:19:14,520 --> 00:19:19,120 Speaker 1: Pacific Mutual Building. Yeah, the business expanded from ten fifteen 321 00:19:19,359 --> 00:19:24,240 Speaker 1: twenty people. We developed the marketing staff, we developed obviously 322 00:19:24,320 --> 00:19:28,720 Speaker 1: accounting and internal staffs, and we developed importantly what we 323 00:19:28,840 --> 00:19:32,879 Speaker 1: call account management, where the account management would connect with 324 00:19:32,960 --> 00:19:37,080 Speaker 1: clients and where the portfolio managers Gross and uh now 325 00:19:37,320 --> 00:19:40,720 Speaker 1: Christal and us Um would be able to stay at 326 00:19:40,760 --> 00:19:43,679 Speaker 1: home and manage money as opposed to travel all around 327 00:19:43,680 --> 00:19:47,080 Speaker 1: and talk to clients. So in the early eighties, we 328 00:19:47,080 --> 00:19:51,600 Speaker 1: were a company of forty fifty people. We were close 329 00:19:51,600 --> 00:19:56,639 Speaker 1: to a billion dollars. Are are the theoretical? Boss Thompson, 330 00:19:57,160 --> 00:20:00,080 Speaker 1: who was head of the investment division and this have 331 00:20:00,160 --> 00:20:03,920 Speaker 1: a mutual, promised the company a trip to Hawaii if 332 00:20:03,920 --> 00:20:06,800 Speaker 1: we could ever reach a billion dollars in assets, And 333 00:20:07,240 --> 00:20:11,240 Speaker 1: when we finally did, he found a way to uh, 334 00:20:11,480 --> 00:20:13,840 Speaker 1: to put off or to reneg on the promise. We 335 00:20:14,119 --> 00:20:18,240 Speaker 1: never got to Hawaii. On Twitter, I did hashtag ask 336 00:20:18,320 --> 00:20:22,760 Speaker 1: Bill Gross, Hey, bill y bonds instead of equities. I 337 00:20:22,800 --> 00:20:25,840 Speaker 1: thought that was kind of an interesting I don't think 338 00:20:25,880 --> 00:20:29,360 Speaker 1: I've ever heard you anyone ask you that question. For me? Yes, 339 00:20:30,440 --> 00:20:33,280 Speaker 1: because I couldn't get a job in the stock area. 340 00:20:33,520 --> 00:20:35,399 Speaker 1: Really yeah, No, I came out of U c. L A. 341 00:20:35,480 --> 00:20:37,920 Speaker 1: I thought it was pretty smart, but nobody else did. 342 00:20:38,000 --> 00:20:41,800 Speaker 1: And Pacific Life gave me a job, like I said, 343 00:20:41,800 --> 00:20:46,040 Speaker 1: clipping those coupons and doing private placements for prospective people 344 00:20:46,080 --> 00:20:50,639 Speaker 1: like Walton and Buffett and uh yeah they by the 345 00:20:50,680 --> 00:20:53,200 Speaker 1: way of those the sort of names they give to hey, 346 00:20:53,600 --> 00:20:55,760 Speaker 1: those guys, or nobody give it to the kid. Is 347 00:20:55,800 --> 00:20:58,320 Speaker 1: that how that works? You know? It's it's sort of 348 00:20:58,359 --> 00:21:01,040 Speaker 1: like at the you know, the meat counter at the 349 00:21:01,040 --> 00:21:03,800 Speaker 1: grocery store. Take a number, and just like uh, just 350 00:21:03,840 --> 00:21:06,200 Speaker 1: like it popped up. And and Sam Walton, by the way, 351 00:21:06,359 --> 00:21:08,879 Speaker 1: was not like I said, he had two stores. I 352 00:21:08,920 --> 00:21:11,960 Speaker 1: traveled to Bentonville. He picked me up in his pickup 353 00:21:11,960 --> 00:21:14,440 Speaker 1: truck with his two sons and his dog and took 354 00:21:14,480 --> 00:21:18,360 Speaker 1: me round to the stores. And that was Walmart at 355 00:21:18,359 --> 00:21:22,480 Speaker 1: the time, and two stores, two stores. And when when 356 00:21:22,480 --> 00:21:24,600 Speaker 1: Buffett came in, he came in with Charlie Munger, and 357 00:21:24,640 --> 00:21:27,879 Speaker 1: they were much younger people, and they had this dilapidated 358 00:21:27,920 --> 00:21:31,639 Speaker 1: company called Berkshire Hathaway it uh it consisted to seize 359 00:21:31,680 --> 00:21:35,439 Speaker 1: candy blue chips stamps in this industrial complex in the 360 00:21:35,480 --> 00:21:38,920 Speaker 1: east that they were gonna, um, you know, close down anyway. 361 00:21:39,000 --> 00:21:42,520 Speaker 1: But they wanted five million dollars. And I can't recall 362 00:21:42,600 --> 00:21:45,160 Speaker 1: why I thought it was a good investment, but obviously 363 00:21:45,760 --> 00:21:51,320 Speaker 1: Buffett and Munger impressed me, and they got they got 364 00:21:51,320 --> 00:21:56,080 Speaker 1: ten million bucks. Not not that Pacific Investment or Pacific 365 00:21:56,160 --> 00:22:01,240 Speaker 1: Life was the beginning for them, because the it it 366 00:22:01,359 --> 00:22:03,000 Speaker 1: helped them on their way. But if you're still in 367 00:22:03,040 --> 00:22:06,880 Speaker 1: touch with either of them, yeah, Warren. I talk a lot, 368 00:22:06,920 --> 00:22:11,240 Speaker 1: and did talk considerably during the crisis, the Layman crisis 369 00:22:11,280 --> 00:22:13,080 Speaker 1: in two thousand and eight and two thousand and nine, 370 00:22:13,080 --> 00:22:16,160 Speaker 1: putting together plans and so on. Of course, Sam Walton's dead, 371 00:22:16,200 --> 00:22:20,840 Speaker 1: but um, yeah, for a while there it was interesting. 372 00:22:21,119 --> 00:22:24,640 Speaker 1: Let's talk a little bit about what else helped form 373 00:22:24,760 --> 00:22:27,720 Speaker 1: your views on investing. Do you did you have any 374 00:22:27,800 --> 00:22:31,639 Speaker 1: early mentors? You know, a business mentor, Walter Gerkin, certainly 375 00:22:31,640 --> 00:22:35,080 Speaker 1: because he at the foresight to give us a start. 376 00:22:35,119 --> 00:22:39,560 Speaker 1: But from the standpoint of investing, um, certainly at Thorpe. 377 00:22:39,840 --> 00:22:42,720 Speaker 1: And it sounds strange why a book called Beat the 378 00:22:42,760 --> 00:22:46,400 Speaker 1: Dealer could serve as that initial example, but but it did. 379 00:22:46,520 --> 00:22:51,159 Speaker 1: It taught me the principle of Gambler's ruined, basically the 380 00:22:51,200 --> 00:22:53,359 Speaker 1: fact that even if the odds are in your favor, 381 00:22:53,480 --> 00:22:56,080 Speaker 1: and you can do that in blackjack by counting the cards, 382 00:22:56,119 --> 00:22:58,960 Speaker 1: and at some point in time you know, instead of 383 00:22:59,000 --> 00:23:06,280 Speaker 1: the house being favored, the client can be favored seven, etcetera, etcetera. 