Epic confrontation between Bill Gross and Mohammed El-Erian at Pimco (*Corrected)

Note: I am making a correction to this post. Pimco did not have a "terrible year." According to the firm it beat its index so one could say it simply had a bad year relative to past performance. In addition, the firm claims that outflows were due to "rotation." The main point of my post, however, is that Gross fundamentally misunderstood the fact that the funds to buy Treasuries come from government spending itself and he continues to mischaracterize the United States as a household that can run out of money.

I have extended an open invitation to Bill Gross to discuss these topics on my show that I do at the NYSE for Hard Assets Investor or, right here on Mike Norman Economics.

I've said for a long time that Bill Gross doesn't know what he is talking about. We've cited examples on this blog, like the now-infamous, "Who's gonna buy them now" comment that Gross tweeted back in 2011. With that comment the "Bond King" displayed to the world that he had no understanding of sovereign fiat money systems.

Gross went on to have a bad year relative to his past performance and we also predicted large capital outflows from his fund and that's exactly what happened.

And Gross wasn't the only one on the receiving end of our scorn. There was Mohammed El-Erian, the Pimco CEO and former IMF economist who spoke in riddles when it came to the economy, perhaps to hide his own ignorance.

Now there's a story out today in the Wall Street Journal about an epic internal clash between these two behemoths. To me it seems like a battle between two partners who basically ran their firm into the ground (maybe that's too harsh) or, we can say at least, damaged its Tiffany reputation.

Check this out from the WSJ piece:

Mr. Gross—by his own admission, a demanding boss—had long showed respect for Mr. El-Erian and indicated that the younger man eventually would take over the world's biggest bond firm. But one day last June, the two men squared off in front of more than a dozen colleagues amid disagreements about Mr. Gross's conduct, according to two people who were there.
"I have a 41-year track record of investing excellence," Mr. Gross told Mr. El-Erian, according to the two witnesses. "What do you have?"
"I'm tired of cleaning up your s—," Mr. El-Erian responded, referring to conduct by Mr. Gross that he felt was hurting Pimco, these two people recall.

Pretty uncivil if you ask me. And don't forget, this is a "white shoe" Wall Street firm. Anyone who's ever worked at a top of the line, white shoe, Wall Street firm, knows that discussions, conversations, indeed, even arguments, are all conducted in the most civil, low volume, non-confrontational manner that you can possibly imagine. You're NEVER going to see two co-CEOs out there trying to tear each other down in front of the hired help. If daggers are to be thrown they get thrown quietly, usually behind backs, but never EVER out in front for all to see. That's what makes this confrontation so amazing. They were really going off the rails.

I've long said that ever since Paul McCulley left Pimco in 2010 that was teh end of their dominance. McCulley was not only Pimco's brilliant and ecclectic chief economist, but he was also an MMT adherent. You can't say that about Gross.

I remember back in 2003, when I had Gross on my radio show, he brought up his now very well known, but incorrect, anaolgy of the United States as a household. When I asked him how he did not recognize the distinction between a currency user, like a household and a sovereign government that is a currency issuer he seemed baffled and even bothered by the question. He said to me, "At the end of the day, they're really the same."

That's the thing, Bill. They're not. They're just not.

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...  

Bill Gross displays some more of his "gross" ignorance

Bill Gross is out again today with another glaring display of his "gross" ignorance when it comes to sovereign currency/fiat money systems.

Read this:

The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean’s oversized creatures. Both the lower quality and lower yields of previously sacrosanct debt therefore represent a potential breaking point in our now 40-year-old global monetary system. Neither condition was considered feasible as recently as five years ago. Now, however, with even the United States suffering a credit downgrade to AA+ and offering negative 200 basis point real policy rates for the privilege of investing in Treasury bills, the willingness of creditor whales – as opposed to debtors – to support the existing system may soon descend. Such a transition occurs because lenders either perceive too much risk or refuse to accept near zero-based returns on their investments. “There she blows,” screamed Captain Ahab and similarly intentioned debt holders may soon follow suit, presenting the possibility of a new global monetary system in future years, or if not, one which is stagnant, dysfunctional and ill-equipped to facilitate the process of productive investment.

Looks like he was really aroused by the whole, Bruno Iksil "London whale" thing as his comments were heavy on the whale/ocean/sea creature analogies.

But here's the point...look at where he says, that the "willingness of creditor whales to support the system is at risk." He seemingly believes that there are these big, private entities ("creditor whales") who have been supporting the whole system with their money (their fiat?) Perhaps he is even making a veiled threat to withdraw his own creditor whale support at some point because I'm sure Gross believes he is one of these creatures.

Gross continues to misunderstand where that "credit" comes from. Where does the fiat (dollars, yen, euros, British pounds, Swiss francs, etc) that he's referring to come from? What is its origin? Does it come from him? Does it come from these so-called, creditor whales? No! The creditor whales are the mere recipients of the fiat issued by the respective governments. It can never run out, which means that the funds to buy government debt can never run out. It is created by government spending itself.

Hey, Bill, there are no "creditor whales." They are figment of your very misguided imagination.