Masters in Business: Janus Capital Group Bill Gross (Audio)

this is really a fascinating interview with a fascinating character. Uh. A little backstory to how this interview came about. And I'm gonna make a really long story, not as short as some people would like, but it's really interesting and I like sharing this behind the scenes stuff with with listeners. So gross gets fired from Pimco or there's certainly a palace coup back in September, and lots of people are writing about it, and lots of people are piling on.

You know, there was a whisper campaign to discredit him. Ever since Muhammed Hillarian left Pimco, there was a little bit of a sort of change in the air, and I think people got a little more bold. Some of the people who were the next tier below Gross and Hillarian began plotting to essentially depose the king, and effectively that's what what happened. But around that time September twenty early October, lots of stories came out. Everybody piled on.

And you know, people sometimes say, hey, why don't you write about Bill Gross, And my answer was, I'm not interested. I have nothing to add. I think people are just ignoring a guy with a forty year track record. Look, he built a firm that and he I say this specifically, even though he gives credit to other people who worked with him and that it was a team effort, and

there were thousands of people who work at PIMCO. The reality is the vast majority of the two trillion dollars let me repeat that, to trillion dollars that PIMCO raised over forty years came there because of Gross. End of story, And so I didn't want to pile on. We don't have any PIMCO funds. We don't, we're not a client of theirs. I just look at them and say, I don't.

I don't need to add something if I'm not adding some value, And just to kick a guy when he's down despite a spectacular longtime track record seemed ridiculous to me. And I said this to one or two people, And sometimes these things travel around, and word gets to a friend of a friend of Bill, and we'll call it

friends of Bill. And the friend of Bill reaches out to me, and I know him through other parties, and he says, so, I hear you're not interested in writing about Gross because you think it's not right to kick a guy with his track record when he's down. And my answer was yeah. He goes, well, what would happen if I shared with you a couple of bullet points about his exit? And I'm like, I'm happy to listen.

And so he proceeds to give me one or two thoughts, and I say, you know, he's due to write a monthly letter and he left before he sent out is. They're called iOS, investment Outlooks. He's been publishing these for decades. I think I might want to write a monthly IO in the voice of Bill Gross. Now understand I've been reading him and Paul McCulley and Muhammad Allarian and the rest of the Pimco crew for a long time. Sometimes

what they write resonates with me. Sometimes it doesn't. But I knew it didn't take much to get into the head of Bill Gross. All I had to do is download a dozen i os and read it on the train on the way home. And I did that. And after reading a few of these i os, you know, whenever they catch a forger of some great artwork, the guy says, you know, I had to get this stroke down. Once I had that stroke, I can anything I did looked like van Go or Picasso or whatever it is.

Once you get Gross in your head, it's easy to write like him. It's easy to adopt his syncopations and his tones and his rhythms. And so that's exactly what I did, and I wrote this parody. You know, Gross is farewell letter, And I imagined, Hey, I built one of the most fantastic firms in the world, two trillion dollars. Less people have put um raised two trillion dollars and have hit five home runs in the in the major leagues.

And so I thought I would parody that perspective. And apparently I did too good a job, because we got panicked phone calls. Hey is this real? People are upset Pimco is upset this one, screaming how did you guys get this letter? Astonishingly, it was on Bloomberg View. People didn't realize it was a joke, or at least some people didn't realize it was a joke. I got a

lot of emails. But because of that, and I'm told through the grape vine that the parody farewell letter from Bill Gross amused the real Bill Gross, and so he reached out at a certain point and said I thought that was kind of interesting, as did other friends of Bill, other people who were still at Pimco when not happy with his being deposed. Eventually led to my getting my hands on a copy of a uh set of bonuses, a spreadsheet of all the bonuses that went out to Pimco.

And I wrote a column that talked about Gross is two million dollar bonus and and and then allarians and everybody else is down the road. It was a billion five in Pimco bonuses. And I got an email from Gross who doesn't say anything about the bonus, but says, you know, you guys keep misrepresenting my track record in

in total returns. It's much better than is claimed. And I as well as the same as true for the closed end funds, and so I said, send me the data, I'll end research and independently and if it's correct, I'll pony up in a minute. Was correct, and it turns out that he was more or less right, absolutely right about the closed end funds there were. The performance was spectacular. According to morning Star, there were one to three, four and six in the universe of multisector fixed income funds.