384 00:23:06,320 --> 00:23:09,120 Speaker 1: But it taught me at the time that even when 385 00:23:09,720 --> 00:23:11,920 Speaker 1: odds and your favorite, you can only be a small 386 00:23:12,000 --> 00:23:14,640 Speaker 1: portion of your principle because you have streaks of bad 387 00:23:14,720 --> 00:23:18,040 Speaker 1: luck and uh, and you can experience what they call 388 00:23:18,080 --> 00:23:20,840 Speaker 1: gamblers ruined. So it's the same thing and investing. You know, 389 00:23:20,920 --> 00:23:24,639 Speaker 1: even with a very significant confident bet, you don't want 390 00:23:24,680 --> 00:23:26,200 Speaker 1: to put all your chips on the table. You want 391 00:23:26,200 --> 00:23:29,359 Speaker 1: to hold it back. And the theory of gamblers around 392 00:23:29,520 --> 00:23:32,600 Speaker 1: was that you needed at least fifty times your your 393 00:23:32,680 --> 00:23:35,760 Speaker 1: maximum bet at any time, no matter what your confidence level. 394 00:23:35,800 --> 00:23:38,760 Speaker 1: And so that was a two you know, a type 395 00:23:38,800 --> 00:23:41,719 Speaker 1: of maximum bet. It's held pretty well in terms of 396 00:23:41,720 --> 00:23:44,959 Speaker 1: corporate credits and sovereign credits. And it gave me a 397 00:23:44,960 --> 00:23:48,480 Speaker 1: sense of risk taking and when to take risk, when 398 00:23:48,480 --> 00:23:50,399 Speaker 1: not to take risk, and how much to take Uh. 399 00:23:50,680 --> 00:23:56,680 Speaker 1: It was perfect for uh marko Witz uh diversified genre 400 00:23:56,920 --> 00:24:00,040 Speaker 1: of portfolio management that was budding in the seven and 401 00:24:00,080 --> 00:24:03,720 Speaker 1: these so so Gambler's ruin leads to modern portfolio theory, 402 00:24:03,760 --> 00:24:07,400 Speaker 1: which leads to broadly diversified holdings even with a high 403 00:24:07,400 --> 00:24:09,760 Speaker 1: degree of confidence. Yeah, I would say his book too. On. 404 00:24:11,200 --> 00:24:13,679 Speaker 1: He wrote a book called Beat the Market. Uh. I 405 00:24:13,760 --> 00:24:18,800 Speaker 1: mentioned this before about convertible bonds and and um warrants 406 00:24:18,960 --> 00:24:22,880 Speaker 1: and and the hedging aspects of it. I developed a 407 00:24:22,960 --> 00:24:25,760 Speaker 1: very crude computer program about it. In any case, It 408 00:24:25,840 --> 00:24:29,880 Speaker 1: gave me a sense that markets weren't perfect, that they're 409 00:24:29,920 --> 00:24:33,600 Speaker 1: not fully efficient. Is that fully session? Yes? That was 410 00:24:33,640 --> 00:24:36,240 Speaker 1: my last class at U C l A, the Efficient 411 00:24:36,280 --> 00:24:41,680 Speaker 1: market theory, and uh yours truly. Bill Gross exited Efficient 412 00:24:42,240 --> 00:24:45,480 Speaker 1: Market Theory with a C minus, which in grad school 413 00:24:45,520 --> 00:24:48,679 Speaker 1: basically means you funked at What other books um or 414 00:24:48,720 --> 00:24:53,359 Speaker 1: investors influenced you? B sides Edgar Well, um, you know 415 00:24:53,440 --> 00:24:56,320 Speaker 1: several there's a there's a book by Jim Grant, and 416 00:24:56,320 --> 00:25:00,240 Speaker 1: he's written quite a few. Uh one at I go 417 00:25:00,320 --> 00:25:03,600 Speaker 1: back to if only because of the title, Uh, the 418 00:25:03,640 --> 00:25:07,200 Speaker 1: Trouble with Prosperity. How could there be trouble with prosperity? 419 00:25:07,400 --> 00:25:09,919 Speaker 1: H He came, I guess from the same theory. Although 420 00:25:09,960 --> 00:25:14,080 Speaker 1: Grant wouldn't claim a not a kinship with Minsky at all. No, 421 00:25:14,440 --> 00:25:16,720 Speaker 1: and you you got right there. Yeah, he wouldn't claim 422 00:25:16,720 --> 00:25:19,000 Speaker 1: a kinship with Minski. But this is the same thing. 423 00:25:19,520 --> 00:25:22,800 Speaker 1: Mensky saying that stability leads to instabilities about the same 424 00:25:22,840 --> 00:25:25,480 Speaker 1: thing to saying there's a trouble with prosperity and um 425 00:25:25,640 --> 00:25:28,120 Speaker 1: and so both of those. I I got into Mensky 426 00:25:28,119 --> 00:25:31,639 Speaker 1: in the early eight early twenty one century thanks to 427 00:25:31,640 --> 00:25:34,720 Speaker 1: Paul McCulley. I was gonna say, Paul, of your colleague, 428 00:25:35,280 --> 00:25:38,000 Speaker 1: I go fishing with him every summer up in Maine. 429 00:25:38,440 --> 00:25:40,919 Speaker 1: And he's the first person, I want to say, about 430 00:25:40,960 --> 00:25:43,760 Speaker 1: eight or ten years ago who first introduced me to 431 00:25:43,840 --> 00:25:46,639 Speaker 1: him in Minsky. Yeah, me too, And this was in 432 00:25:46,680 --> 00:25:50,440 Speaker 1: the two thousand and two and three, before the crisis. 433 00:25:50,520 --> 00:25:53,000 Speaker 1: But but he said, hey, here's uh, you know, here's 434 00:25:53,400 --> 00:25:56,560 Speaker 1: this guy called Minsky. And of course, you know, he 435 00:25:56,560 --> 00:26:01,439 Speaker 1: wrote some very technical and lengthy tone I guess, and 436 00:26:01,480 --> 00:26:04,159 Speaker 1: you had to work through them with difficulty. But the 437 00:26:04,280 --> 00:26:07,119 Speaker 1: essence of it was the stability leads to in stability 438 00:26:07,119 --> 00:26:13,119 Speaker 1: and the combination of the the classical Keynesian um neo classical, 439 00:26:13,160 --> 00:26:16,560 Speaker 1: if you will, uh concept of the economy in terms 440 00:26:16,600 --> 00:26:22,400 Speaker 1: of an outside influence that ultimately would re equibal equival 441 00:26:23,520 --> 00:26:27,840 Speaker 1: lead to a real equilibrium, I guess, As opposed to Minski, 442 00:26:27,880 --> 00:26:31,600 Speaker 1: who said, hey, no, the problem isn't the fact that 443 00:26:31,640 --> 00:26:35,119 Speaker 1: the economy itself and the financial economy are connected and 444 00:26:35,200 --> 00:26:39,120 Speaker 1: when one moves to access then uh, that it comes 445 00:26:39,119 --> 00:26:41,679 Speaker 1: from the inside as opposed to the outside. And that 446 00:26:41,760 --> 00:26:44,720 Speaker 1: was a brilliant observation because at PIMCO we began looking 447 00:26:44,880 --> 00:26:49,280 Speaker 1: in the early twenty one century for problems in terms 448 00:26:49,320 --> 00:26:52,399 Speaker 1: of debt creation and leverage in the housing market. And 449 00:26:52,400 --> 00:26:56,679 Speaker 1: we we sent our own people very um and we 450 00:26:56,760 --> 00:27:01,960 Speaker 1: took ten credit analysts in two thousand five and two 451 00:27:02,000 --> 00:27:05,159 Speaker 1: thousand and five and turned them into real estate u 452 00:27:06,080 --> 00:27:09,000 Speaker 1: uh phony real estate shoppers. We sent them to Phoenix 453 00:27:09,040 --> 00:27:13,240 Speaker 1: and the Vegas and Miami and Cincinnati and and pretended 454 00:27:13,280 --> 00:27:15,400 Speaker 1: to buy a house to see exactly what was going 455 00:27:15,440 --> 00:27:18,600 Speaker 1: on from the inside. Because of Minski and because of 456 00:27:18,640 --> 00:27:22,760 Speaker 1: this uh developing bubble and housing so we had it 457 00:27:22,760 --> 00:27:26,440 Speaker 1: pretty well down and thanks to Paul McCully um and 458 00:27:26,800 --> 00:27:29,200 Speaker 1: like I said, thanks to Minsky and Jim Grant, all 459 00:27:29,280 --> 00:27:32,920 Speaker 1: which you know, gave me and gave us this common 460 00:27:33,040 --> 00:27:40,600 Speaker 1: sense a goal, uh a lesson that that simply by 461 00:27:40,680 --> 00:27:44,720 Speaker 1: keeping inflation low at two percent does not necessarily mean 462 00:27:44,760 --> 00:27:50,560 Speaker 1: that the financial system remains totally stable forever. It doesn't. 463 00:27:50,560 --> 00:27:53,800 Speaker 1: It creates its own problems. And we all know what happened. 