The transcript from this week’s, MiB: Bill Gross is Still Standing, is below.
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RITHOLTZ: This week on the podcast we have an extra special guest. I’m trying to — to maintain low tones and I’m trying to keep my insane enthusiasm down. But holy cow, Bill Gross, the Bond King, spent three hours talking with us literally about everything. This is a pretty amazing conversation.
He does not hold anything back. He names names. He calls people out. He — I don’t even want to say he has scores to settle because he did that in his book. He explains what made PIMCO such a — a unique place, how they accumulated trillion dollars, essentially creating the concept of institutional bond trading before PIMCO bond trading was by appointment only. This didn’t exist before then.
We cover everything from card counting to inflation, to the Fed, to his book. It’s a Mary Childs book, “The Bond King,” about him. Really, there were no comments left unturned. And we also revealed what his thoughts were about when his bonus was revealed by a certain podcast host about eight years ago, and — and how that came about. His and Mohamed El-Erian’s multibillion bonus pool, how that thing could even exist, Allianz allowed them to do it, and — and how after almost being a parlor game of speculation, how those billions of dollars in who got what bonus pool was finally revealed. This was an absolutely fascinating conversation and an extra special guest.
So, with no further ado, my conversation with PIMCO Co-founder Bill Gross.
ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest this week is the Bond King, Bill Gross, the Co-founder of PIMCO. At one time, Bill’s total return fund was nearly $300 billion. It was the world’s largest mutual fund. Gross controlled more bond money than anybody else in the world. He advised the U.S. Treasury on the role of subprime mortgage bonds in the ’08-’09 crisis. He was named Morningstar’s Fund Manager of the Decade in 2010.
They observed no other fund manager made more money for more people than Bill Gross. He is the author of several books, including “Bill Gross on Investing” and most recently, his book “I’m Still Standing: Bill Gross and the PIMCO Express.”
Bill Gross, welcome back to Masters in Business.
GROSS: Thank you, Barry. Actually, I’m — I’m sitting talking to you, but I’m standing in life, so that’s what the — the title applies, I think, but it’s good to be here.
RITHOLTZ: It’s good to have you back. And, in fact, I owe you a debt of gratitude because when you came on the show, you know, it’s got to be six, seven years ago. You were really the first big name that said that I – let’s try this podcast thing out, and you opened the floodgates. So, if I’m lacking in any objectivity, let me disclose that right up front.
But — but let’s talk about your career starting with Pacific Life. You’re — you’re a junior guy there, literally, going into the vaults, taking bond certificates and clipping coupons off of that. How — how do you get from that sort of junior intern menial labor to launching a standalone active bond shop?
GROSS: We’ll, let me add to that quickly. I — I could only clip coupons for half of the day, I guess. The other half I was off making private placements of loans to fledgling companies such as Berkshire Hathaway and Wal-Mart. I — I visited Sam Walton with his two kids with a dog I struck. They had two Wal-Marts in Bentonville, Arkansas. And same thing with Buffett and Charlie Munger. So, I — I was doing some of that.
But to — to — to make the transition, I guess, to managing money, I — I — I did a master’s thesis at UCLA, I just graduated, and it was about convertible bonds, but also about warrants and — and option-related vehicle. So, I was interested in the bond market even though I wanted to get in the stocks.
And Pacific Mutual in downtown LA had a $1 billion worth of bonds. And a broker from Weeden & Company, Howard Raykoff, decided to visit and tell me that somebody else in town was trading some bonds from boxes. And — and that was as — as you know, there weren’t any computers or IBM 360s, but we only had one. You couldn’t really buy and sell on the wire, and so it was very difficult to trade. But I convinced him to, you know, let me use $5 million of their bonds and set-up an active trading account. That was the beginning of PIMCO.
RITHOLTZ: And before PIMCO, I’ve heard bond trading described as by appointment only. Is it fair to say you and your team invented fixed income trading? Am I — am I overstating that?
GROSS: Probably just a little. There was this gentleman, I forget his name in Occidental Life Insurance in L.A. that was doing some of that. There was Jim guy from Lehman who later died that was doing some of that. But I was certainly one of the first, and I was certainly one that pursued it and convinced at least the executives of Pacific Mutual that this could be turned into a business.
RITHOLTZ: So maybe I should say PIMCO helped to bring about institutional trading on a level that just didn’t exist before. You guys helped to systematize it. Is that — is that more accurate?
GROSS: Yeah, I think that’s true because back then, you know, stocks were the vehicle to trade, and even then, they weren’t traded that actively. Bonds were basically bought and ultimately matured, I guess that — the big banks in the East, the New York, and Boston, and Chicago. And so, yeah, bond trading was — was an afterthought. No one thought that you could sell one bond, buy another, and make some money. And so, it was innovative, and I was glad to be part of it.
RITHOLTZ: So, in the book, you describe how PIMCO grew in the 1980’s and 1990’s, but we’ll talk about the latter years later. But that period, following everything that Chairman Paul Volcker had done with the bond market, that really was a — a perfect storm to — to plow into the fixed income space. Tell us about the growth of PIMCO in the 1980’s and 1990’s.
GROSS: OK. And — and so you’re right, we started at a great time not in the 70’s because the bear market didn’t really end until ’81, ’82, ’83 depending upon, you know, the maturities of bond. But you — you know, it’s — it’s set-up the premise for total return in bonds where you could not only get a coupon, get an interest payment, but get a capital gain. And when you’re starting at close to 15 percent for a 30-year treasury, you know, it was — it was fairly easy ultimately to get a capital gain, and so that — that helped us.
We were also helped by a legislation from the Congress a bill that legislated ERISA, which basically mandated that pension managers had to diversify and not just diversify between, you know, the obvious, but also diversify between East Coast and West Coast. And so, this little company called AT&T, the biggest in the world team according late in the 70’s and liked what they saw, and they hired PIMCO. And that really was the beginning of it all. I mean, who — who wouldn’t open the door to a person or to a company that had just been hired by AT&T.
RITHOLTZ: But this is more than just lucky timing for a couple of reasons that I want to go into. We’ll talk a little later about some of the technical aspects that PIMCO really figured out to generate fixed income alpha. We’ll — we’ll circle back to that.
I want to talk a little bit about your investment outlooks. These were — were highly regarded. People thought they were both insightful and well-written. And this is at a time when, you know, we kind of take it for granted today that so many people write about financial investing and strategies. When you started doing the investment outlooks each month, that was somewhat unusual, wasn’t it? Tell us about that.
GROSS: Yeah, it was very unusual, and I thought about it from a business context. And I said, you know, if I want to be successful at PIMCO, if we want to grow as a company, you’ve got to say hello. And the best way to say hello is to write these investment outlooks.
I mean, there were a few. There was a famous guy you know, Barton Biggs from …
RITHOLTZ: Sure.
GROSS: … Morgan Stanley that was a real good writer. And — and I don’t think Jim Grant had started yet, but he was a excellent writer in the time. So, I wasn’t the only one. But I — I thought that if I’m going to inject some personal vignettes into my forecast for the bond market, the people would read it because they didn’t really read these things that came out of First Boston, and Solomon Brothers, and so on. And so, I — I decided to take a little risk.