That's just, you know, just swept the It's like winning Laman's one, two and three e race team takes all three pole positions and and amazing set of numbers. He was kind of right about total returns. It wasn't nearly as bad as people had depicted. He had been top ten, top desk isle and often top one percent. And in the years that followed he had a bad year after two thousand eleven was he underperformed two thousand twelve, he

did really well about flat relative to the benchmark. Underperformed a little bit about points uh fourteen until until the end of September, but he essentially didn't put in the sort of numbers that leads to, you know, a founder getting deposed. And so I ran the story and but along the course of having this conversation with him, said, you know, I would love to have you sit down and just you tell your story. I'll throw some questions

at you, but you say what happened. And and I know you don't trust people in the media, and I know you are fearful of filters and and spin. This is pretty and varnished. You get to say whatever the heck you want to say. And so for two hours we spoke and he said whatever the heck he wanted to say. So this is the first hour of the interview.

It's essentially him describing the creation of PIMCO. What it was like, was early mentors were, how things developed, what it was like running money in the flashnary periods of the nineteen seventies, uh the seven crash. He talked about a lot of really fascinating things. And I've now babbled for over five minutes, So let me stop now and with no further ado, Bill Gross, this is Masters in Business with Barry Ridholts on Bloomberg Radio. Today. We have

a very special guest. You probably have heard his name once or twice if you're involved in the world of investing. His name is Bill Gross, perhaps the most famous bond investor in history. A quick background on who he is. Born in Middletown, Ohio, moved to San Francisco ten years later, ended up going to Duke University as a Duke scholar with a degree in psychology, which is quite fascinating. And UM served during the Vietnam War in the navy. Is

that correct? Unfortunately, that is correct, and thank you for having me very oh my pleasure, sons long a long time ago, not not really, not not too long, just long enough to have developed some wisdom and experience. So so let's we're gonna cover a lot of different material, a lot of of um areas. But I really want to start out with your backgrounds in the early days, because you mentioned you've been doing this for forty years.

You have some history and some perspective. But what I find fascinating is that you essentially began as a c f A at Pacific Life, at an insurance company. How did you go from being an analyst to saying I have an idea, let's set up a bond shop in v one or so. Well, it was serendipity. Perhaps I

did private placements for Pacific Mutual life insurance companies. A matter of fact, I made two private placements to the eventual too richest people in the world, Sam Walton and Warren Buffett unbeknownst to me, and Pacific Mutual at the time. But that's how I got started making five and ten million dollar loans. At time, downtown Los Angeles, there was

a budding development of bond trading. UM Traders actually put their bonds physical bonds in a box UH, the ones that they wanted to trade, and when they sold them, they would shift them up by career and then they get some new bonds in to the box US that they would be trading on a weekly basis. So it

was very rudimentary and fundamental. And as a matter of fact, Pacific Mutual bonds were held in a vault down below in a basement, and one of my first assignments was to go down and clip coupons, to send those coupons and get the interest and UH and earned Pacific Mutuals some some premiums. So you started and as an analyst, literally clipping bond coupons. But how do you go from that too? Here's an idea. Let's set set up a standalone bond shot. Well, there was a setup, and at

the setup was basically developing inflation. In the early seventies, after the the Vietnam War, um, you know, became apparent that bonds could go down in price as well as up. A matter of fact, I've been going down for ten or fifteen years. And uh, there came a time when someone thought, and there were some early people. I was one of them, that thought that perhaps some bonds down in those vaults should be sold in order to preserve principle.

And so uh in Los Angeles, and I'm sure to some extent in New York and Chicago and Detroit, which were the hubs back then. You know, some early young individuals like myself began trading and selling bonds primarily in order to keep them from going from a hundred to sixty five and sixty and some of was a T and T buns in the seventies actually with the two and three eights coupons got as low as thirty three

cents on the dollar. Oh my god. And what was the net So if anybody bought that, what sort of yield are they looking at? Practically nine percent at the time. Well, yes, you know, at the peak in one with the Volker peak um long treasuries for fourteen and a half percent, and so a T and T was probably trading at sixteen sixteen and a half percent. And um they had, believe it or not, some Gennu May mortgages with a

twenty percent coupon. So really for two of his timing, when you you began right with the right call and at the right moment more or less, yeah, I think so. When I came out of u c l A. With my master's degree having done a thesis on a book called Beat the Market by Ed Thorpe, but I had studied black jack. You were sort of professional black jack player, well was for three or four months, not a big

hitter like Ed Thorpe. But I proved that the system could work, and I went to u c l A. Did my master is on Beat the Market, which was a book on hedging, warrants and convertible bonds, and that's

