Thursday, August 2, 2012

Did Bill Gross just make the WORST CALL of all time?


“Bond King” (Ha!!) Bill Gross of Pimco is at it again with what could end up to be his greatest BAD CALL of all time.  

Remember last year when he said that Treasuries were going to collapse once the Fed stopped their QE 2 program? And his now infamous tweet, “Who’s going to buy them now?” which exposed his utter lack of understanding of how rates are set. His massive short Treasury position that turned out to be a HUGE loser. (MMT had it right on the money!)  

As an aside, Paul McCulley, who used to be Pimco’s chief economist until two years ago when he retired, understood the monetary system and was probably the brain behind much of Gross’s success because now that he’s gone, Gross is pretty much on the wrong side of everything. But I digress…

Well, here’s Gross’s latest call. In a piece he wrote on the Pimco website he said…  

“The cult of equity is dying.” (Calls equity investing a CULT???? This guy is off the deep end.)

My guess is this could end up to be the greatest bad call since the 1979 Business Week cover that proclaimed “The Death of Equities.” (Even sounds similar.)   Just for fun, have a look at how this whole, "death of equities" thing played out.  

  Business Week August 1979 cover  
                                               























And here's what the market did...  











22 comments:

Matt Franko said...

Mike,

I think he used the term "Ponzi" in some way in relation to equity investing.

How can he term a company like Microsoft or Apple a "Ponzi"? These companies do REAL things... he does not sound like he has a firm grip on reality....

Conjecture: I wonder if he lost a sh--load of money trading in his own account when he made the now infamous tweet?

He's really going off the deep end in any case...

No one else holds him accountable for his statements.

rsp,

Matt Franko said...

Here is the 'Ponzi' paragraph:

"Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)? The commonsensical “illogic” of such an arrangement when carried forward another century to 2112 seems obvious as well. If stocks continue to appreciate at a 3% higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world! Owners of “shares” using the rather simple “rule of 72” would double their advantage every 24 years and in another century’s time would have 16 times as much as the sceptics who decided to skip class and play hooky from the stock market."

So he does not see how if total US gdp was growing at 3.5% how just one sector could grow at a rate greater than that????

A sector that has GAAP earnings exposure to the external sector????

Whaaaaaat?????

McCulley: YOU NEED TO GET BACK IN THERE!!!

Tom Hickey said...

It seems that BG doesn't get the digital revolution. He seem to think that M$ just produced CD's. :)

What doesn't he get about "PRODUCTIVITY software" and value added.

On this view the whole digital revolution is Ponzi other than the hardware and physical media. He doesn't seem to understand the dawning of "soft capital." Or maybe he does and equates it with finance capital, which is where the actual Ponzi is.

He also doesn't get that equity shares are different from actual equity, i.e, non-financial capital. The price of equity shares doesn't necessarily reflect the actual productive value of non-financial capital.

He is onto something here that is significant but he either doesn't see it or doesn't explain it well. It's called rent.

Moreover, he may get that a balance sheet recession takes years to work through without liquidation and a debt-deflationary depression, and in either case, consumer preferences and behavior are altered for some time. This may not be supportive of rising equity prices generally.

Why doesn't the rule of 72 work? Compound interest would already have made a very few people extraordinarily wealthy relative to the rest. Oh, wait.

Again it comes back to how much rent and rent-seeking a system can bear before it breaks down and there is a reset.

Matt Franko said...

Tom,

I was wondering if what he really meant was that FIRE equities were a "Ponzi Scheme" ? ;)

Matt Franko said...

He for sure has his stocks and flows mixed up (comparing 'wealth' and gdp) and looks like he doesnt understand that US companies (S&P 500) can "make money" in overseas operations.

Tom Hickey said...

Matt: "I was wondering if what he really meant was that FIRE equities were a "Ponzi Scheme" ? "

Well, I would agree with that. That is based not only rent-seeking behavior but "questionable" behavior to boot.

Maybe he gets and doesn't want to call a spade a spade. It's his sector, after all.

Not that the big tech companies aren't monopolists.

Mike Norman said...

I can only imagine what McCulley really thinks of Gross in private. It's probably why he "retired."

Tom Hickey said...