464 00:27:54,119 --> 00:27:57,680 Speaker 1: What do you think the typical investor does wrong? From 465 00:27:57,680 --> 00:28:02,320 Speaker 1: a psychological perspective? Is it simply giving into fear and 466 00:28:02,440 --> 00:28:04,880 Speaker 1: greed or is it more nuanced than that? I think 467 00:28:04,920 --> 00:28:09,080 Speaker 1: it's you know primarily that berry not although it's more nuanced. 468 00:28:09,359 --> 00:28:13,040 Speaker 1: But I can see it myself. Um, you know these 469 00:28:13,119 --> 00:28:16,520 Speaker 1: days and in recent days, UM, you know, I can 470 00:28:16,560 --> 00:28:19,440 Speaker 1: recognize where I turn right when I should have turned left, 471 00:28:19,440 --> 00:28:21,679 Speaker 1: and turned left when I should turn right. I'm a 472 00:28:21,760 --> 00:28:24,840 Speaker 1: human being. I get afraid. I'm a human being. I 473 00:28:24,880 --> 00:28:28,200 Speaker 1: get greedy when things are going the right way. Hopefully 474 00:28:28,240 --> 00:28:32,080 Speaker 1: all of this tempered by the gamblers ruined rules of 475 00:28:32,280 --> 00:28:34,680 Speaker 1: ed Thorpe. But yeah, I think the bane of all 476 00:28:34,760 --> 00:28:39,160 Speaker 1: investors is um is not doing what what Rothschild says. 477 00:28:39,680 --> 00:28:41,760 Speaker 1: You know, buying when there's blood in the streets. Hard 478 00:28:41,800 --> 00:28:43,880 Speaker 1: to buy when there's blood in the streets, and it's 479 00:28:43,880 --> 00:28:48,280 Speaker 1: hard to sell when the trumpets are are sounding. So 480 00:28:48,320 --> 00:28:52,000 Speaker 1: the ability to temper that, I think for all investors, 481 00:28:52,000 --> 00:28:54,680 Speaker 1: not just individuals, is the ultimate key. And to know 482 00:28:54,920 --> 00:28:59,040 Speaker 1: that things you know simply can't continue forever. Now. I 483 00:28:59,040 --> 00:29:01,840 Speaker 1: get a principle in my book called the alarm clock principle, 484 00:29:02,040 --> 00:29:05,400 Speaker 1: and uh. It basically says that everybody has an individual 485 00:29:05,440 --> 00:29:07,720 Speaker 1: alarm clock in terms of when they get up a 486 00:29:07,800 --> 00:29:11,440 Speaker 1: relative to the markets, meaning so say people get up 487 00:29:11,440 --> 00:29:16,440 Speaker 1: at six uh on average. In the investment world, very 488 00:29:16,440 --> 00:29:19,240 Speaker 1: few people get up at six, meaning at the right time. 489 00:29:19,720 --> 00:29:22,320 Speaker 1: A lot of them get up way too early, at 490 00:29:22,800 --> 00:29:25,400 Speaker 1: one in the morning or two in the morning. In 491 00:29:25,440 --> 00:29:28,440 Speaker 1: other words, they sound the clarion called the arm agedding 492 00:29:29,000 --> 00:29:32,040 Speaker 1: warning far too early, and and by the time it 493 00:29:32,080 --> 00:29:34,920 Speaker 1: gets to be six o'clock, Uh, they're out of business 494 00:29:35,040 --> 00:29:38,520 Speaker 1: or out of money, or they've kept their money in 495 00:29:38,520 --> 00:29:41,760 Speaker 1: cash for so long that the pack is distanced them 496 00:29:41,840 --> 00:29:45,080 Speaker 1: by by miles. And we certainly have seen that. On 497 00:29:45,120 --> 00:29:49,640 Speaker 1: the equity side. From O nine, people have been calling 498 00:29:50,040 --> 00:29:52,920 Speaker 1: for the end of the bowl market for I don't know, 499 00:29:54,000 --> 00:29:57,680 Speaker 1: six months after the bottom um, and that can be done, 500 00:29:57,680 --> 00:30:00,400 Speaker 1: and yours truly has done that. I've got I've gotten 501 00:30:00,480 --> 00:30:04,600 Speaker 1: up in many cases at one and two o'clock. But 502 00:30:04,680 --> 00:30:07,040 Speaker 1: on the other side, investors can get up far too 503 00:30:07,160 --> 00:30:10,760 Speaker 1: late at ten or eleven. Were more familiar with that 504 00:30:10,840 --> 00:30:14,040 Speaker 1: because that tends to connote either a teenager or laziness 505 00:30:14,120 --> 00:30:18,360 Speaker 1: or whatever. But it basically means you've missed the boat, 506 00:30:18,400 --> 00:30:20,320 Speaker 1: and by the time you get into the market, the 507 00:30:20,360 --> 00:30:24,600 Speaker 1: markets over its high noon, so to speak. Anyway, you know, 508 00:30:24,760 --> 00:30:29,080 Speaker 1: I think an individual investor has to know um through 509 00:30:29,120 --> 00:30:33,200 Speaker 1: experience and through analysis and thinking. When they get up 510 00:30:33,240 --> 00:30:36,160 Speaker 1: in the morning. And obviously the perfect time to get 511 00:30:36,240 --> 00:30:38,720 Speaker 1: up is five for five or six o'clock. You you 512 00:30:38,720 --> 00:30:41,240 Speaker 1: won't miss a thing, You'll be right on the money. 513 00:30:42,240 --> 00:30:46,440 Speaker 1: But we all have dispositions, predispositions like you mentioned. And uh, 514 00:30:47,200 --> 00:30:50,920 Speaker 1: my individual alarm clock is I think around four thirty. 515 00:30:50,960 --> 00:30:54,920 Speaker 1: It's a little bit early, but not too bad. Um. 516 00:30:55,160 --> 00:30:58,800 Speaker 1: And so knowing that it's four thirty, I try and 517 00:30:59,360 --> 00:31:03,840 Speaker 1: blend that into uh to what I do on the 518 00:31:03,880 --> 00:31:07,160 Speaker 1: investment side from the standpoint of timing markets. And so 519 00:31:07,280 --> 00:31:10,040 Speaker 1: you stay longer than your gut wants you to. Is 520 00:31:10,080 --> 00:31:12,440 Speaker 1: that the way you're describing it. And my my gut 521 00:31:12,480 --> 00:31:15,360 Speaker 1: wants me to get in there at four thirty, but 522 00:31:15,360 --> 00:31:19,040 Speaker 1: but my brain tells me it's really six. And and 523 00:31:19,080 --> 00:31:22,360 Speaker 1: so it's just like a it's like a batter. I 524 00:31:22,360 --> 00:31:25,480 Speaker 1: guess at the plate um, uh, you know, seeing a 525 00:31:25,480 --> 00:31:28,680 Speaker 1: lot of fastballs, and and now it is getting a curveball, 