how I got my job at Pacific Mutual. And um, so there was just the beginnings, um of option types of theories and and arbitrage types of trades that you know, somebody like myself that had studied it usually had done a master's you could could begin to take advantage of a trading atmosphere in which you could compare a value

of one bond versus another. Back in those days, mostly utility bonds, but there'd be a Detroit five and a Detroit six, and the Detroit six would be trading at a yield of the fifteen basis points less than the Detroit five. And uh so, some of the early trades were easy trades in which you could just clip ten or fifteen basis points. But you didn't have the same technology we had today. It was much harder to do

the compare. It's not like if you just punched something into the terminal and say, all right, here's the expected returns for these similarly graded bonds. It was really interesting and really different. Um. The first time I saw a tolerate machine was in nineteen seventy five. I came back to New York to do a speech and uh at the Hilton they had this fabulous machine that showed ongoing

prices for treasuries. I said, we've got to get one of those, and barely could convince my boss at the time in terms of private placements, to to do one. But yeah, you know, very few screens and very little technology. Everything was done by phone, which was interesting because if if although don't I don't have a great phone voice, I have a great trader demeanor on the phone, and I can get the best price frequently, or could in

my early days. And so the ability to deal by phone back and forth was much different, I think than it is today with electronic trading. So you had to sell your bosses on the idea of a toll rate machine. How did you sell them on the idea of let's spin out a fixed income division and this way we can attract other clients and other capital. And hey, you own most of it anyway, so what do you care. There was a chairman of the board, Walter Girkin. He's

still alive. He's five miles away from Newport Beach up in the hills. UH. I revere him because of his UH Walter Walter came from Northwestern Mutual, came out to Pacific Mutual about the same time I came to Pacific Mutual. But he had this attitude, this aggressive attitude that um was expressed I think in our building in Newport Beach. They moved a year later from downtown l a to Newport Beach with his fabulous new building and expressed an

attitude towards the future. Um we and when I say we've Jim Muzzy who is the marketing person, and Bill Publick, who is the the business person. We three the uh we three kings of um not orient Are but the Newport Beach got together and said, hey, um, yeah, that we've got the potential here for a business. And we walked into the chairman's office scared as uh baby ducks and um with with leg shaking, said we'd like to start a company called Pacific Investment Management, and we'd like

a piece of the action. Um. He didn't kick us out. He thought about it. Uh he said, it sounds like a good idea, even though within twelve months we were making more than he was, and and on and on and on it it went. We we started with our first client, the Southern California Edison, which to be fair, was a local board related um win so to speak. We uh got a second client, A T and T, which was the the beginning of it all because at the time H T n T was the biggest of

the big and they chose us. The young kids we were still in our twenties as the their first West Coast manager. At the time, Bury there was this legislation called Arissa in which pension funds were being nudged, forced, you know, basically to open u their choices for managers. Typically they've been Chicago Banks, Detroit Banks, New York Banks, but now they had to choose amongst the different set and so PIMCO became their first West Coast independent investment manager.

And boy, once you get a ten T, your your on and up. So you start out, you garner a few clients. Did you have any clue when you first launched the shop what the future held or did you think, hey, we can make a nice living doing this. No, we thought we could. I I thought unbelievably And I told my parents, Uh, when they came down the shin Via, which about twenty miles south of the Newport Beach. First house was a thirty one tho dollar house. UM, so we weren't making much um. But I told my parents

about the bond business. They didn't know what a bond was, but I told them that I was going to be the best bond manager in the world. Um. At age twenty something, at age twenty eight. They looked at me quizzically. UM weren't quite sure whether I had gone up to deep end, but in any case, that was my goal. And UM, I think by that time my mom passed in two thousand and two, that I was UM pretty well in that direction. That that's quite fascinating. Um. Initially,

you guys began with twelve million dollars. Is that urban legend or is that accurate now that it is twelve million? So the early days is the three of you, when did you start inning employee ease at a rapid clip? I mean it was it was it a small three man shop for a while? Or how soon will you adding analyst, traders, bodies, etcetera. It took three or four years, and we were stelling in a little wing of the Pacific Mutual Building. Yeah, the business expanded from ten fifteen

twenty people. We developed the marketing staff, we developed obviously accounting and internal staffs, and we developed importantly what we call account management, where the account management would connect with clients and where the portfolio managers Gross and uh now Christal and us Um would be able to stay at home and manage money as opposed to travel all around and talk to clients. So in the early eighties, we were a company of forty fifty people. We were close

to a billion dollars. Are are the theoretical? Boss Thompson, who was head of the investment division and this have a mutual, promised the company a trip to Hawaii if we could ever reach a billion dollars in assets, And when we finally did, he found a way to uh, to put off or to reneg on the promise. We never got to Hawaii. On Twitter, I did hashtag ask Bill Gross, Hey, bill y bonds instead of equities. I thought that was kind of an interesting I don't think