You know, one of the things that I wrote at the beginning of my book, a quote, it said that, “Talent is helpful in writing, but guts are absolutely necessary.” And so, I — I decided to have a few guts and opened myself up to people. And some like that and some didn’t but, you know, the — the reputation grew.
RITHOLTZ: Well, I want to point out first, you were the — the O.G., the original gangster when it came to financial writing because, of course, there were lots of professional writers and journalists running about it. But as far as I recall you might be one of the earliest people who were managing money to describe what you were doing. I — I want to say it was Howard Marks and you. Pretty much, you were the guys that were putting out regular commentary before, you know, anybody could — could go online and find letters from Warren Buffett or — or things that Ray Dalio wrote or anyone of thousands of other professional money managers. When you began, I don’t think there were many other money managers putting out written commentary the way you guys were. You, Buffett, and Marks are kind of the three that — that blazed this trail.
GROSS: I — I think so. And, you know, one of my positive attributes is that I — I wasn’t afraid to take risk and to — to take chances. And so, you know, there were those that, you know, PIMCO and marketing and so on that would suggest that you can’t do that because people would just jump on your ideas and front-run. But, you know, I’m — I’m paranoid in a lot of things, but I wasn’t paranoid in that in terms of thinking that no one really cared. And so, — so why not? Why not tell people what I thought? And I — I think it worked.
RITHOLTZ: So, no doubt I remember worked because the firm did well in the 80’s and 90’s. At what point did you come to the realization, “Hey, this is kind of a one of a kind company and it’s going to be special.” Did you ever imagine you would have a trillion dollars in assets under management?
GROSS: Well, of course not, but at some point, I did when we were $990 billion.
RITHOLTZ: Right.
GROSS: But — no, my — my objective was to — was to grow the company to, you know, have a fiduciary responsibility to clients in terms of products and not — not charging them too much or inventing products that ripped them off. But I also want to or wanted to be famous. I mean, that’s — that’s in my book and — and the — the Childs book as well. And, you know, growing into $1 trillion and ultimately ended $2 trillion was — was very productive in terms of being famous and I guess, ultimately, infamous.
RITHOLTZ: So now that you look back, which is more important in hindsight, money, power or fame?
Greg Dardis: Well, I — I never enjoyed power and I’ve enjoyed some of the money, but after a certain point, it’s not that productive unless you give it away. And so, I — I think ultimately, if those are the three choices and I did offer those to potential recruits who, by the way, would never answer the question because they were afraid that any of the answers would be — be negatively.
But I — I — I — I’m certain, you know, I would choose fame again. And I — I was — I was cognizant at the time that fame can turn into infamy that you could fly too close to the sun, et cetera , et cetera from an objective standpoint. But I must say I didn’t think it could happen to me because I was always on the up and up, always honest, always open, and — and why would anybody. And I — I think ultimately, that was eye-opening to me, but I — I do it again.
RITHOLTZ: Really interesting.
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RITHOLTZ: Let’s talk a little bit about the way he PIMCO grew and generated profits for clients. You — you describe a lot of very technical aspects to bond management and trading, which all contributed to fixed income alpha, which I think a lot of people reading your latest book might not have realized all the ways that — that you guys generated outperformance. The — the question I — I ask is how is it possible with all this money laying around nobody thought of this before. Why didn’t anybody else try and systematize total return of fixed income portfolios?
GROSS: Well, I think, I mean, a lot of bond managers were and probably still are very conservative. That’s their job to protect principal. And therefore, on the sales side, on the Wall Street side, they were facing the clientele that didn’t really want to accept any of their suggestions, whatever they were, you know, well, just the other way for me and for PIMCO.
And, you know, we were very innovative from the standpoint of new products. We were one of the first to — to buy financial futures. We were one of the first to — to fund mortgages — Fannie Mae mortgage. I mean, most — most bond managers didn’t want to go through the problem of segregating principal and interest, and determining performance. It took a long time and a separate staff, and so we did that. And then, of course, in the — later in the global and tips. And — and so — and so the innovation was key, I think, to help with generation.
The biggest key was the thrust of what we called secular forecasting, secular outlooks. And I — I — I read a book early on just after I joined PIMCO called “Investing for the Long-Term.” I forget who wrote it. But, you know, you’re focused maybe on the dangers of trading for the short-term because fear and greed on the others that get involved and you tend to make bad decisions. And so, we approached it from the standpoint of three to five years.
In terms of the — an outlook, we brought in speakers that spoke to that, many of them, you know, Fed officials or ex-Fed officials, et cetera. And so, I think that really helped us to avoid, you know, the bad — the bad months and the bad quarter by looking at three to five years. So those were several of the case.
RITHOLTZ: And when you say investing for the long run, you’re not talking about Jeremy Siegel’s stocks for the long run, you’re talking about something more specific.
GROSS: Yeah, and basically it involved forecasting interest rates. And — and to be fair, you know, throughout the period of time that the secular outlook for interest rates was down, down, down. And, you know, during our annual secular forums that we had where we brought in outside speakers and basically set the tone for the next 12 months, you know, for the most part, it was a bullish forecast, which turned out to be true.
If we had a forecast, it went the other way for the long-term for the next three to five years and obviously, the company would have disappeared. But — but focusing on that, forgetting about the day or the week or the month, I think it became very successful in terms of position in a portfolio duration-wise, and volatility-wise, and credit-wide.
RITHOLTZ: Really intriguing. So — so let’s talk a little bit about, you know, you as a investor and trader. I’m — I’m kind of entranced by the way I’ve heard the PIMCO trading floor describe your desk was a horseshoe, and the traders and the analysts were arranged in a really specific manner. Tell us a little bit about — about the thinking there.
GROSS: Well, I — I thought it was pretty simple, and I don’t really remember the horseshoe. But, you know, I was positioned in the middle certainly, and the traders of which they eventually grew to 20, 30, 40, 50 were, you know, basically positioned in pods: the mortgage people, the high-yield people, the global people, et cetera. And, you know, they would work together and almost independently day-to-day, but I would check and — and others would check in terms of what they were doing, make suggestions, and so on as — as we walked around the floor. So, it — it made a lot of sense. It was a big trading room with — I don’t know how many square feet, but I think functionally it really worked for us.
RITHOLTZ: So — so who got to sit close to you and who sat further away? Was that a function of how accurate — how active those markets were or was it, you know, just seniority basis?
GROSS: You know, well, it was both. You know, I remember that Scott Simon sat to the left to me, and — and Bill Powers, and I don’t think Chris Dialynas ever sat next to me. He was — he was content to be on the wing, so to speak, and do his own thing. But — but usually, I would be determined as well by who would — who would be quiet as opposed to loud. You know, I — I liked quiet to be able to think myself, and somebody with a loud voice talking to brokers are calling up their spouse, you know, just wasn’t working for me in terms of a trading day.
So, you know, the quiet, and function, and seniority all sort of fit in. And I — I didn’t think somebody else picked and I just went along with it until the noise got too loud, and then they were out and somebody else is in.
RITHOLTZ: So — so you mentioned the number of your colleagues. In the book, which we’ll talk about in a little bit, you’re very generous in giving lots of credit to your colleagues for being major drivers of — of the firm’s success. Tell us about some of these colleagues and — and how they contributed to PIMCO’s growth.