526 00:31:29,080 --> 00:31:31,560 Speaker 1: and a curveball comes in at ten miles an hour less. 527 00:31:31,600 --> 00:31:35,040 Speaker 1: And so the key for hitting a curveball, um is 528 00:31:35,080 --> 00:31:39,120 Speaker 1: to wait, wait, wait, wait, wait boom uh. And and 529 00:31:39,160 --> 00:31:43,200 Speaker 1: so the mikey uh, you know, it's seeing something about 530 00:31:43,240 --> 00:31:45,760 Speaker 1: to happen at four thirty is to wait for an 531 00:31:45,800 --> 00:31:48,440 Speaker 1: hour and a half and then you know, take a 532 00:31:48,440 --> 00:31:51,400 Speaker 1: swing and hopefully get a hit. So, um, every investor 533 00:31:51,440 --> 00:31:53,880 Speaker 1: I think has to know who they are from that standpoint, 534 00:31:53,880 --> 00:31:56,320 Speaker 1: because we're all different. Um, this is Barry Rehults. You're 535 00:31:56,320 --> 00:31:58,960 Speaker 1: listening to Masters in Business on Bloomberg Radio and my 536 00:31:59,000 --> 00:32:02,840 Speaker 1: guest today one Bill Gross, formerly of Pacific Life in 537 00:32:02,880 --> 00:32:07,200 Speaker 1: PIMCO now with Janice. So. I began my career on 538 00:32:07,240 --> 00:32:10,560 Speaker 1: a trading desk, and I've one of the things that 539 00:32:10,600 --> 00:32:14,400 Speaker 1: have always stayed with me from the head trader at 540 00:32:14,400 --> 00:32:16,360 Speaker 1: the time, a guy named Bill used to say to me, 541 00:32:16,760 --> 00:32:19,960 Speaker 1: it's okay to be wrong, it's not okay to stay wrong. 542 00:32:20,480 --> 00:32:22,880 Speaker 1: And throughout your career you've had a lot of great calls, 543 00:32:22,920 --> 00:32:25,280 Speaker 1: but you've had some calls that have been wrong, which 544 00:32:25,320 --> 00:32:29,480 Speaker 1: you subsequently reversed fairly quickly. So let's talk a little 545 00:32:29,480 --> 00:32:32,280 Speaker 1: bit about two thousand and eleven, where I think a 546 00:32:32,280 --> 00:32:34,320 Speaker 1: lot of people have made a big deal about that. 547 00:32:34,480 --> 00:32:37,680 Speaker 1: You said, hey, we're gonna have a problem, but you 548 00:32:37,960 --> 00:32:41,760 Speaker 1: reverse that trade fairly quickly, didn't you. You took treasuries 549 00:32:41,800 --> 00:32:45,400 Speaker 1: off in eleven, thinking we're gonna see higher inflation, higher 550 00:32:45,400 --> 00:32:48,760 Speaker 1: interest rate, it's bigger deficit. But you didn't marry that 551 00:32:48,800 --> 00:32:52,040 Speaker 1: position at all. No, you can't get married to a position. 552 00:32:52,200 --> 00:32:55,640 Speaker 1: And you know, like you're suggesting, and I had just 553 00:32:55,680 --> 00:32:59,600 Speaker 1: suggested with the alarm clock. You know that the timings 554 00:33:00,040 --> 00:33:01,880 Speaker 1: article is to win, to get in and win to 555 00:33:01,960 --> 00:33:05,480 Speaker 1: get out. But being married to a position, yeah, is 556 00:33:05,960 --> 00:33:08,600 Speaker 1: death for an investor. You can't fall in love with 557 00:33:08,640 --> 00:33:12,880 Speaker 1: your certificates. Um, some of them are very pretty, by 558 00:33:12,920 --> 00:33:15,000 Speaker 1: the way, and you can fall in love with him 559 00:33:15,080 --> 00:33:20,200 Speaker 1: spoken like a stamp. So yeah. And in two thousand eleven, um, 560 00:33:20,280 --> 00:33:22,320 Speaker 1: yeah it was. It was the wrong call in terms 561 00:33:22,320 --> 00:33:26,960 Speaker 1: of treasury. Sort of a famous year, I guess for PIMCO. 562 00:33:27,120 --> 00:33:30,840 Speaker 1: But uh, you know, like you're suggesting. Uh, that was 563 00:33:31,480 --> 00:33:34,920 Speaker 1: reversed later in the year and in two thousand and twelve, actually, 564 00:33:34,960 --> 00:33:38,240 Speaker 1: by March of two thousand and twelve, everything that had 565 00:33:38,280 --> 00:33:41,960 Speaker 1: been lost from an alpha standpoint, about three d and 566 00:33:41,960 --> 00:33:45,000 Speaker 1: fifty basis points as I remember, came back in a 567 00:33:45,000 --> 00:33:47,120 Speaker 1: period of three or four months, And in two thousand 568 00:33:47,160 --> 00:33:50,120 Speaker 1: and twelve went on too to have a six hundred 569 00:33:50,160 --> 00:33:53,520 Speaker 1: basis point off a year versus the minus three fifties. 570 00:33:53,600 --> 00:33:57,120 Speaker 1: I remember in ten cent and total return, I think 571 00:33:57,160 --> 00:34:01,160 Speaker 1: the benchmark was three seven thing like that. So you 572 00:34:01,200 --> 00:34:03,040 Speaker 1: had made that up. And at the same time, not 573 00:34:03,120 --> 00:34:05,520 Speaker 1: only because you and I let me a little background 574 00:34:05,520 --> 00:34:09,080 Speaker 1: for listeners, so you and I had been emailing about this. 575 00:34:09,760 --> 00:34:15,640 Speaker 1: Paul Krugman famously chastised you after you left Pimco, saying 576 00:34:16,239 --> 00:34:19,600 Speaker 1: Pimco and gross never recovered from two thousand eleven. And 577 00:34:19,640 --> 00:34:21,919 Speaker 1: you said, hey, this isn't true. To take a look 578 00:34:21,960 --> 00:34:23,880 Speaker 1: at it, and so I did. I went back. I 579 00:34:23,920 --> 00:34:28,240 Speaker 1: looked at the data. Not only did total return regain 580 00:34:28,280 --> 00:34:31,759 Speaker 1: all the outflows and then some the following year. Two 581 00:34:31,840 --> 00:34:34,800 Speaker 1: years later, PIMCO had gone from one point to five 582 00:34:35,239 --> 00:34:39,480 Speaker 1: to two trillion dollars. So it was fairly clear this 583 00:34:39,600 --> 00:34:43,800 Speaker 1: was far from quote haunting Pimco. It was a trade 584 00:34:43,800 --> 00:34:46,400 Speaker 1: that didn't work out. You reversed it, and it certainly 585 00:34:46,400 --> 00:34:49,880 Speaker 1: didn't stop the asset gathering process over the next couple 586 00:34:49,880 --> 00:34:53,680 Speaker 1: of years, nor did it impact negatively um the performance 587 00:34:53,719 --> 00:34:55,680 Speaker 1: the following year. Yeah, I think that's right, and it's 588 00:34:55,680 --> 00:34:57,000 Speaker 1: a bad rap. And I don't I don't know what 589 00:34:57,120 --> 00:35:01,200 Speaker 1: Krugman is doing waning in on h uh, you know, 590 00:35:01,239 --> 00:35:05,960 Speaker 1: not buying treasuries and and being unpatriotic, which was I 591 00:35:05,960 --> 00:35:09,319 Speaker 1: think it's an inflation debate from his perspective as an economist, 592 00:35:09,400 --> 00:35:13,640 Speaker 1: not a investing debate. But you were certainly an available, 593 00:35:13,680 --> 00:35:15,960 Speaker 1: full guy to use as an example. Look, you got 594 00:35:16,000 --> 00:35:18,759 Speaker 1: the inflation call wrong