I've ever heard you anyone ask you that question. For me? Yes, because I couldn't get a job in the stock area. Really yeah, No, I came out of U c. L A. I thought it was pretty smart, but nobody else did. And Pacific Life gave me a job, like I said, clipping those coupons and doing private placements for prospective people like Walton and Buffett and uh yeah they by the way of those the sort of names they give to hey, those guys, or nobody give it to the kid. Is

that how that works? You know? It's it's sort of like at the you know, the meat counter at the grocery store. Take a number, and just like uh, just like it popped up. And and Sam Walton, by the way, was not like I said, he had two stores. I traveled to Bentonville. He picked me up in his pickup truck with his two sons and his dog and took me round to the stores. And that was Walmart at

the time, and two stores, two stores. And when when Buffett came in, he came in with Charlie Munger, and they were much younger people, and they had this dilapidated company called Berkshire Hathaway it uh it consisted to seize candy blue chips stamps in this industrial complex in the east that they were gonna, um, you know, close down anyway.

But they wanted five million dollars. And I can't recall why I thought it was a good investment, but obviously Buffett and Munger impressed me, and they got they got ten million bucks. Not not that Pacific Investment or Pacific Life was the beginning for them, because the it it helped them on their way. But if you're still in touch with either of them, yeah, Warren. I talk a lot, and did talk considerably during the crisis, the Layman crisis in two thousand and eight and two thousand and nine,

putting together plans and so on. Of course, Sam Walton's dead, but um, yeah, for a while there it was interesting. Let's talk a little bit about what else helped form your views on investing. Do you did you have any early mentors? You know, a business mentor, Walter Gerkin, certainly because he at the foresight to give us a start. But from the standpoint of investing, um, certainly at Thorpe.

And it sounds strange why a book called Beat the Dealer could serve as that initial example, but but it did. It taught me the principle of Gambler's ruined, basically the fact that even if the odds are in your favor, and you can do that in blackjack by counting the cards, and at some point in time you know, instead of the house being favored, the client can be favored seven, etcetera, etcetera.

But it taught me at the time that even when odds and your favorite, you can only be a small portion of your principle because you have streaks of bad luck and uh, and you can experience what they call gamblers ruined. So it's the same thing and investing. You know, even with a very significant confident bet, you don't want to put all your chips on the table. You want

to hold it back. And the theory of gamblers around was that you needed at least fifty times your your maximum bet at any time, no matter what your confidence level. And so that was a two you know, a type of maximum bet. It's held pretty well in terms of corporate credits and sovereign credits. And it gave me a sense of risk taking and when to take risk, when not to take risk, and how much to take Uh.

It was perfect for uh marko Witz uh diversified genre of portfolio management that was budding in the seven and these so so Gambler's ruin leads to modern portfolio theory, which leads to broadly diversified holdings even with a high degree of confidence. Yeah, I would say his book too. On. He wrote a book called Beat the Market. Uh. I mentioned this before about convertible bonds and and um warrants and and the hedging aspects of it. I developed a

very crude computer program about it. In any case, It gave me a sense that markets weren't perfect, that they're not fully efficient. Is that fully session? Yes? That was my last class at U C l A, the Efficient market theory, and uh yours truly. Bill Gross exited Efficient Market Theory with a C minus, which in grad school basically means you funked at What other books um or investors influenced you? B sides Edgar Well, um, you know several there's a there's a book by Jim Grant, and

he's written quite a few. Uh one at I go back to if only because of the title, Uh, the Trouble with Prosperity. How could there be trouble with prosperity? H He came, I guess from the same theory. Although Grant wouldn't claim a not a kinship with Minsky at all. No, and you you got right there. Yeah, he wouldn't claim a kinship with Minski. But this is the same thing. Mensky saying that stability leads to instabilities about the same thing to saying there's a trouble with prosperity and um

and so both of those. I I got into Mensky in the early eight early twenty one century thanks to Paul McCulley. I was gonna say, Paul, of your colleague, I go fishing with him every summer up in Maine. And he's the first person, I want to say, about eight or ten years ago who first introduced me to him in Minsky. Yeah, me too, And this was in the two thousand and two and three, before the crisis. But but he said, hey, here's uh, you know, here's