GROSS: Well, they were, you know, we hired some really smart people and really aggressive people, obsessive people that really love to do what they’re doing. Chris Dialynas was one of the first who was my co-portfolio manager so to speak from the early 80’s. He wanted to be a baseball player for the Angels, but decided to take our $20,000 offer. And he came and he — he had gone to the University of Chicago and, you know, studied there about options and so on, and ultimately became instrumental in terms of bringing financial futures to — to the portfolios and suggesting some very creative ideas in terms of Ginnie Mae futures which, you know, some say we — we broke the market, but he was one.
And then there was another gentleman Changhong Zhu that came to us from Wells Fargo in San Francisco. He ultimately left after 10 years to go back to China with his family and head up, you know, a key position in the Chinese Central Bank, I think. But he — he would make lots of suggestions and Investment Committee in terms of the convexity and yield curve strategies, euro dollar futures, et cetera. He was perhaps the smartest guy in the floor, including me. And, you know, so I think a lot of the strategies are due to his suggestions.
You know, there was a high-yield gentleman, Ben Trosky, who was really a master that all of our mortgage people Bill Powers and John Hague, and Scott Simon that I mentioned were really smart. And their performance and mortgages through the years in terms of their own portfolios, you know, just flowed over into the total return fund. So, all of these people and there are a lot of other ones.
You know, we were a team and, you know, the — the term “Bond King” was, I guess, more of a P.R. acceptance than anything else. I — I — I don’t think there was a king, I was a leader and certainly a leader of the Investment Committee. And — and in terms of accepting a standard portfolio for those to manage, but not the smart people. And I think it bared acknowledgement in my book.
RITHOLTZ: So, lots of these colleagues eventually became successful, they became very wealthy, and they, you know, hit the eject button and retired. You stuck around for 43 years. That’s a long time. What led to that longevity? That’s pretty unusual these days.
GROSS: I — I think it — it was because I loved it. And, you know, the — the standard — the standard idea that you should do what you love is fine. It — it can’t really apply to — to billions of people, you know, throughout the world that they all can’t find jobs that they love. They can’t all paint. They can’t all write music, but this was an area that I loved in terms of buying, and selling, and competing, and making money, and becoming famous, of course.
And so, I — I think I stuck around for that long until I was 72 at PIMCO or 71 simply because I love coming in. It — it just — it made my week.
And, you know, at PIMCO we would have an Investment Committee until — from 12 to three every day, but after three and certainly in the summertime, I — I could just go across the street and hit some balls and play golf, too. So, I — I wasn’t a — a one-way horse rider, I — I guess, I — I could do a lot of things, but managing money and investing and — and talking about it, writing about it was something I truly enjoyed.
RITHOLTZ: So, let’s talk a little bit about the two thousands. You guys really, because the way you were positioned, got a very early warning look at what was going on in the bond market and the housing market. You were pretty well-positioned before, during, and after the financial crisis of ’08-’09. How did you manage to — to accomplish that?
GROSS: Well, I — I — I give most of the credit, in this case, to Paul McCauley, and Paul is still around. He’s on TV. He’s got that long hair and that southern (inaudible). But — but …
RITHOLTZ: At least he got rid of the beard finally.
GROSS: Yes. But he was a — an economist at — at heart, and he was a prominent member of Investment Committee. And he — he would speak about Hyman Minsky and his theory about stability turning into instability. And — and as the housing market roared and dipped, we became sensitive to the potential for instability.
I — I had a brother-in-law who was a mortgage banker on kind of small scale, and we would have dinner sometimes. He would tell me about no dots and liar loans, and so on before anyone at the Fed knew anything about that. And so, I — I decided to take 10 of our credit analysts and send them out to — throughout the country and pretend that they were buying houses and to see what was going on. They came back and said hey, that this stuff is dangerous, these subprime mortgages, et cetera, et cetera.
And so, we (inaudible) to this early on. We voided portfolios of subprime mortgages and high-yield bonds in general anticipating a crisis at some point. So, I — I — I think our Investment Committee, and again Paul McCauley was the leader in this regard. Grant (ph) really helped in terms of anticipating what might happen at some point, that did happen.
RITHOLTZ: To say the least. Full disclosure, I know McCauley really well. We’ve gone fishing together in Maine. I’ve had him on the show before, and full credit to him for giving Minsky’s work a wider modern audience.
So, given that you were positioned so well during the financial crisis, how did the relationship with the U.S. Treasury develop? Tell us a little bit about that.
GROSS: Well, I guess this sounds delicate, but it shouldn’t be. You know, almost all of us were in touch with the Treasury. I mean, I — I talked to Timothy Geithner once over the phone on a Sunday evening when he called me up after it had a few beers and wanted to know what was happening in the economy. But that — that’s the only time I can ever remember talking to the Treasury. We weren’t — unlike BlackRock and Larry Fink, nothing wrong with that, but we were a company on the West Coast that basically did our own research and weren’t in touch with Treasury officials unless they were Fed officials that had retired like, you know, Bernanke and Paul Volcker, and — and others.
And so, I don’t really know how to go up. It certainly wasn’t a phone call. They called us and — and said can we help manage a portfolio of mortgages for them, and we said sure. And so, that was basically it.
And, you know, there was a rumor that we badgered them into guaranteeing Fannie and Freddie mortgages. Nothing could be further from the truth. Nobody made a phone call to — to badger or to — to influence in any way.
What we did see is that of all the mortgages that Fannie and Freddie were the highest quality and that they were yielding astronomical yields relative to treasuries and — and much wider spreads and — had ever occurred. And so, that was the fascination with Fannie and Freddie. We did well with mortgages, and we did well during the crisis. And after the crisis, PIMCO went from $1 trillion to $2 trillion because we had protected their money.
RITHOLTZ: So, we mentioned earlier the — the new book by Mary Childs, “The Bond King” is out. And I know you participated in — in responding to some questions about at least validating certain things are not factually. But it’s pretty easy to read that book and see that she is trying to make the case that PIMCO was the largest holder of Fannie and Freddie bonds, and that you guys bullied the government into guaranteeing them. Make your case. Rebut that premise. Was it simply, hey, we never spoke to anyone at Treasury about Fannie and Freddie?
GROSS: Exactly. I mean, how could we (inaudible) our badger if I or I guess Mohamed didn’t pick up the phone and — and — and badger and bully. First of all, we — we were bullies in the trading room, but we weren’t bullies from the standpoint of, you know, Treasury strategy.
RITHOLTZ: Were you bullies or were you really just the 800-pound gorilla in the space?
GROSS: Yeah, I think so. You know, we had a lot of money. We bought a lot of bonds and, you know, that helped our performance. But, you know, bullies, no. You can’t be a bully if you don’t pick up the phone.
RITHOLTZ: So, your counter to the book, “The Bond King” is no, we — we didn’t force the government to guarantee these. The government did that because, for their own reasons, primarily, they were desperate for liquidity and they were desperate for some degree of stability, and this is how they achieved it. Is — is — is that a fair counterargument to her book?