and then all sorts of bad 595 00:35:18,760 --> 00:35:21,040 Speaker 1: things happen, or that was the argument, you know, did 596 00:35:21,120 --> 00:35:22,920 Speaker 1: you just shake that off at the time? Did you 597 00:35:22,960 --> 00:35:26,120 Speaker 1: think that would really be a significant issue on a 598 00:35:26,200 --> 00:35:28,279 Speaker 1: long and story track record, Because there are a number 599 00:35:28,280 --> 00:35:34,000 Speaker 1: of people I've been through so many of those, um mistakes, Um, 600 00:35:34,840 --> 00:35:38,200 Speaker 1: nature of trading. It's the nature of trading. Um. And 601 00:35:38,800 --> 00:35:42,120 Speaker 1: almost every time, like my wife says, um, you know, 602 00:35:43,040 --> 00:35:46,640 Speaker 1: you'll make it up. And and we always did and 603 00:35:46,640 --> 00:35:49,800 Speaker 1: and um. So it didn't bother me. It seemed to 604 00:35:49,920 --> 00:35:52,840 Speaker 1: bother a lot of people under the impression, I guess 605 00:35:52,880 --> 00:35:57,399 Speaker 1: that the gross and pimpco were infallible. But because and 606 00:35:57,400 --> 00:36:00,520 Speaker 1: and and it's fair to say we came through the crisis, 607 00:36:00,520 --> 00:36:04,120 Speaker 1: the Layman crisis with shining colors because of what I 608 00:36:04,160 --> 00:36:07,400 Speaker 1: talked about with Mensky and McCaulay, and knowing about the 609 00:36:07,440 --> 00:36:11,680 Speaker 1: housing market, we uh, you know, we were nine percentile 610 00:36:11,800 --> 00:36:14,600 Speaker 1: stars and oh eight No. Nine, and that was really 611 00:36:14,600 --> 00:36:17,520 Speaker 1: the basis for the total return fund going to two 612 00:36:18,840 --> 00:36:21,960 Speaker 1: billion dollars at it at its peaked a confidence that 613 00:36:22,040 --> 00:36:25,400 Speaker 1: we could protect principle and then, like I say, with 614 00:36:25,480 --> 00:36:27,719 Speaker 1: a mild mistake in two thousand and eleven, make it 615 00:36:27,760 --> 00:36:31,160 Speaker 1: grow in two thousand and ten and two thousand and twelve. 616 00:36:31,280 --> 00:36:35,000 Speaker 1: And to me, it was a sleepless, uh you know, 617 00:36:35,160 --> 00:36:39,640 Speaker 1: period of months um as always, but never one without 618 00:36:39,680 --> 00:36:42,040 Speaker 1: the confidence that we'd get it back. I have to 619 00:36:42,040 --> 00:36:44,680 Speaker 1: ask you one question. You mentioned two hundred and nine, 620 00:36:45,200 --> 00:36:49,640 Speaker 1: almost three hundred billion dollars. Did the size of total 621 00:36:49,680 --> 00:36:53,680 Speaker 1: returns have an outsized impact on your ability to maneuver? 622 00:36:53,800 --> 00:36:56,200 Speaker 1: Did it just get to be too big at that 623 00:36:56,239 --> 00:36:59,560 Speaker 1: point in retrospect? And you know, I would have to say, yes, 624 00:36:59,719 --> 00:37:01,680 Speaker 1: that's a lot of money, you know, not that the 625 00:37:01,719 --> 00:37:06,560 Speaker 1: markets uh haven't grown with us, didn't grow with Pemco. 626 00:37:06,760 --> 00:37:08,880 Speaker 1: You know, through the years, that was always our claim 627 00:37:08,960 --> 00:37:12,279 Speaker 1: to clients that hey, we're still only one and a 628 00:37:12,280 --> 00:37:14,200 Speaker 1: half percent of the market. That cider eat side of 629 00:37:14,200 --> 00:37:16,680 Speaker 1: the market gets bigger, It's fair to say in the 630 00:37:16,760 --> 00:37:22,560 Speaker 1: last few years that the street would always know what 631 00:37:22,680 --> 00:37:25,760 Speaker 1: Pemco was doing. We would always know in the early 632 00:37:25,840 --> 00:37:28,040 Speaker 1: years what the state of California was doing. They were 633 00:37:28,040 --> 00:37:31,239 Speaker 1: the big horse and a big wheel back then, and 634 00:37:31,719 --> 00:37:33,719 Speaker 1: you know, you'd know within five or ten minutes via 635 00:37:33,760 --> 00:37:36,840 Speaker 1: the brokerage wires and the phones the state was in, 636 00:37:37,000 --> 00:37:39,520 Speaker 1: the state was out. And so it became the same 637 00:37:39,560 --> 00:37:42,480 Speaker 1: thing with PEMCO. Any trade that we did obviously had 638 00:37:42,520 --> 00:37:45,239 Speaker 1: to be an enormous size relative to the rest of 639 00:37:45,239 --> 00:37:48,560 Speaker 1: the market, and we affected markets and we paid a 640 00:37:48,600 --> 00:37:51,600 Speaker 1: price for that in terms of in and outs and 641 00:37:52,200 --> 00:37:56,600 Speaker 1: ultimately in terms of the street being well informed and 642 00:37:56,640 --> 00:38:00,040 Speaker 1: in some cases working against us. Any plans on a 643 00:38:00,719 --> 00:38:04,399 Speaker 1: cap at the young constrained funded janis well not yet. 644 00:38:04,440 --> 00:38:07,759 Speaker 1: We're only a two billion dollars and and so you 645 00:38:07,800 --> 00:38:10,960 Speaker 1: know that to me is um maybe not a perfect size, 646 00:38:11,000 --> 00:38:13,160 Speaker 1: like to get a little bit bigger, but it's certainly 647 00:38:13,200 --> 00:38:16,799 Speaker 1: size where uh you can move and you're flexible and 648 00:38:17,239 --> 00:38:19,799 Speaker 1: you don't have the problems of the street, you know, 649 00:38:19,960 --> 00:38:22,920 Speaker 1: wondering what Janie is going to do, because two billion 650 00:38:23,000 --> 00:38:26,960 Speaker 1: doesn't move markets like two nobody's front running, you know, 651 00:38:27,000 --> 00:38:30,120 Speaker 1: one's training against you. It's not the same situation. So 652 00:38:30,280 --> 00:38:34,560 Speaker 1: let's talk a little bit about the Lehman situation, the 653 00:38:34,600 --> 00:38:40,160 Speaker 1: financial crisis. So you're running firm that has at the time, 654 00:38:40,600 --> 00:38:43,160 Speaker 1: I want to say, oh seven, total return was about 655 00:38:43,160 --> 00:38:46,560 Speaker 1: a hundred and sixty billion dollars. Is that about right? Okay, 656 00:38:46,640 --> 00:38:49,560 Speaker 1: I'll go with it. UM, and PIMCO was just under 657 00:38:49,560 --> 00:38:53,200 Speaker 1: a trillion dollars. So now you're sitting on this huge 658 00:38:53,239 --> 00:38:56,640 Speaker 1: pile of other people's capital that you're managing on their behalf, 659 00:38:57,320 --> 00:39:02,200 Speaker 1: and suddenly the world tum into the abyss. What's that like? 660 00:39:02,560 --> 00:39:05,600 Speaker 1: It was sheer panic, not just from the standpoint of 661 00:39:05,680 --> 00:39:09,760 Speaker 1: the company, but personally. UM. It's a well told story 662 00:39:09,840 --> 00:39:13,520 Speaker 1: that Mohammad al Arian and and Bill Gross both on 663 00:39:13,560 --> 00:39:17,120 Speaker 1: the same day