this guy called Minsky. And of course, you know, he wrote some very technical and lengthy tone I guess, and

you had to work through them with difficulty. But the essence of it was the stability leads to in stability and the combination of the the classical Keynesian um neo classical, if you will, uh concept of the economy in terms of an outside influence that ultimately would re equibal equival lead to a real equilibrium, I guess, As opposed to Minski, who said, hey, no, the problem isn't the fact that the economy itself and the financial economy are connected and

when one moves to access then uh, that it comes from the inside as opposed to the outside. And that was a brilliant observation because at PIMCO we began looking in the early twenty one century for problems in terms of debt creation and leverage in the housing market. And we we sent our own people very um and we took ten credit analysts in two thousand five and two thousand and five and turned them into real estate u

uh phony real estate shoppers. We sent them to Phoenix and the Vegas and Miami and Cincinnati and and pretended to buy a house to see exactly what was going

on from the inside. Because of Minski and because of this uh developing bubble and housing so we had it pretty well down and thanks to Paul McCully um and like I said, thanks to Minsky and Jim Grant, all which you know, gave me and gave us this common sense a goal, uh a lesson that that simply by keeping inflation low at two percent does not necessarily mean that the financial system remains totally stable forever. It doesn't. It creates its own problems. And we all know what happened.

What do you think the typical investor does wrong? From a psychological perspective? Is it simply giving into fear and greed or is it more nuanced than that? I think it's you know primarily that berry not although it's more nuanced. But I can see it myself. Um, you know these days and in recent days, UM, you know, I can recognize where I turn right when I should have turned left, and turned left when I should turn right. I'm a human being. I get afraid. I'm a human being. I

get greedy when things are going the right way. Hopefully all of this tempered by the gamblers ruined rules of ed Thorpe. But yeah, I think the bane of all investors is um is not doing what what Rothschild says. You know, buying when there's blood in the streets. Hard to buy when there's blood in the streets, and it's hard to sell when the trumpets are are sounding. So the ability to temper that, I think for all investors, not just individuals, is the ultimate key. And to know

that things you know simply can't continue forever. Now. I get a principle in my book called the alarm clock principle, and uh. It basically says that everybody has an individual alarm clock in terms of when they get up a relative to the markets, meaning so say people get up at six uh on average. In the investment world, very few people get up at six, meaning at the right time. A lot of them get up way too early, at

one in the morning or two in the morning. In other words, they sound the clarion called the arm agedding warning far too early, and and by the time it gets to be six o'clock, Uh, they're out of business or out of money, or they've kept their money in cash for so long that the pack is distanced them by by miles. And we certainly have seen that. On

the equity side. From O nine, people have been calling for the end of the bowl market for I don't know, six months after the bottom um, and that can be done, and yours truly has done that. I've got I've gotten up in many cases at one and two o'clock. But on the other side, investors can get up far too late at ten or eleven. Were more familiar with that because that tends to connote either a teenager or laziness

or whatever. But it basically means you've missed the boat, and by the time you get into the market, the markets over its high noon, so to speak. Anyway, you know, I think an individual investor has to know um through experience and through analysis and thinking. When they get up in the morning. And obviously the perfect time to get up is five for five or six o'clock. You you won't miss a thing, You'll be right on the money.

But we all have dispositions, predispositions like you mentioned. And uh, my individual alarm clock is I think around four thirty. It's a little bit early, but not too bad. Um. And so knowing that it's four thirty, I try and blend that into uh to what I do on the investment side from the standpoint of timing markets. And so you stay longer than your gut wants you to. Is that the way you're describing it. And my my gut wants me to get in there at four thirty, but

but my brain tells me it's really six. And and so it's just like a it's like a batter. I guess at the plate um, uh, you know, seeing a lot of fastballs, and and now it is getting a curveball, and a curveball comes in at ten miles an hour less. And so the key for hitting a curveball, um is to wait, wait, wait, wait, wait boom uh. And and so the mikey uh, you know, it's seeing something about to happen at four thirty is to wait for an hour and a half and then you know, take a

swing and hopefully get a hit. So, um, every investor I think has to know who they are from that standpoint, because we're all different. Um, this is Barry Rehults. You're listening to Masters in Business on Bloomberg Radio and my guest today one Bill Gross, formerly of Pacific Life in

PIMCO now with Janice. So. I began my career on a trading desk, and I've one of the things that have always stayed with me from the head trader at the time, a guy named Bill used to say to me, it's okay to be wrong, it's not okay to stay wrong. And throughout your career you've had a lot of great calls, but you've had some calls that have been wrong, which

you subsequently reversed fairly quickly. So let's talk a little bit about two thousand and eleven, where I think a lot of people have made a big deal about that. You said, hey, we're gonna have a problem, but you reverse that trade fairly quickly, didn't you. You took treasuries off in eleven, thinking we're gonna see higher inflation, higher interest rate, it's bigger deficit. But you didn't marry that position at all. No, you can't get married to a position.