GROSS: It certainly is. And one interesting sidelight having — during the crisis as Congress was voting, I guess, for their $900 billion package — bailout package, you know, Warren Buffett called me up and — and — and told me about a plan he had to — to contribute $100 million in equity — $100 million — $100 — $100 …
RITHOLTZ: $100 billion.
GROSS: $100 billion of equity. And to — you know, to basically buy subprime mortgages from the banks, in other words, to take a load off their shoulders, obviously, to — to buy them at our — at the right price. And within 30 minutes after checking with our Executive Committee, I said, “Fine, we’ll do it.”
The next day, however, you know, the Treasury Secretary decided to go the other way. And that’s when they decided to — to ask banks to — to issue preferred stock and the bailout took another form. But that’s about the only potential connection we had with the Treasury. And as I say, it never came to fruition. It was like a 48-hour idea.
RITHOLTZ: Really intriguing.
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RITHOLTZ: Let’s talk a little bit about this book, which generated a little bit of controversy. People blamed you for just seeking to settle scores. Tell us about the book and what motivated you to sit down and write it.
GROSS: Well, I had written the book 20 years ago, and I didn’t really think at the time that I had another book in me sort of so like writing novels, I guess. After the first one, it fell downhill. But I – I was in touch with Mary Childs for five or six years certainly after I left PIMCO. We were not good friends, but she would interview me occasionally. And so, I was alerted to the fact or I — I read something on Apple Books a book by Mary Childs who’s coming, you know, 12 months in the future, and it had a respected cover on it, described me on the cover as — as ruthless and, you know, how they lost everything.
And I — I said to myself that’s not who I am as I look in the mirror. And — and so, you know, rather than thinking about a lawsuit or any of that, I said, “Well, the — the best way to counter that and to give your impression of PIMCO and its years and your part in it was create your own version.
And I had a time. I’m now here in the desert. I play golf in the afternoon. I get up at six in the morning and I manage, you know, my portfolios for five or six hours. And I had time, and so I — I just started writing in order to say that I’m still standing. I haven’t lost everything. And the ruthless part, I am not sure what she was referring to.
I — I — I called her up and I said, “Mary, you know, I kind of get the ruthless part.” And I think she decided to take it off the cover. I — I haven’t read the book, of course, because I’m too sensitive to criticism. And I know there’s criticism and that the — the ruthless part just went overboard. That’s what set me off and said, “Write your own book. Tell your own story.” And — and hopefully after five or six years, you know, the — the wounds — as in time heals all wounds — had healed pretty much, and the scars had turned from red to white. And so, I thought I could write an objective book about the pluses and the minuses. Each argument, PIMCO’s argument, my argument why I left and why I wasn’t necessarily the Bond King, the company was full of bond kings and bond queens for a long, long time.
RITHOLTZ: And — and the book title does not have ruthless in it.
GROSS: Right.
RITHOLTZ: And for those people who may not be familiar with Mary Childs, she covered PIMCO in the bond market at Bloomberg News for a while. Before that she worked at “The Financial Times,” and now she’s a co-host of Planet Money podcast at NPR. And we’ll talk a little later about a — a project she and I did together.
But let’s talk about the book. You do not — and I think ruthless may not be the right word, but you don’t hold anything back in the book. I mean, you are completely blunt and forthcoming. An example I wanted to ask you about, you said your partner who negotiated the Allianz purchase of PIMCO, skinned them alive. So — so that’s a serious line. Tell us about the Allianz takeover of PIMCO and how you guys managed to get such a one-sided deal that worked to the benefit of the PIMCO owners and the company.
GROSS: Oh, so much so, and Ken Poovey is no longer with us, but he was brilliant. He was — he was the — a leader in terms of negotiating with Allianz. And, by the way, Allianz, when they bought PIMCO they — they only bought 50 percent of it. Pacific Mutual held on to 50 percent of it for, you know, a year or two. And they left with us — the people, the partners — 33 percent of the profits going forward, which still exists. And — and so that basically meant that what they were paying for was — was about a sixth of PIMCO in — in 10 terms of the ongoing revenue stream.
But to — to talk about Poovey and what he did, he basically suggested to them and we would suggest to him and would — yes, we were very ruthless from the standpoint of, you know, trying to strike a — a very good deal if we’re ever going to sell part of the company. And Poovey would always tell them, and I — I would participate in the discussions that these people needed to be incentivized not that 33 percent of the profit pool wasn’t incentive enough, but Poovey would say, you know, these partners will be — they’re 25 now, they’ll be 50, they’ll be 75, they’ll be 100. This won’t be enough to keep incentivizing the existing partners and to bring in new partners. So, he — he devised a — what he called a B share sort of a fake equity type of plan where partners would be given a certain amount of B shares and — and that the value of those shares 10 — five, 10 years forward, when they could be cashed in, would be based upon multiples — 10, 12, 14, 16 time multiples of — of existing of earnings.
And basically, when I say you skin them, Allianz had no idea that what they would be paying in terms of those multiples and in terms of the performance of we’re anywhere close to what eventually occurred, and it was a brilliant idea. He pulled the wool with her eyes. They were, I guess, starstruck with, you know, buying PIMCO and — and looking forward to a wonderful publicity. But it was really that B share plan that made — made me more money and made partners more money than the existing 33 percent profit pool. It — it totaled billions and billions of dollars in terms of B share payouts.
RITHOLTZ: And you — you don’t — again, you don’t hold back. You say in the book, quote, “None of us were worth what we were paid,” unquote. Explain. If — if you’re generating billions in dollars of profits, what should you have been paid?
GROSS: Well, I — there’s a certain logic to that. I mean, our — our fees weren’t excessive. We were charging 35 basis points on average. We just grew and grew, and grew, and grew, and grew.
And one of the beauties of working with PIMCO was that it was small. We kept our expenses down and our people low. You know, companies like Bank of America had 250,000 people. We had 2,500. We’re a 100th of their size with …
RITHOLTZ: Wow.
GROSS: … you know, profits about the same size. And — and so, you know, that was part of our strategic brilliance as well, I guess. Jim Muzzy and early on Bill Podlich, the original partners have, you know, simply thought that we should keep expenses and people low that we could manage without a lot of people. And so, you know, that generated huge bonuses.
Were we worth it? You know, I — I simply said that I don’t think anybody is worth that type of money. Yeah, maybe — maybe Bezos and Elon Musk in terms of their creativity, but it just — it was too much money yet.
You know, as — as I left and go, our executive secretaries were making $500 million.
RITHOLTZ: Oh, my God.
GROSS: Our — our head corporate lawyer, you know, that the G.E. lawyer was making $1 million or $2 million, our — our lawyer was making $10 million to $12 million just like we didn’t know we had so much money, we didn’t know how to get rid of it. And we had this egalitarian type of attitude that we should spread it out as much as possible, but I don’t think anybody there deserve to make what they were making.
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RITHOLTZ: So, we’re going to circle back to the bonus structure, but unfortunately, at this point, I have to insert myself into our conversation. So, you get fired from PIMCO in 2014, and I save a bunch of your IOs from previous dates. And in the train home from work, I — I just read a bunch just, you know, across a couple of years.