independently called their wives uh and told 664 00:39:17,160 --> 00:39:19,480 Speaker 1: them to take all the money they had in the 665 00:39:19,560 --> 00:39:24,520 Speaker 1: bank out of the bank. Um in cash. Of course, 666 00:39:24,560 --> 00:39:26,600 Speaker 1: I think there was a ten dollar limit, but we 667 00:39:26,640 --> 00:39:30,000 Speaker 1: said get it out of there. UM. So that tells you, uh, 668 00:39:30,200 --> 00:39:34,000 Speaker 1: personally what was going on and institutionally. UM. You know, 669 00:39:34,080 --> 00:39:36,560 Speaker 1: we were we were full time. We were sleeping in 670 00:39:36,560 --> 00:39:40,600 Speaker 1: the garage, sleeping in cars. Uh. You know, many of 671 00:39:40,680 --> 00:39:45,239 Speaker 1: us never left the building. Uh. It was good to 672 00:39:45,360 --> 00:39:49,719 Speaker 1: have Mohammed uh with us at the time because he 673 00:39:49,760 --> 00:39:53,040 Speaker 1: had more expertise than I had in terms of the 674 00:39:53,040 --> 00:39:57,320 Speaker 1: the technical dealings, in terms of money markets and brokers 675 00:39:57,360 --> 00:40:01,360 Speaker 1: and repo and collateral. Um, you know I was. I 676 00:40:01,440 --> 00:40:04,840 Speaker 1: was a trader and a portfolio manager. Um. Some Mohammed 677 00:40:05,440 --> 00:40:08,880 Speaker 1: really helped us, uh back then in terms of preserving 678 00:40:09,520 --> 00:40:13,320 Speaker 1: what we had. We we had money invested in Lehman Brothers. 679 00:40:13,360 --> 00:40:17,680 Speaker 1: We had money invested in um, you know, unsettled positions 680 00:40:17,680 --> 00:40:20,440 Speaker 1: with Lehman Brothers. And there were some uh you know, 681 00:40:20,480 --> 00:40:23,799 Speaker 1: minute a minute maneuver and yelling screaming, uh you mean 682 00:40:23,960 --> 00:40:28,959 Speaker 1: them as a counterparty. It's actually we owned Lehman brother 683 00:40:29,000 --> 00:40:33,520 Speaker 1: paper too unfortunate. Yeah, and and everybody did. Yeah, And 684 00:40:33,800 --> 00:40:36,640 Speaker 1: we came out of it very very well. And in 685 00:40:37,040 --> 00:40:40,840 Speaker 1: terms of the positions that we owned that that countered 686 00:40:40,840 --> 00:40:44,920 Speaker 1: our Layman positions, I mean we own you know, billions 687 00:40:44,920 --> 00:40:48,000 Speaker 1: and hundreds of billions of euro dollar features that were 688 00:40:48,800 --> 00:40:52,960 Speaker 1: screaming higher in price because the FED was dropping interest 689 00:40:53,040 --> 00:40:55,640 Speaker 1: rates are about the Trump indust rates to zero. And 690 00:40:55,719 --> 00:40:59,040 Speaker 1: so you know, we had some insurance against the Layman positions, 691 00:40:59,080 --> 00:41:02,280 Speaker 1: but no, we weren't. Some were enough to completely avoid 692 00:41:03,080 --> 00:41:06,440 Speaker 1: the situation. And as you know, during Layman it was 693 00:41:06,480 --> 00:41:10,160 Speaker 1: not just Layman, but you know Goldman and Meryl and 694 00:41:10,200 --> 00:41:12,840 Speaker 1: Morgan Stanley, they were all next, so to speak, and 695 00:41:12,880 --> 00:41:16,480 Speaker 1: so everything was thinking like a rock and um, everyone 696 00:41:16,640 --> 00:41:21,000 Speaker 1: was trying to preserve their own uh collateral, their own cash. 697 00:41:21,080 --> 00:41:24,000 Speaker 1: And it was really a dog fight of food fight, 698 00:41:24,760 --> 00:41:29,280 Speaker 1: not just between um, you know, private institutions and Layman 699 00:41:29,719 --> 00:41:32,360 Speaker 1: and the street and Layman, but between each other. Everybody 700 00:41:32,440 --> 00:41:34,839 Speaker 1: was looking after their own little skinny. You were at 701 00:41:34,880 --> 00:41:37,840 Speaker 1: the time a huge holder of Fannie Mae and Freddie 702 00:41:37,880 --> 00:41:40,640 Speaker 1: Mac the g s c S. That was a trade 703 00:41:40,680 --> 00:41:44,160 Speaker 1: that could have turned out to be disastrous. It actually 704 00:41:44,160 --> 00:41:46,000 Speaker 1: turned out to be a big money maker for you. 705 00:41:46,280 --> 00:41:49,400 Speaker 1: To describe the thinking beyond that, well, the thinking was 706 00:41:49,440 --> 00:41:51,560 Speaker 1: that they were money good. I I know, the Chinese 707 00:41:51,640 --> 00:41:54,640 Speaker 1: at the time, we're asking questions of Paulson and and 708 00:41:54,680 --> 00:41:57,200 Speaker 1: so on, and legitimate questions as to whether they were 709 00:41:57,239 --> 00:42:01,760 Speaker 1: money good and um holders of treasure. Reason and Fannie 710 00:42:01,800 --> 00:42:04,480 Speaker 1: and Freddie and thinking might have been something along the 711 00:42:04,480 --> 00:42:06,799 Speaker 1: lines of, hey, if you guys aren't going to back 712 00:42:06,840 --> 00:42:08,719 Speaker 1: the g s c s, why should we think you're 713 00:42:08,719 --> 00:42:12,000 Speaker 1: gonna back your own treasuries? And that that certainly was 714 00:42:12,040 --> 00:42:14,640 Speaker 1: the case, and that was the reason why we thought 715 00:42:14,680 --> 00:42:16,920 Speaker 1: that they would back the the g S c S 716 00:42:17,040 --> 00:42:19,680 Speaker 1: and and you know, there was I think a five 717 00:42:19,760 --> 00:42:23,279 Speaker 1: billion dollar you know, line of credit to the G 718 00:42:23,560 --> 00:42:27,120 Speaker 1: S S technically in a prospective, but that was nothing 719 00:42:27,200 --> 00:42:31,960 Speaker 1: relative to their size. Ultimately, it was a position of 720 00:42:32,080 --> 00:42:35,719 Speaker 1: faith that that the G S S and the agencies 721 00:42:35,840 --> 00:42:37,920 Speaker 1: and the U. S. Treasury were one and the same. 722 00:42:38,360 --> 00:42:40,400 Speaker 1: Obviously they're not one and the same, but one and 723 00:42:40,440 --> 00:42:43,120 Speaker 1: the same in terms of protection of principle and interest. 724 00:42:43,200 --> 00:42:45,560 Speaker 1: And so that was the bit, and it was a 725 00:42:45,560 --> 00:42:48,759 Speaker 1: big bit, and and others were moving in the other 726 00:42:48,840 --> 00:42:52,080 Speaker 1: direction because like I said, um, you know, no one 727 00:42:52,239 --> 00:42:56,239 Speaker 1: was deemed safe other than the the the U. S. 728 00:42:56,560 --> 00:42:59,360 Speaker 1: Treasury per se, and uh, you know, it's just a 729 00:42:59,480 --> 00:43:02,560 Speaker 1: question of of where to where to put your money. 