And you know, like you're suggesting, and I had just suggested with the alarm clock. You know that the timings article is to win, to get in and win to get out. But being married to a position, yeah, is death for an investor. You can't fall in love with your certificates. Um, some of them are very pretty, by the way, and you can fall in love with him spoken like a stamp. So yeah. And in two thousand eleven, um, yeah it was. It was the wrong call in terms

of treasury. Sort of a famous year, I guess for PIMCO. But uh, you know, like you're suggesting. Uh, that was reversed later in the year and in two thousand and twelve, actually, by March of two thousand and twelve, everything that had been lost from an alpha standpoint, about three d and fifty basis points as I remember, came back in a period of three or four months, And in two thousand and twelve went on too to have a six hundred basis point off a year versus the minus three fifties.

I remember in ten cent and total return, I think the benchmark was three seven thing like that. So you had made that up. And at the same time, not only because you and I let me a little background for listeners, so you and I had been emailing about this. Paul Krugman famously chastised you after you left Pimco, saying Pimco and gross never recovered from two thousand eleven. And you said, hey, this isn't true. To take a look at it, and so I did. I went back. I

looked at the data. Not only did total return regain all the outflows and then some the following year. Two years later, PIMCO had gone from one point to five to two trillion dollars. So it was fairly clear this was far from quote haunting Pimco. It was a trade that didn't work out. You reversed it, and it certainly didn't stop the asset gathering process over the next couple of years, nor did it impact negatively um the performance the following year. Yeah, I think that's right, and it's

a bad rap. And I don't I don't know what Krugman is doing waning in on h uh, you know, not buying treasuries and and being unpatriotic, which was I think it's an inflation debate from his perspective as an economist, not a investing debate. But you were certainly an available, full guy to use as an example. Look, you got the inflation call wrong and then all sorts of bad things happen, or that was the argument, you know, did

you just shake that off at the time? Did you think that would really be a significant issue on a long and story track record, Because there are a number of people I've been through so many of those, um mistakes, Um, nature of trading. It's the nature of trading. Um. And almost every time, like my wife says, um, you know, you'll make it up. And and we always did and and um. So it didn't bother me. It seemed to bother a lot of people under the impression, I guess

that the gross and pimpco were infallible. But because and and and it's fair to say we came through the crisis, the Layman crisis with shining colors because of what I talked about with Mensky and McCaulay, and knowing about the housing market, we uh, you know, we were nine percentile

stars and oh eight No. Nine, and that was really the basis for the total return fund going to two billion dollars at it at its peaked a confidence that we could protect principle and then, like I say, with a mild mistake in two thousand and eleven, make it grow in two thousand and ten and two thousand and twelve. And to me, it was a sleepless, uh you know, period of months um as always, but never one without the confidence that we'd get it back. I have to

ask you one question. You mentioned two hundred and nine, almost three hundred billion dollars. Did the size of total returns have an outsized impact on your ability to maneuver? Did it just get to be too big at that point in retrospect? And you know, I would have to say, yes, that's a lot of money, you know, not that the markets uh haven't grown with us, didn't grow with Pemco. You know, through the years, that was always our claim to clients that hey, we're still only one and a

half percent of the market. That cider eat side of the market gets bigger, It's fair to say in the last few years that the street would always know what Pemco was doing. We would always know in the early years what the state of California was doing. They were the big horse and a big wheel back then, and you know, you'd know within five or ten minutes via the brokerage wires and the phones the state was in, the state was out. And so it became the same

thing with PEMCO. Any trade that we did obviously had to be an enormous size relative to the rest of the market, and we affected markets and we paid a price for that in terms of in and outs and ultimately in terms of the street being well informed and in some cases working against us. Any plans on a cap at the young constrained funded janis well not yet.