By the time I get home that night, your voice is in my head. And, you know, whenever they arrest a painting forger, they always say the same thing, “Once I had his stroke down, everything I painted look like Picasso.”
Well, once I had your voice in my head, whatever I wrote sounded like you. And so, for — it was then called Bloomberg View, I wrote your final investment outlook in your voice purposefully making it outrageous. But, you know, by the time it got through the editing process, it was smoothed out enough that it very much sounded like your voice so much so that PIMCO called Mary Childs, asking her, “Hey, how the hell did you guys get bills last I.O.? This is wrong.” And it’s in Bloomberg View. It’s an opinion piece. It’s a satire. It’s a parity.
And so, you and I began speaking about that. But before we get into the bonus discussion, tell us a little bit about that day, what was it like after 43 years to be sent to the principal’s office and — and sent home.
GROSS: Well, it was traumatic. I — I mean, I — I was the — one of the founders. I — I was one of the leaders, the Chief Investment Officer. The performance was flat for 12 months but, you know, nothing tragic.
And, you know, the Executive Committee, which was going to fire me on Friday afternoon because they thought I was unsettling in terms of my pursuit of insiders talking to the press. In any case, you know, I — I decided I’m not walking that plank, that I — I deserve better than this. So, I — I even asked in the last week or two when — when I knew that, you know, the inevitable was coming up that Friday afternoon. I said, “Why don’t you just let me manage, you know, a small portfolio, a closed-end fund just so I can stay in it.” I — I said, “I’ll even work in another building if you want.” And they looked at me. They — they said it’s not going to happen.
And so, I — at the time, I couldn’t understand that. Now I sort of do. You know, when you — when you kill the king, better make sure he’s dead. And …
RITHOLTZ: That …
GROSS: … he didn’t want any presence of Bill Gross in the ongoing PIMCO. I — I objectively I understand that. But to turn down and offered to let me manage a few small portfolios and maybe write some investment outlooks like I couldn’t believe it, I made a quick call to Janus with Dick Weil who is heading that up and had him COO at PIMCO a few years before. And he said, “Sure, come over.” And so, I didn’t want to walk the plank, I didn’t want to go into that committee and be fired, and so I left.
That night, I walked down the 20 floor stairs for the last time, and — and the next morning I was off to Denver. I just — I didn’t think it — it was the way you should treat somebody that was a founder and responsible for much of their success.
RITHOLTZ: And — and there was, at the time, a lot of sniping in the news. They had said you had become disruptive and were a problem on the trading floor, and was affecting morale. And there was a lot of personal stuff. Hey, Bill is a little unstable, and they trotted out that picture from you with the Morning Star conference with the glasses, which I think were a 2010 or 20- it was years before. You know, what was your reaction when this became so, you know, personal, and to be blunt so petty on — on all around?
GROSS: Well, it — it wasn’t good. You know, I — I guess like in a divorce and this was a divorce, both sides start to picking at each other, you know, War of the Roses type of thing. So, you know, I didn’t enjoy what they were leaking to the press. And I never talked to the press, by the way, but I didn’t enjoy that they said the performance was bad, that I was erratic, et cetera, et cetera.
So, I — I was always somewhat not erratic, but always …
RITHOLTZ: New quirky.
GROSS: … somewhat of a — somewhat of a quirky character. And …
RITHOLTZ: Yeah.
GROSS: … and I don’t think that it changed. But — but there had been, you know, two or three people that our lawyers eventually discovered that were leaking — leaking information to the press and favoring Mohamed, I suppose, than me in terms of why he left. And I — I didn’t think that was nice. And so, that ultimately — and — and to be fair, as I wrote in my book, you know, one of the main reasons I think that they fired me what was — I — I was in favor of low fees and they were in favor of high fees.
You know, Dan and I listened and the Mortgage Department had created, you know, products that had two and 20 hedge fund types of venture fees and we make a lot of money. I was making some of it, but it just seemed to me in terms of fiduciary responsibility that low fees were something we owed to clients and we were hedge fund managers. And so, ultimately, I think the Executive Committee, which was formed with eight people, three of which were portfolio managers, one (inaudible) 00:54:34 who eventually led the coup, as I called it, you know, they — they went in the direction of high fees as opposed to low fees, ETFs and — and so on.
So — so there was a fundamental reason, but there was also other personal reasons. I was 72. It was the time to go …
RITHOLTZ: Sure.
GROSS: … not in my mind, but in their mind because at 72 so I wrote in my book, if you’re not as sharp as you at 52 and certainly not as sharp as you at 77 as you as you were at 72. So — so maybe there was some of that that I — I understand some of that. I just still don’t understand the exit and why they had to do it that way.
RITHOLTZ: So, let’s talk a little bit about that War of the Roses. So, I got – I don’t remember if it was a fax or an email, but a spreadsheet that was, you know, the long debated and wondered about bonus pool at PIMCO and it had you earning about $300 million a year in bonus, Mohamed El-Erian about $240 million in bonus, and down the run — a whole run of — of literally billions of dollars in excess compensation. So, tell us about why that was released, and — and did that have the intended effect of really rattling the senior management at PIMCO and — and causing turmoil in the — the C-suite.
GROSS: Well, I think it might have had an effect. That was the intent. I — I didn’t have anybody in the company that could tell me whether or not there is steam coming, you know, out of the years of the — many of the — the — the partners. But I — you know, like I say, I — I had been fired. They were talking in the press negatively about me, and I didn’t want to call up the press and talk negatively about them. And so, what I did was I said, I know how I can get back at them. And it was childish in a way, but it was — it was a way to — you know, to stop taking punches and maybe throw one of my own.
And so, I — I took last year’s bonus pool, and I — I mailed it to eight random partners in an envelope and send it as a package to PIMCO. And I assume they ultimately distributed it. You know, for the most part, I — I assumed anyway that partners knew what other partners were making that — you know, that happened over drinks and over the water cooler. But it just made me feel better that I could do something to counter what they were doing.
RITHOLTZ: So, in the book you said you could hear the screams from the top floor all the way your house, but let me just shed a little color about what took place when — when I got the document. I walked it over to some senior editors at Bloomberg who walked it through legal, and we brought in — of all people — Mary Childs who is covering PIMCO. And the plan was I would write the opinion piece about how outrageous this was and Mary would cover it as straight news. And that after we had vetted everything and they — you know, to Bloomberg’s credit, their process is just absolutely fastidious and top notch.
I was very comfortable that we checked every box, both from a journalistic side and the legal side. And what they did is they waited till 8:00 PM East Coast time after the Wall Street Journal and The New York Times print editions had gone to bed, and they called up PIMCO to get a — a comment on it. And they seem to not really believe that we had what we had. And so, the next day both pieces ran and all hell broke loose. That was the most read pieces on the Bloomberg terminal for like six months. I don’t remember the exact date, but it absolutely blew up.
And I know it was a parlor game. People were trying to guess what PIMCO’s bonus pool was. So now that you look back at it, did — did this accomplish what you hope? And, you know, do you have any regrets about that, you know, War of the Roses era?
