Gross-Out: End of an Era

The news flash crossed the wires at 8.29 AM. CNBC’s Becky Quick was astounded. Bloomberg’s Tom Keene was stunned. They had to double-check that the William H. Gross joining Janus Funds was indeed THE William H. Gross, bond king, whom they had interviewed many times. The answer was YES—the Two Billion Dollar Man was leaving Pimco, the firm he founded.

Why should we care? That’s a real good question, unless you happen to own shares in Janus or Allianz, owner of Pimco.

Here’s the answer. This Gross-Out signals the end of an era, an era of ever lower bond yields and higher bond prices. Yields have been dropping for a long, long, long, long time. Back in the early 1990s I helped write a bullish report on the bond market (the theme and title were conceived by my co-author, Edward Kerschner). The report’s daring title was “Six in ’96,” and it was followed in due course by “Five at the Turn” (of the century) and then “Fours Before Long.” We never thought to write a report called “One and Not Yet Done,” which is now appropriate for the 10-year German Bund.

Anyhow, the era of ever-rising bond prices, which Mr. Gross brilliantly rode to fortune and fame, is very probably over, at least in the U.S. QE bond buying by the Fed is about to end. The U.S. economy is finally strengthening. Unemployment is fairly low. The Fed will start to tighten next year. Bond prices will stop rising. I admit they may not decline all that much, what with inflation restrained by the strong dollar and foreign bond yields depressed by deflationary pressures in Europe, China and Emerging Markets. So maybe bond yields gradually drift higher from 2.5% to 3.5% over the next year or two. That is still a difficult bond market in which to produce attractive returns for mutual fund investors.

A Parade of Gurus

Historical perspective is useful. Bill Gross is just the latest celebrity fund manager whose brilliant career coincided with a specific phase of the financial markets.

  • In the late 1920s mega-bulls Billy Durant (founder of General Motors) and John Jacob Raskob (who engineered DuPont’s purchase of a large stake in GM) mesmerized the public with investment wisdom, which turbo-charged their speculative positions. A favorite forum was the deck of an ocean liner, where Durant would regale financial reporters before he set sail for Europe. A bullish interview that Raskob gave The Lady’s Home Journal was immortalized in an article titled “Everybody Ought to Be Rich.” Unfortunately it appeared two months before the 1929 crash.
  • In the “go-go” stock market of the late 1960s, the Manhattan Fund of Gerald Tsai (rhymes with “die”) personified the “performance” mutual fund of the era, which beat the market by trading tech stocks and conglomerates.
  • The leading guru of the dismal 1970s was Henry Kaufman, “Dr. Doom.” He kicked off the great bull market in August 1982 when, as Salomon Brothers’ Chief Economist, he became more bullish on bonds.
  • The celebrity fund manager of the 1980s was Peter Lynch, the brilliant stock picker who ran Fidelity’s Magellan Fund. His approach was strictly bottom-up: “If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.”
  • A variety of strategists and fund managers became “household names” during the tech bubble of the 1990s. (Bearish strategists tended to lose their jobs.)
  • During the financial crisis, when bonds soared and stocks soured, it was all about macro insights, not stock selection. Bill Gross was a star commentator on Fed policy, bank balance sheets, the fate of the Euro, the risk of deflation, and the direction of interest rates.

As markets change, financial market celebrities who hitch their wagon to a certain phase inevitably fade into obscurity, though not poverty. Gerald Tsai parted ways with his Manhattan Fund during the bear market year 1973. Henry Kaufman eventually resigned from Salomon to start his own firm. After Peter Lynch left, Magellan Fund struggled under a succession of managers; today, few people on Wall Street are aware of who is managing that portfolio.

Dance of the Money Bees

Step back and contemplate how weird this all is.

After all, investing occurs throughout the economy, not just stocks and bonds. But there is no famous “strip mall king” or publicly celebrated “garden apartment queen” or widely quoted “elevated parking structure guru” even though there are smart people who have made oodles of money investing in those properties. Stocks and bonds are different because they constitute a participatory spectator sport—not unlike fantasy football. With just a few dollars John and Jane Q Public can participate, and the media is constantly commenting, especially these days when there are three business channels on cable TV. The media, in concert with ubiquitous gurus like Bill Gross, whip up excitement in whatever part of the market is glamorous now.

Shrewd New York investor John Train called this process, “the dance of the money bees” (the title of one of his books). By watching the coming and going of celebrity fund managers and financial gurus, we can get some sense of where markets are headed. Today’s fixation on the Gross Out shows the media is behind the times. The next generation of celebrity investors will run stock funds, not bond funds.

Copyright Thomas Doerflinger 2014. All Rights Reserved.


About tomdoerflinger

Thomas Doerflinger, PhD is a prominent observer of American capitalism – past, present and future.
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