We're only a two billion dollars and and so you know that to me is um maybe not a perfect size, like to get a little bit bigger, but it's certainly size where uh you can move and you're flexible and you don't have the problems of the street, you know, wondering what Janie is going to do, because two billion doesn't move markets like two nobody's front running, you know, one's training against you. It's not the same situation. So let's talk a little bit about the Lehman situation, the

financial crisis. So you're running firm that has at the time, I want to say, oh seven, total return was about a hundred and sixty billion dollars. Is that about right? Okay, I'll go with it. UM, and PIMCO was just under a trillion dollars. So now you're sitting on this huge pile of other people's capital that you're managing on their behalf, and suddenly the world tum into the abyss. What's that like? It was sheer panic, not just from the standpoint of

the company, but personally. UM. It's a well told story that Mohammad al Arian and and Bill Gross both on the same day independently called their wives uh and told them to take all the money they had in the bank out of the bank. Um in cash. Of course, I think there was a ten dollar limit, but we said get it out of there. UM. So that tells you, uh, personally what was going on and institutionally. UM. You know, we were we were full time. We were sleeping in

the garage, sleeping in cars. Uh. You know, many of us never left the building. Uh. It was good to have Mohammed uh with us at the time because he had more expertise than I had in terms of the the technical dealings, in terms of money markets and brokers and repo and collateral. Um, you know I was. I was a trader and a portfolio manager. Um. Some Mohammed really helped us, uh back then in terms of preserving what we had. We we had money invested in Lehman Brothers.

We had money invested in um, you know, unsettled positions with Lehman Brothers. And there were some uh you know, minute a minute maneuver and yelling screaming, uh you mean them as a counterparty. It's actually we owned Lehman brother paper too unfortunate. Yeah, and and everybody did. Yeah, And

we came out of it very very well. And in terms of the positions that we owned that that countered our Layman positions, I mean we own you know, billions and hundreds of billions of euro dollar features that were screaming higher in price because the FED was dropping interest rates are about the Trump indust rates to zero. And so you know, we had some insurance against the Layman positions, but no, we weren't. Some were enough to completely avoid

the situation. And as you know, during Layman it was not just Layman, but you know Goldman and Meryl and Morgan Stanley, they were all next, so to speak, and so everything was thinking like a rock and um, everyone was trying to preserve their own uh collateral, their own cash. And it was really a dog fight of food fight, not just between um, you know, private institutions and Layman and the street and Layman, but between each other. Everybody

was looking after their own little skinny. You were at the time a huge holder of Fannie Mae and Freddie Mac the g s c S. That was a trade that could have turned out to be disastrous. It actually turned out to be a big money maker for you. To describe the thinking beyond that, well, the thinking was that they were money good. I I know, the Chinese at the time, we're asking questions of Paulson and and so on, and legitimate questions as to whether they were

money good and um holders of treasure. Reason and Fannie and Freddie and thinking might have been something along the lines of, hey, if you guys aren't going to back the g s c s, why should we think you're gonna back your own treasuries? And that that certainly was the case, and that was the reason why we thought that they would back the the g S c S and and you know, there was I think a five billion dollar you know, line of credit to the G S S technically in a prospective, but that was nothing

relative to their size. Ultimately, it was a position of faith that that the G S S and the agencies and the U. S. Treasury were one and the same. Obviously they're not one and the same, but one and the same in terms of protection of principle and interest.

And so that was the bit, and it was a big bit, and and others were moving in the other direction because like I said, um, you know, no one was deemed safe other than the the the U. S. Treasury per se, and uh, you know, it's just a question of of where to where to put your money. We we decided that the agencies were okay, and certainly the agency mortgages, which was the key because even if the agency has failed you, you theoretically and in reality

had collateral behind your loan that ultimately could be foreclosed on. Now, as we know through experience, the foreclosure ultimately resulted in forty and thirty and twenty cents on the dollar in some cases. So it wasn't perfect, But the combination of the you know, our confidence in money, goodness of the agencies, and the collateral made an attractive risk reward situation. So now let's talk about You've been a pretty I don't want to say critic, but you've been a commentator and

observer of of the markets and of the Fed. So let's ask the big question. What is the impact of ZERP and zero interest rate policy and quantitative easing? How has this impacted the markets? What is this mean to risk assets? And and how do you think this is going to impact this current generation of portfolio match And

how has it affected the real economy? Because I think it's all connected and and most observers don't connect it to the real economy, but certainly it's affected financial markets, uh, you know, with interest rates where they are, and we're not exactly sure because it's a counterfactual that are where they would be if we hadn't have QUI in the in the United States, or if the b o J didn't have que and if you know, the ECB doesn't