730 00:43:02,680 --> 00:43:05,560 Speaker 1: We we decided that the agencies were okay, and certainly 731 00:43:05,600 --> 00:43:09,040 Speaker 1: the agency mortgages, which was the key because even if 732 00:43:09,080 --> 00:43:13,280 Speaker 1: the agency has failed you, you theoretically and in reality 733 00:43:13,360 --> 00:43:19,480 Speaker 1: had collateral behind your loan that ultimately could be foreclosed on. Now, 734 00:43:19,520 --> 00:43:23,920 Speaker 1: as we know through experience, the foreclosure ultimately resulted in 735 00:43:24,400 --> 00:43:26,680 Speaker 1: forty and thirty and twenty cents on the dollar in 736 00:43:26,719 --> 00:43:30,719 Speaker 1: some cases. So it wasn't perfect, But the combination of 737 00:43:30,760 --> 00:43:35,000 Speaker 1: the you know, our confidence in money, goodness of the agencies, 738 00:43:35,040 --> 00:43:39,200 Speaker 1: and the collateral made an attractive risk reward situation. So 739 00:43:39,239 --> 00:43:42,160 Speaker 1: now let's talk about You've been a pretty I don't 740 00:43:42,160 --> 00:43:45,040 Speaker 1: want to say critic, but you've been a commentator and 741 00:43:45,160 --> 00:43:49,520 Speaker 1: observer of of the markets and of the Fed. So 742 00:43:49,600 --> 00:43:52,279 Speaker 1: let's ask the big question. What is the impact of 743 00:43:52,480 --> 00:43:57,760 Speaker 1: ZERP and zero interest rate policy and quantitative easing? How 744 00:43:57,800 --> 00:44:00,440 Speaker 1: has this impacted the markets? What is this mean to 745 00:44:01,440 --> 00:44:03,640 Speaker 1: risk assets? And and how do you think this is 746 00:44:03,640 --> 00:44:08,560 Speaker 1: going to impact this current generation of portfolio match And 747 00:44:08,640 --> 00:44:11,279 Speaker 1: how has it affected the real economy? Because I think 748 00:44:11,280 --> 00:44:15,319 Speaker 1: it's all connected and and most observers don't connect it 749 00:44:15,960 --> 00:44:21,000 Speaker 1: to the real economy, but certainly it's affected financial markets, uh, 750 00:44:21,320 --> 00:44:24,120 Speaker 1: you know, with interest rates where they are, and we're 751 00:44:24,120 --> 00:44:27,520 Speaker 1: not exactly sure because it's a counterfactual that are where 752 00:44:27,520 --> 00:44:30,239 Speaker 1: they would be if we hadn't have QUI in the 753 00:44:30,440 --> 00:44:32,560 Speaker 1: in the United States, or if the b o J 754 00:44:32,680 --> 00:44:36,560 Speaker 1: didn't have que and if you know, the ECB doesn't 755 00:44:36,600 --> 00:44:40,120 Speaker 1: do q E. Um. You know, all very uncertain. But yeah, 756 00:44:40,200 --> 00:44:43,200 Speaker 1: many studies by the FED itself, not that they can 757 00:44:43,239 --> 00:44:48,520 Speaker 1: be the trusted verbatim. Uh, in terms of uh you 758 00:44:48,560 --> 00:44:51,719 Speaker 1: know the facts so to speak, but you know they suggest, 759 00:44:52,239 --> 00:44:58,080 Speaker 1: you know, impact of maybe basis points on ten year treasuries, 760 00:44:58,080 --> 00:44:59,960 Speaker 1: and we know the impact in terms of money mark 761 00:45:00,000 --> 00:45:02,560 Speaker 1: it rates just so in other words, instead of two 762 00:45:03,080 --> 00:45:06,560 Speaker 1: we'd have three. That seems kind of low, although when 763 00:45:06,560 --> 00:45:09,640 Speaker 1: we look around the rest of the world, everybody else's 764 00:45:09,719 --> 00:45:13,160 Speaker 1: rates at least the major countries much lower than than 765 00:45:13,280 --> 00:45:16,560 Speaker 1: us here are in the US, right, Um, well, that's 766 00:45:16,560 --> 00:45:20,799 Speaker 1: because the US at the moment has a stronger economy 767 00:45:20,840 --> 00:45:24,760 Speaker 1: and a potential for um, some inflation as opposed to 768 00:45:24,760 --> 00:45:28,279 Speaker 1: the negative inflation. So you know we have that that 769 00:45:28,600 --> 00:45:32,799 Speaker 1: spread in the expectation that will remain a a dominant 770 00:45:32,880 --> 00:45:36,719 Speaker 1: leader in terms of the global recovery. Um, you know, 771 00:45:36,719 --> 00:45:40,120 Speaker 1: so so que He's definitely had an impact on on bonds, 772 00:45:40,120 --> 00:45:42,880 Speaker 1: on money market rates, on and on stock prices to 773 00:45:43,360 --> 00:45:45,480 Speaker 1: h you know, that's the hard one. Where would a 774 00:45:45,520 --> 00:45:49,320 Speaker 1: peb if the tenure was at three instead of two, 775 00:45:49,400 --> 00:45:53,000 Speaker 1: and if money market rates were at uh two percent 776 00:45:53,280 --> 00:45:56,520 Speaker 1: that is zero? Um, you know, always hard to answer, 777 00:45:56,560 --> 00:45:58,960 Speaker 1: but there's no doubt that the tripling of the stock 778 00:45:59,000 --> 00:46:03,319 Speaker 1: market since the the bottom has been significantly affected by 779 00:46:03,400 --> 00:46:08,960 Speaker 1: QUEI money has gone out from the course, so to speak, 780 00:46:09,080 --> 00:46:12,920 Speaker 1: from the banks in terms of reserves, and not entirely so, 781 00:46:13,080 --> 00:46:15,840 Speaker 1: but out from the banks in terms of reserves into 782 00:46:15,880 --> 00:46:19,000 Speaker 1: the outer reaches of the asset markets. And that would 783 00:46:19,040 --> 00:46:22,800 Speaker 1: include you know, bonds and long term bonds and corporate bonds, 784 00:46:22,800 --> 00:46:25,000 Speaker 1: and then stocks and equities and real estate, and so 785 00:46:25,360 --> 00:46:30,920 Speaker 1: the asset markets have been fertilized, undoubtedly, h fertilized, that's 786 00:46:30,920 --> 00:46:34,440 Speaker 1: a good word. Yeah. The question to me becomes, you know, 787 00:46:34,480 --> 00:46:37,919 Speaker 1: the effect on the real economy again, a counterfactual, would 788 00:46:37,960 --> 00:46:42,600 Speaker 1: the real economy be at three now if we hadn't 789 00:46:42,680 --> 00:46:46,720 Speaker 1: done quantitative easing? Probably not, because there is, in my opinion, 790 00:46:46,760 --> 00:46:50,600 Speaker 1: a wealth effect that trickles down very slowly, but trickles 791 00:46:50,640 --> 00:46:55,200 Speaker 1: down from wealthy investors into the economy, and so the 792 00:46:55,239 --> 00:46:58,040 Speaker 1: real economy is better. But I would make this point, 793 00:46:58,120 --> 00:47:02,719 Speaker 1: and uh, I think others such as uh, you know 794 00:47:03,400 --> 00:47:07,120 Speaker 1: Fisher in Dallas and several others you know are have 795 00:47:07,280 --> 00:47:10,880 Speaker 1: quietly tried to make the point that interest rate should 796 00:47:10,880 --> 00:47:13,840 Speaker 1: be higher, and not because of the inflationary menace, but 797 00:47:13,960 --> 00:47:18,840 Speaker 1: because it affects the returns, the real returns on investment 798 00:47:18,920 --> 00:47:22,440 Speaker 1: in the real economy. Look at it this way. If 799 00:47:22,440 --> 00:47:25,920 Speaker 1: a long term thirty year treasury bond was at uh, 800 00:47:26,040 --> 00:47:29,080 Speaker 1: you