GROSS: Oh, God, no, I — I mean, (inaudible) — I — I — I thought then, I still think now that it was just a little jab to — to counter their uppercuts, and so they really do any damage to the — the structure of the company in terms of compensation, I don’t know. But since they were all very good in terms of the Executive Committee in terms of smoothing things out, I — I assume internally that, you know, they gave it an afterthought, but not — not for six months.
RITHOLTZ: I’ll tell you a funny story that I — I never shared with you, but I — I might as well as long as we’re coming clean. So, in order to protect our source, spreadsheet was to the penny. I mean, it was really precise. It — it wasn’t $240 million, it was $239,877,643.52 …
GROSS: Right.
RITHOLTZ: … but — I let’s make it $240 million, and it’ll protect the source a little bit. And I don’t remember the gentleman’s name who is the head of P.R. at PIMCO at the time, but I was very annoyed that he would come out and say, “Oh, those numbers are wrong,” and — and he accused me of getting it, not just that they weren’t precise, oh, this is wrong, Ritholtz doesn’t know what he’s talking about. It’s all wrong. So, I — I recall sending an email to him with his exact salary and bonus to the penny and said, “Next time you say something wrong I will release the salary of every person at PIMCO down to the penny.”
So, your career — most of us have followed your career for decades, and there is a sense that you grew up kind of hard scrabbled. You didn’t come for money. I’m — I’m curious, do you — today do you think of yourself as rich? Have you wrapped your head around the fact that you’re a billionaire? Because sometimes we — we see some of the things you write, and say, and do, and it’s like he still thinks he’s that kid from, you know, 50, 60 years ago.
GROSS: I do. You know, objectively, I — I know I’m a billionaire, I see it every morning with my, you know, financial statement and my portfolios. But, you know, I think that comes from a certain insecurity. I — and — and to be fair, you know, I’ve got a plane, I’ve got several homes, and so that’s typical of billionaires. But, you know, all throughout my life and my marriages and so on, I — you know, I would bring home takeout dinners from the — the local Taco Bell three times a week.
You know, we — we never lived and still don’t live high off the hog, we eat very simply. We go to sleep at 8 o’clock and — and watch Netflix, and so on and so on. We don’t go out to parties. We don’t dress up a lot. And — and — and so, you know, my idea of living well is — is, yeah, certainly have enough money to live well, put them to — to live simply and to ultimately give — give back not in terms of time.
I — I don’t give back time like Bill Gates and Melinda Gates do. That’s not my strength, but, you know, I — I get back a lot of money. I’ve done giving pledge. I’ve already given a billion or so in — in terms of money. I have a $500 million foundation, et cetera, et cetera. And so, — so, you know, it’s a simple life, but not so simple in terms of all the money that I have to — to give back, not just to people and organizations but, you know, certainly do the government when I kick the bucket, I’ll take 40 percent of it.
RITHOLTZ: Unless you give it all away, that’s a — a good enough reason to, A, having state tax and, B, give the money away.
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RITHOLTZ: So, I have to ask this question, what’s the deal with Gilligan’s Island? You — you have to explain. And P.S., I always understood that you can put whatever you want in your backyard. Nobody has the right to a view across the neighbor’s property, but tell us about Gilligan’s Island.
GROSS: Well, our — our house is right across from the — the bay or the entrance that the opening segment of Gilligan’s Island takes place. And — and — and …
RITHOLTZ: Ah, OK.
GROSS: … one day a few years ago, I mean, and I was …
RITHOLTZ: This is Newport Beach or in Laguna?
GROSS: It’s in Newport Beach. It’s a home in Newport Beach. And so, we watched it, and we said, “Hey, that’s — that’s where this house is.” And — and so we — we learned to love Gilligan’s Island, the skipper, and the movie star, and — and we would sing it to each other. And so, when we would go down to the hall and south of (inaudible), we’d sing Gilligan’s Island, and — and the whole neighbor thing started with a sculpture in the backyard that the neighbor didn’t disapprove of, a matter of fact, he had said he liked it.
But one day there was a windstorm. The palm tree front broke down and — and broke some of the — the glass, and so we put up a net to — you know, during inclement weather to protect it. He didn’t like that, and he sued, and that was the — the start of the whole thing, which was ultimately ridiculous that — that, you know, I spent $500 million or — $500 million — you know, I spent $500,000 in lawyers’ fees. I think he did, too. I suggested we just give it all to local charities. He didn’t want to do that.
I — I — I think he — I think being a personage, you know, like The Bond King was part of the problem. He wanted to take it to The Bond King, and — and he did. And then (inaudible) …
RITHOLTZ: You mentioned in the book he was always sort of watching you guys, had cameras trained on your house. How much of this is just, gee, you know, I don’t care if I’m a billionaire bond king, I’m entitled to have some degree of privacy in my own backyard. Where is the line there?
GROSS: Well, that’s true and that’s our argument that it didn’t fly with the judge. But, you know, the city ordinance have said that 60 decibels was as loud as you could play the music. We had a decibel meter that kept it at 60 or under, but it didn’t please the neighbor, especially at eight or nine o’clock when we were in the pool. And so, you know, he kept suing, he kept calling the cops, et cetera, et cetera, et cetera, and ultimately wound up in court for playing loud music.
And it — it is sort of disheartening not that it diminishes my career, but it — it — it certainly what people talk about. And, you know, I guess my epitaph we have Bond King and have, you know, loud music, which is a little disturbing, but — but I was part of it.
RITHOLTZ: Bill, I — I wish you would have called me for advice. I would have given you a very simple solution. Ask him what he wants for the house, buy it, knock it down, and — and problem solved.
GROSS: He didn’t have as much money as I did.
RITHOLTZ: I’m gonna tell you, I — I — someone I worked for had a neighbor that was problematic and that was their solution. Hey, what do you want for your house? And the guy throughout ridiculous numbers like done, have you lawyer call my lawyer, and we’ll — we’ll be bulldozing this in a month.
GROSS: Yeah, right.
RITHOLTZ: So — so, you know, Mary’s book is out. Your book is out. There’s been reviews of both. Your book actually got some pretty good reviews also. You really lay a lot of stuff out there that most people don’t. Any regrets about the book? Is there anything you feel like, well, maybe I shouldn’t have gone that far here or, hey, this is who I am and — and you got to take the good with the bad?
GROSS: No, no regrets about the book. I mean, I — I read it myself about 100 times over and over and over again and cut some stuff. And not — what I wanted to do was to present subjectively, of course, from my classes what — what I thought was a fair argument on either side from PIMCO and myself and — and to explain what I call the, you know, the PIMCO magic why we were so successful. And I — I think that’s the heart of the book, you know, why (inaudible) PIMCO successful, what — what were the people like.
So, what — I — I think it was a good book. It was — I think it — I — I shouldn’t say this, I think it was a great book, and I think people should read it not — not thoroughly you can’t spend three to four hours reading it. There’s some very interesting parts and there’s some interesting investment outlooks in the appendix that, you know, I think are pretty humorous and some of my best. And so, I’d — it’s only $4.99, so I’d — I’d recommend, you know, going to where you need to go, Amazon or wherever it is. And …
RITHOLTZ: Five dollars and — and all the proceeds are donated to charity.
GROSS: Yeah, to the — to the extent that matters much, but that’s where — where it goes.
