Pimco, Bloomberg Radio, Ed Baxter discussed on Masters in Business


This is Bloomberg best on Bloomberg radio This is Bloomberg best I'm Ed Baxter And I'm Denise Pellegrini Denise pilgrim as you know is a cofounder of pimco and notably the author of I'm still standing An interesting to think about how he became known as the so called bam king to begin with And then what does he think about the bond market now Gross started his career at what became pimco later on in the vault operations there And here is what he told Bloomberg's Lisa Abramovich and Tom Keane about how he worked his way up and went to watch out for with bonds these days Let's listen in Well we had a $1 billion portfolio Pacific mutual did It wasn't pimple at the time And I just graduated from UCLA Anderson I had a master's degree I was clipping coupons not exactly in the mailroom clipping coupons And I said to myself wouldn't it be better to get out of the vault and into the sunshine and maybe you could trade these bonds you know back then there weren't computers IBM had a 360 et cetera but you couldn't really move them back and forth except physically And so most banks and most insurance companies didn't And so I thought that if I could take 5 million of that 1 billion portfolio and trade it and perform then we could get some clients and grow a little investment company called little investment company They grew quite large Bill You talk also about your start just even with education with $200 so into your pants going to Las Vegas gambling and getting $10,000 to pay for your college education Partly that gambling to the markets and how the game has changed How much has the game changed over your tenure Most states a lot Since when I started there weren't really liquid mortgage pass throughs This certainly wasn't interested in foreign bonds There weren't any tips inflation protected securities et cetera et cetera And so that and the evolution of financial futures which is probably the biggest change Introduce liquidity into the marketplace and it allowed for even a small firm at the time like pimco to basically trade and to make money Bill the reason why I ask is because we're in an era where a lot of people talk about the distortions in the debond market by the Federal Reserve or the fed is prepared to start moving back from some of their support from their bond purchases How much can the bond market really give the same kinds of messages as it did back when you started out clipping coupons Well certainly not as much There's more involvement by almost all central banks despite the pullback that you mentioned And interest rates are so artificially low that it's hard for institutional investors or even individual and private investors to make much of a difference Central banks control the market I think they're terribly wrong in terms of what they've done So low for so long and now we have inflation not necessarily because of those policies but probably in large part because of them And so it's just a difficult market You train to anticipate the central banks which has been relatively easy in the past few years because they haven't done anything But now they're about moving it's simply a question of what Powell and others do in terms of the policy rate Bill gross I've been out to Newport to see your Monroe trader on your desk of long ago and far away where you calculated convexity like no one that could do it And part of the as you mentioned the first mover advantage of pimco was intellect I want you to speak about what you and doctor Aryan did When the two of you got together and put intellect first for a buy side house every single buy side shop had to react and pattern themselves against what you and Muhammad invented Tell us how you put intellect first at your pimp co Well we did build a small company that a larger company a very smart people And it wasn't just myself and Muhammad Muhammad came much later Pimple was very much a success before Muhammad but Paul McCullough was very key in terms of fed policy and anticipating the Great Recession Chris Diana was very important in terms of bringing financial futures to the company There were lots of others that were innovators that were mild risk takers and putting together a group of Bond kings and later queens was quite important Was it challenges that you had later in your career And I don't want to get into the soap opera of it But Bill gross were the challenges that you had like it's so many other shops due to the decline in profitability of the buy side It used to be a cozy job billiard show up for two hours then you'd go pay cough golf trying to get your handicap up And that Bill the buy side every single buy side story is about lower and lower and lower revenue and squeezed margin Is that what you ran into later in your career That's what I was advocating in the bond market There was this extension of trading into ETFs into vehicles that charged lower and lower and lower fees I sensed that as a Sense of as a trend because simply as interest rates themselves lowered went down to 5 four three two one You know you couldn't charge 50 basis points on a 1% ten year treasury That's half of the half of the yield and it was almost an egregious type of situation And so fees became important It became important in terms of my leaving pimp code because the surviving contingent basically wanted higher yield products hedge fund types of products and I wanted to stick to the old total return formula that had done so well The total return formula is in a very tenuous moment simply because of where yields are and where inflation is expected to be Some people consider Jeff gunlock your successor when it comes to the bond king moniker You may disagree Others do the question I have is do you agree with his prognostications of a 10% inflation rate this year And the likelihood that the fed is vastly behind the curve Will the ladder yes 10% inflation rate is problematic It depends of course on commodity prices oil prices And the wage follow on But I do think inflation will be in a four to 5% category for the next several years And does that validate a ten year at one 80 or 85 it does not Is it mean that there will be a huge amount of sellers because of the lack of fed buying Probably not You know as we've seen in the last few weeks treasuries are a safe haven much like gold And so investors are stick at.

Coming up next