know, instead of you know, below three percent, was 801 00:47:29,120 --> 00:47:33,960 Speaker 1: at one percent, bond investors would know that, you know, 802 00:47:34,120 --> 00:47:39,080 Speaker 1: the the duration would be uh, you know, probably forty years, 803 00:47:39,120 --> 00:47:42,240 Speaker 1: and that the risk return would be inappropriate. So they 804 00:47:42,239 --> 00:47:45,560 Speaker 1: wouldn't invest in a thirty year bond at a one 805 00:47:45,600 --> 00:47:48,080 Speaker 1: percent level. It's the same thing in the real economy, 806 00:47:48,480 --> 00:47:50,960 Speaker 1: you know, C e O S and and uh you know, 807 00:47:51,000 --> 00:47:53,800 Speaker 1: corporate leaders look at the return on investment and the 808 00:47:53,880 --> 00:47:57,080 Speaker 1: return on equity and they've come down, down, down, you know, 809 00:47:57,920 --> 00:48:04,640 Speaker 1: because proportionately, uh, the the financial market leads those types 810 00:48:04,680 --> 00:48:09,280 Speaker 1: of returns. And secondly, because of structural influences that Larry 811 00:48:09,280 --> 00:48:14,759 Speaker 1: Summers is mentioned in recent months, aggregate demand, dearth on 812 00:48:14,800 --> 00:48:17,600 Speaker 1: a global basis, etcetera. I could go on, but in 813 00:48:17,640 --> 00:48:21,000 Speaker 1: any case, the return on investment is so sufficiently low. 814 00:48:21,400 --> 00:48:24,600 Speaker 1: Let's call it four or five percent as opposed to six, 815 00:48:24,640 --> 00:48:27,920 Speaker 1: seven or eight percent. That and and and remember, return 816 00:48:27,960 --> 00:48:30,680 Speaker 1: on investment is a long term return or investment. In 817 00:48:30,719 --> 00:48:32,759 Speaker 1: many cases, we're talking about a building here that will 818 00:48:32,800 --> 00:48:34,840 Speaker 1: be up there for thirty, forty fifty years, So it 819 00:48:35,160 --> 00:48:38,320 Speaker 1: just sort of like a long term bond. Corporate leaders 820 00:48:38,360 --> 00:48:41,799 Speaker 1: in the real economy are reluctant to make an investment 821 00:48:41,880 --> 00:48:44,600 Speaker 1: in the real economy because the returns are too low 822 00:48:44,640 --> 00:48:47,520 Speaker 1: and the risk is too great from a durational standpoint 823 00:48:47,560 --> 00:48:50,719 Speaker 1: and from a lack of perceived aggregate demand, and so 824 00:48:51,360 --> 00:48:54,279 Speaker 1: having gone so low in terms of interest rates, to 825 00:48:54,400 --> 00:48:57,160 Speaker 1: my way of thinking, and I think to Fisher at Dallas, 826 00:48:57,680 --> 00:49:01,320 Speaker 1: UH and others was was probably believe the critical mistake. 827 00:49:01,360 --> 00:49:03,280 Speaker 1: They should have stopped at one or two. They should 828 00:49:03,280 --> 00:49:06,000 Speaker 1: have left something for savers. It wouldn't have made much 829 00:49:06,040 --> 00:49:09,200 Speaker 1: difference if if FED funds work one percent instead of 830 00:49:09,239 --> 00:49:13,160 Speaker 1: twenty five basis points. Leave something for savers, leave something 831 00:49:13,280 --> 00:49:17,000 Speaker 1: for the investing in the real economy, so that you 832 00:49:17,000 --> 00:49:20,600 Speaker 1: know there would be an impetus and the potential to 833 00:49:20,680 --> 00:49:23,720 Speaker 1: have an attractive rate of return. There isn't that today, 834 00:49:23,760 --> 00:49:26,960 Speaker 1: and so um you know, central banks are in this 835 00:49:27,080 --> 00:49:30,720 Speaker 1: conundrum of knowing what will happen when they raise rates. 836 00:49:30,719 --> 00:49:35,080 Speaker 1: In other words, the potential for another moment like in 837 00:49:35,200 --> 00:49:38,480 Speaker 1: two thousand and thirteen at Taper tantrum. But yet at 838 00:49:38,480 --> 00:49:44,240 Speaker 1: the same time recognizing that zero percent interest rates distort capitalism, 839 00:49:44,280 --> 00:49:47,000 Speaker 1: to a significant degree. And that's my main point. Zero 840 00:49:47,040 --> 00:49:51,080 Speaker 1: percent interest rates distort capitalism. So a couple of examples 841 00:49:51,680 --> 00:49:55,960 Speaker 1: stock by backs instead of capital investing, increased dividends instead 842 00:49:56,000 --> 00:49:59,400 Speaker 1: of hiring. Is that the sort of thing you're alluding to, exactly, 843 00:50:00,239 --> 00:50:02,719 Speaker 1: And that's not the fault of corporation. If they can 844 00:50:02,760 --> 00:50:06,000 Speaker 1: buy their stock at a at a sixte and a 845 00:50:06,080 --> 00:50:10,400 Speaker 1: perceived return of the six or seven percent, uh, you know, 846 00:50:10,800 --> 00:50:14,560 Speaker 1: with relative certainty and with the certainty that earnings for 847 00:50:14,600 --> 00:50:17,240 Speaker 1: share will go up because of it in their tenure 848 00:50:17,400 --> 00:50:20,120 Speaker 1: while they're getting a bonus. Then you know who who's 849 00:50:20,160 --> 00:50:23,279 Speaker 1: default that. But it's just math. That is just math, 850 00:50:23,360 --> 00:50:27,359 Speaker 1: and and the same thing with dividends. But but dividends 851 00:50:27,760 --> 00:50:33,200 Speaker 1: and stock buybacks do not make for investment in the 852 00:50:33,239 --> 00:50:36,799 Speaker 1: real economy. And that's that that. The net savings rate 853 00:50:36,840 --> 00:50:39,480 Speaker 1: in the United States and net savings rate in most countries. 854 00:50:40,719 --> 00:50:43,920 Speaker 1: Some have avoided this, like Mexico, but the net savings 855 00:50:43,920 --> 00:50:46,200 Speaker 1: writ in the United States is very close to zero. 856 00:50:46,239 --> 00:50:50,239 Speaker 1: A dip below zero, you know, during the Layman recession 857 00:50:50,280 --> 00:50:54,719 Speaker 1: of the Great Recession, it's crawled above zero. Uh, you know, 858 00:50:54,800 --> 00:50:57,200 Speaker 1: in the last year or two, but typically it hung 859 00:50:57,239 --> 00:51:00,760 Speaker 1: out around five to ten percent in terms of net investment, 860 00:51:00,800 --> 00:51:06,279 Speaker 1: and that's after corporate depreciation um and netting out the 861 00:51:06,560 --> 00:51:09,040 Speaker 1: entire ball of walks and and so it basically means 862 00:51:09,120 --> 00:51:12,800 Speaker 1: we're not investing in our economy. We're eating our seed 863 00:51:12,840 --> 00:51:17,759 Speaker 1: corn because of this distortion in the financial markets where 864 00:51:17,880 --> 00:51:22,080 Speaker 1: zero interest rates make financial assets attractive but not real assets. 865 00:51:22,719 --> 00:51:26,000 Speaker 1: You're listening to Masters in Business with Barry rid Holts 866 00:51:26,239 --> 00:51:27,440 Speaker 1: on Bloomberg Radio