RITHOLTZ: Let’s talk a little bit about the state of the market today and — and what’s going on. When you wrote the book “Inflation” was looking like it was going to tick all the way up to five percent. We’re recording this towards the end of March. The last print we got was just about eight percent. What’s your view of inflation here? Is this transitory or is this akin to the 1970’s or is this something completely different?
GROSS: Well, I don’t think it’s transitory. In other words, going back to two percent or less, I think it’s a result, yes, of — of supply shocks of oil prices of the war in Ukraine, you know, a lot of global considerations, but it’s also, you know, Friedman — Milton Friedman type of thing in which, you know, basically money supply matters.
And I — I’ll take it back, Barry, and I don’t think you started then, but you’re certainly aware of 1971 when Nixon went off the gold standard and …
RITHOLTZ: Sure.
GROSS: … and credit was free to be created as supposed to be tied to — to gold and — and back then total credit in the United States, and I’m talking about mortgages. I’m talking about government debt. I’m talking about credit cards. I’m talking about everything. It was $1 trillion.
Today, that number is $87 trillion, and so talk about a growth industry, 1,287 over — well, it’s 51 years, and — and so it’s been this tremendous creation of credit in the last few years certainly based upon the — the COVID bailout and as well as the fiscal stimulation of $4 trillion, you know, to steer the economy. So, when you combine a huge fiscal push with, you know, monetary creation and the Fed increasing its balance sheet to $8 trillion, and like I say credit, credit, credit, inflation is inevitable. And so, if — if they can tell you to do this and I know the Fed’s talked about reducing its balance sheet, and the government isn’t issuing a — a $4 trillion deficit, perhaps it is $1 trillion, you know, this is certainly excessive in terms of the possibility of exceeding 2 percent inflation.
So yeah, we’re coming back down, yes, oil prices and gasoline prices will steady at some point and come back down, same thing with food, wheat, and all of the commodities. But — and this is a guess, you know, four to five percent inflation for the next several years, I think, is baked in the cake. And the question becomes now that the Fed isn’t buying bonds, who wants to buy them at, you know, 2.35 for the 10-year and — and 2.50 for the 30-year, and — and perhaps a flight to safety, I can see that, but — but you’re certainly being out-inflated, I guess, by, you know, the — the existing and the future trail of inflation going forward. Bonds are definitely something to avoid.
RITHOLTZ: That’s really interesting. The Fed, are they behind the curve? And if so, by how much?
GROSS: Yeah, they’re way behind the curve and then I — I can see, you know, that the COVID crisis of a year, two years back now are getting onto two years. I can see how that would be a reason to — to not raise interest rates, to not stop buying bonds. But, you know, I — I think Powell should’ve figured it out that the — you know, a $4 trillion budget deficit, and the stimulation, and the economy that that creates as — as well as the credit that was being created by his policies at near zero percent interest rates was — was ultimately going to be very inflationary. And that to think that he could stop it and he — he doesn’t speak to stop it on a dime, he — he says it will take time. But once you get the moment, I’m going like in the 70’s, you know, in — in the races of — you know, based upon prices at the stores and grocery stores, you know, it’s pretty hard to stop.
And — and in order to keep the economy above the line, that’s the important thing, to keep it above the line in terms of 4% to 5% nominal GDP, which was the standard before. You have to keep on printing money and ultimately, that becomes destructive not just in terms of inflation, but in terms of savings and it distorts the U.S. economy and it distorts the global economy.
RITHOLTZ: So, I’m going to assume you don’t think bonds are a buy anytime soon.
GROSS: No, I don’t, but I — but I don’t fear — you know, I think there’s a limit to the 10-year. I — I — I’ve talked about in my tweets in the last few weeks about, you know, breaking a long-term downtrend line at 2.15 for the 10-year and now it’s at 2.35, so theoretically it’s broken the line. I don’t — I don’t think the economy can stand much more in terms of higher yield. I mean, we have a flat yield curve. What does that mean?
Ultimately in terms of forward interest rates, it — it basically means that the 10-year at 2.35 is — five years forward is estimated to be 2.40 or 2.45. So all of — all of the curb going forward basically in terms of current pricing suggesting that interest rates don’t go up much, and so why would that be if inflation is four to five percent? It — it would be simply because if a 10-year goes to three or 3.5 or four, then it — it’ll break the economy much like when the Fed went to 5.25 in 2006, it broke the mortgage market. You know, now we’re at much lower levels, but there’s been a lot more debt created.
And I — I simply think that 50 or 100 basis points higher is about as much as — as the economy can take, otherwise, we see recession. And — and that’s basically what the flat yield — yield curve is telling you that — that you got to be careful, and that’s why the 30-year bond with, you know, a duration of, you know, close to 20 is trading at 2.5 percent simply because there are those that think that if interest rates go much higher, the — the economy will enter a recession.
So, I — I don’t like bonds. Obviously, if you buy a 10-year at 2.35, you’re not getting paid your money’s worth relative to inflation, you should go elsewhere. But I don’t — I don’t think there’s the 1979, ’80, ’81 risk anytime soon of both in the interest rates moving much more than 100 basis points higher.
RITHOLTZ: That’s really interesting.
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Let me give you a counterfactual to the issue of $1 trillion in credit 50 years ago. Hypothetically, there wasn’t this massive credit creation — Fannie, Freddie, the government, the private sector, the household sector. Let’s say the — the — the outstanding credit was a couple of trillion dollars. What would that lack of credit creation have meant for the economy? As differently, how much of our wealth, and success, and — and GDP expansion, and rise in — in corporate profits is related to all of this credit that’s been issued.
GROSS: Oh, it is, and certainly, you need to create credit — ongoing credit relative to last year and the year before in order to — to keep the economy going. The question becomes how much, how much credit. And certainly, in the last several years, it’s accelerated dramatically because of the fiscal and the monetary stance at zero percent interest rates. And no one can really judge. No — no one can tell you or any — no one could tell me that they know what the number is. It’s just that the global economy for the most part is hooked on more and more credit, more and more money. And that’s what, you know, the cryptos, that’s what — bitcoin and Ethereum and so on represent in terms of people that are fearful that the government keeps on printing.
RITHOLTZ: So — so let’s talk about that. I’m going to suggest it’s not a huge coincidence that all the credit created during the financial crisis in ’08 and ’09 and beyond coincided with the creation of a lot of different cryptocurrencies and their rise in price. You mentioned you own bitcoin, you’re optimistic about Ethereum. This is not the typical safe bond experience, this is a bit of a long shot, so tell us why you jumped aboard the cryptocurrency train.
GROSS: Well, it’s not a — because it was volatility and comparing it to the dollar, you know, it’s certainly 10 times as volatile as the dollar during any particular period of time. So, to — to use it as a medium of exchange, which ultimately, I — I think it will be and is becoming, you know, it’s a very risky proposition. It depends on — on the level of bitcoin on any particular day, any particular moment.
I — I think it’s fascinating on Saturday and Sunday that at midnight I can — I can see trading. And — and bitcoin, you know, limited though it is, but I — I think ultimately, you know, the — the global financial system, which is dollar-dependent, dollar-supported, you know, much like in the 70’s in which Nixon broke the code from gold, you know, things happened. And now that there is a potential alternative in terms of bitcoin and — and some of the other cryptos, you know, I — I think it offers the opportunity to — to avoid — to avoid a — a currency that goes down, down, down in terms of its value.