do q E. Um. You know, all very uncertain. But yeah, many studies by the FED itself, not that they can be the trusted verbatim. Uh, in terms of uh you know the facts so to speak, but you know they suggest, you know, impact of maybe basis points on ten year treasuries, and we know the impact in terms of money mark it rates just so in other words, instead of two

we'd have three. That seems kind of low, although when we look around the rest of the world, everybody else's rates at least the major countries much lower than than us here are in the US, right, Um, well, that's because the US at the moment has a stronger economy and a potential for um, some inflation as opposed to the negative inflation. So you know we have that that spread in the expectation that will remain a a dominant

leader in terms of the global recovery. Um, you know, so so que He's definitely had an impact on on bonds, on money market rates, on and on stock prices to h you know, that's the hard one. Where would a peb if the tenure was at three instead of two, and if money market rates were at uh two percent

that is zero? Um, you know, always hard to answer, but there's no doubt that the tripling of the stock market since the the bottom has been significantly affected by QUEI money has gone out from the course, so to speak, from the banks in terms of reserves, and not entirely so, but out from the banks in terms of reserves into

the outer reaches of the asset markets. And that would include you know, bonds and long term bonds and corporate bonds, and then stocks and equities and real estate, and so the asset markets have been fertilized, undoubtedly, h fertilized, that's a good word. Yeah. The question to me becomes, you know, the effect on the real economy again, a counterfactual, would the real economy be at three now if we hadn't

done quantitative easing? Probably not, because there is, in my opinion, a wealth effect that trickles down very slowly, but trickles down from wealthy investors into the economy, and so the

real economy is better. But I would make this point, and uh, I think others such as uh, you know Fisher in Dallas and several others you know are have quietly tried to make the point that interest rate should be higher, and not because of the inflationary menace, but because it affects the returns, the real returns on investment

in the real economy. Look at it this way. If a long term thirty year treasury bond was at uh, you know, instead of you know, below three percent, was at one percent, bond investors would know that, you know, the the duration would be uh, you know, probably forty years, and that the risk return would be inappropriate. So they wouldn't invest in a thirty year bond at a one

percent level. It's the same thing in the real economy, you know, C e O S and and uh you know, corporate leaders look at the return on investment and the return on equity and they've come down, down, down, you know, because proportionately, uh, the the financial market leads those types of returns. And secondly, because of structural influences that Larry Summers is mentioned in recent months, aggregate demand, dearth on

a global basis, etcetera. I could go on, but in any case, the return on investment is so sufficiently low. Let's call it four or five percent as opposed to six, seven or eight percent. That and and and remember, return on investment is a long term return or investment. In many cases, we're talking about a building here that will be up there for thirty, forty fifty years, So it

just sort of like a long term bond. Corporate leaders in the real economy are reluctant to make an investment in the real economy because the returns are too low and the risk is too great from a durational standpoint and from a lack of perceived aggregate demand, and so having gone so low in terms of interest rates, to my way of thinking, and I think to Fisher at Dallas, UH and others was was probably believe the critical mistake. They should have stopped at one or two. They should

have left something for savers. It wouldn't have made much difference if if FED funds work one percent instead of twenty five basis points. Leave something for savers, leave something for the investing in the real economy, so that you know there would be an impetus and the potential to have an attractive rate of return. There isn't that today, and so um you know, central banks are in this conundrum of knowing what will happen when they raise rates.

In other words, the potential for another moment like in two thousand and thirteen at Taper tantrum. But yet at the same time recognizing that zero percent interest rates distort capitalism, to a significant degree. And that's my main point. Zero percent interest rates distort capitalism. So a couple of examples stock by backs instead of capital investing, increased dividends instead of hiring. Is that the sort of thing you're alluding to, exactly,

And that's not the fault of corporation. If they can buy their stock at a at a sixte and a perceived return of the six or seven percent, uh, you know, with relative certainty and with the certainty that earnings for share will go up because of it in their tenure while they're getting a bonus. Then you know who who's default that. But it's just math. That is just math, and and the same thing with dividends. But but dividends and stock buybacks do not make for investment in the

real economy. And that's that that. The net savings rate in the United States and net savings rate in most countries. Some have avoided this, like Mexico, but the net savings writ in the United States is very close to zero. A dip below zero, you know, during the Layman recession

of the Great Recession, it's crawled above zero. Uh, you know, in the last year or two, but typically it hung out around five to ten percent in terms of net investment, and that's after corporate depreciation um and netting out the entire ball of walks and and so it basically means we're not investing in our economy. We're eating our seed corn because of this distortion in the financial markets where zero interest rates make financial assets attractive but not real assets.

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