Matt, "looks like he doesnt understand that US companies (S&P 500) can "make money" in overseas operations."

Without looking at the global economy as a closed system it going to be increasingly hard to get it right analytically.

Matt Franko said...

This is similar to the Zero Hedge people last week being indignant that net UST issuance over some period greatly exceeded the same period change in US GDP....

Tom Hickey said...

The big difficulty in modeling the global economy as a closed system is complexity, uncertainty, and lack of reliable data. That's why econometricians generally don't want to touch it. It's really only the international institutions (BIS, IMF, World Bank), central banks, Treasuries, and large investment firms that can invest what it takes and they still are largely poking in the dark. And there is also the ~10T yearly informal economy globally.

Matt Franko said...

"how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)? "

Stockholders are not "profiting", certain of their asset values are increasing....

Interesting also" "at the expense of government"....

Mike, he may need some help out there in Newport Beach looks like!!!

;)

paul said...

He doesn't (why not ????) understand that companies can make money as long as Uncle Sam keeps printing it (directly, not through the banking system).

I believe there is a limit to how far credit can be leveraged, so it comes down to monetary expansion and resource limitations. It certainly isn't a lack of productivity.

It all comes back to not understanding the implications of closed systems IMO.

That's THE piece of the puzzle most people (even very smart ones) don't seem to get.

Once they get caught in that infinite loop they can't get out.

Mike Norman said...

Mike, he may need some help out there in Newport Beach looks like!!!

Matt,

He wouldn't have to sell me on the location, that's for sure!!

Tom Hickey said...

paul: "I believe there is a limit to how far credit can be leveraged, so it comes down to monetary expansion and resource limitations. It certainly isn't a lack of productivity."

Right. It comes down to rent. When traders realize gains where the asset price is far about the non-financial value, that difference is rent and it is extracted from the circular flow, which is where non-financial value resides and non-financial (real) value does't necessarily correspond to nominal price.

The presumption is that markets keep price and value in equilibrium but the fact is there are wide swings in both directions due to a variety of reasons, subjective and objective. Leverage is one of those reasons and it is objective in the sense that it can be observed and measured.

Matt Franko said...

Mike,

Looks like Kashkari, Crencenzi and El Arian are supposed to have his 6 o'clock covered and they let him post this?????

He needs to re-look at who he has on his executive staff imo...

rsp,

paul said...

It comes down to rent

Right, and if it doesn't involve investment spending for future needs (or has a labor component) it falls under the rent classification IMO.

Mike Norman said...

Crecenzi's clueless, El-Arian is a former IMF economist (that speaks volumes) and Kashkari is an aeronautical engineer, so he obviously knows something about "hard landings."

Anonymous said...

"And here's what the market did..."

Um, there is a difference between nominal gains and real gains.

Mike Norman said...

True, but are you suggesting there were no real gains?

The point was to show that a) the market is not a Ponzi scheme b) that Bill Gross's calls are terrible and c) popular sentiment is often wrong.

Anonymous said...

"True, but are you suggesting there were no real gains?"

I am only suggesting that just because stocks experienced nominal gains, it doesn't mean there were equivalent real gains.

Compare the S&P 500 to gold for example, and we get this:

http://i.imgur.com/NDwyZ.jpg

In other words, if you bought gold in 1990, you would have made the same nominal gain as of 2012, as you would have made if you bought the S&P500 in 1990.

One could argue that the nominal gains of the S&P 500 since the year 2000, have not represented real wealth accumulation, since it fell relative to a barbaric relic that doesn't pay dividends.

If you want to talk about real gains, then how do you know that the real gains were had because of the accelerating money supply inflation since the early 1970s, rather than despite the accelerating money supply inflation? You can't know that through the data alone.

The point was to show that a) the market is not a Ponzi scheme b) that Bill Gross's calls are terrible and c) popular sentiment is often wrong.

I agree on all three points.

Anonymous said...

Look at how volatile the Federal Reserve System has made the stock market since the mid 1990s.

SchittReport said...

hard to beat peter schiff's DOW 2,000 Nasdaq 500 call in 2002 and again in 2009 (note: his senile market strategist john browne made a DOW 1,000 call on CNBC may 14, 2009).

http://www.youtube.com/watch?v=LHdkrWWcP_4