You know, the bitcoin ultimately is capped, and we say — say it’s capped. You know, at a certain level, most of which has — has already been mined or — or supplied, and so to the extent that future supply is limited and to the extent — and this is important, to the extent that it becomes a medium of exchange, and — and it’s not really a medium of exchange, yet you can’t buy a donut with bitcoin, but you — you can buy other things. And there are countries that are using it.
So, you know, it — it’s — it’s up in the air. And, you know, did I get in at a good price? No, I think I got in it through a mutual fund of $50,000. But I — it’s just a small — it’s up a small piece, but I use it mainly for observation and to remind me that — that even the dollar as a global standard is subject to future volatility and certainly to depreciation in terms of its value relative to what it can buy.
RITHOLTZ: Really interesting. Let’s talk growth stocks and technology. They had a great couple of years until — I don’t know — about four or five months ago. We’ve seen that the complex really takes some — some hits. What — what do you thought about the various tech stocks that are out there and — and some of the managers who — who kind of rose to fame on — on the rally in technology?
GROSS: Well, I — I think two months ago at the big — there was a bubble in most of these stocks. You know, many of them had no earnings and — and really no prospect for earnings two, three, four, five years in the future. You know, they were based on hope and — and yes on objective and subjective estimations of — of a changing world in terms of technology and consumer use of — of that technology, so I don’t (inaudible) by that.
RITHOLTZ: You pointed out in the past that, quote, the new stock queen Cathie Wood seems to be a two-year wonder, and since then the ARK complex has had some pretty serious drawdowns. What are your thoughts on managers like Woods who, you know, put together a great track record when the big cap profitable companies, the Googles, Amazons, Apples, Teslas, Netflix, Nvidia when — when windows have been screaming higher?
GROSS: Well, you — you know, I give her credit. I — I watch — she’s got $15 billion, $20 billion under management, and — and that’s — that’s just how you break in to — to this market, you know, break in by being a junior clerk like I was at the — at Pacific Mutual, you break in with an innovative idea and hers was that these companies that she was buying, you know, were a significant part of our future — economic future. And I — I think that’s true.
But, you know, I listen to her on CNBC all the time, and it — it seems like she doesn’t have a — an excellent sense of value, and when to buy, and what to pay. She — she simply thinks that, at some point down the road — a long-term road that her — her judgment in terms of owning these securities will be validated. And — and perhaps they will, but in the meantime, you know, subject to huge volatility. And I — I also think, you know, much like Peter Lynch back and not to knock Peter Lynch because, you know, he was a — a significant part of the late 80’s and early 90’s in terms of Magellan.
But, you know, once money started to come in to a fund because he was doing well, that money went straight into the same stocks that he was owning and buying, and — and yeah, it went up, up, up because the cash flow was going straight into that. And I think the same thing for the last several years with Ark, and some of the other funds that she manages huge inflows would lead to more and more and more buying. And now some of the outflows lead to lower and lower prices.
And so, I think you just have to be careful in terms of anointing someone that has a — had a good record for two years now. The last year is not so good. You know, let — let’s see what happens five years from now. I think it’s a little early.
RITHOLTZ: Fair enough, and — and to clarify the assets under management, I want to say that it was about coming up on $60 billion at its peak, and it since fallen at least as of the beginning of this year to about $23 billion or $25 billion. I’m not looking at her releases, but more or less, that seems to be a ballpark number when I’m looking at …
GROSS: Right.
RITHOLTZ: … their website.
So, let’s talk about someone else. You actually mentioned in the book whose another fund manager. You — you talk about Jeff Gundlach, who many anointed as the heir-apparent to replace you, I don’t know if that worked out that way. What are your thoughts about Gundlach’s approach to managing fixed income?
GROSS: Well, he — he’s sort of anointed himself. I — I mean, he’s one of the commentators on CNBC throughout the term once and — and he ran with him. I — I guess — I guess I did, too, but, you know, to be a bond king you have got to have a kingdom. And, you know, PIMCO’s kingdom ultimately grew to $1 trillion to $2 trillion of Gundlach’s kingdom in terms of his mutual fund is around $50 billion and not growing.
And — and as four months has been like 60th percentile for three years, five years, whatever, I — I — I think he’s a smart guy. You know, when I listen to him on CNBC, I go, yeah. And he — he — he follows markets, you know, very assiduously. He’s — he’s really into it. So, I — I — I respect that, but you got to put up the numbers and you got to t build your kingdom in order to be a bond king or the new bond king.
And book I — you know, I — I don’t think anybody can be the future bond king because central banks basically are the kings and queens of the market. They rule — they determine where interest rates are going, not, you know, bond managers like PIMCO or, you know, DoubleLine, et cetera, et cetera. So, you know, I think the term is sort of passé and — and certainly kind of like doesn’t tip, you know, the — the past definition of — of what a bond king should be.
RITHOLTZ: Right, and — and as of December 31, 2021, DoubleLine had $134 billion in assets under management. Totally, I don’t — I’m not listing the breakdown by fund but, you know, it’s definitely a substantial amount of money but, you know, not $1 trillion worth.
Let –you know, one of the things we should talk about is risks to financial markets, and you have pointed out that climate change is an actual risk factor. Tell us what you see as that risk from rising temperatures and — and how do you think about ESG investing.
GROSS: Well, I think the risk is it’s sort of like the broken window syndrome. I mean, so a bat sends a baseball through a window, and it breaks, and you got to replace it. That increases GDP the replacement of a window, but it doesn’t make the window any better than it was before. And it — it’s really the same thing, I think, in terms of global warming.
Does — you know, because it requires a huge amount of investment in order to — to stop it from going forward and a huge change in terms of suicidal behavior. And — and so that investment that goes into capping carbon creation at a certain level, you know, if it — if global warming wasn’t taking place, then — then you could use that money for something more productive. But it — it — it’s — you can’t really call it productive if — if you simply stop a negative trend from happening. It — it — it makes things better than they would be, but it — it’s sort of like the broken window.
And so, I — I — I think in the future enormously countries and companies will be moving in the direction of — of create — aiding a better future environment for us and for our kids and grandkid. But — but ultimately, it won’t make it any better than it is now. It’ll simply not make it worse, and that cost a lot of money. And I …
RITHOLTZ: Don’t — don’t make it worse. That’s the advice at this point.
GROSS: Right.
RITHOLTZ: Interesting. You know, we’ve gone this far into the conversation, and I just haven’t gotten around to ask you about your days as a card counter and playing blackjack. Tell us a little bit — which also you mentioned in the book. Tell us a little bit about Ed Thorpe and — and his books and what led you to — to head to Sin City.
GROSS: Well, go through it quickly. You know, the — the year before I graduated from Duke in ‘65 I had gone to the Bahamas on a spring break. I lost $50 on the blackjack table. And I remember that after I nearly cut off the top of my head in a car accident, was in the hospital for a long time, and somebody introduced me to this new book called “Beat the Dealer”, and so I had all the time in the world to sit there and — and discover whether or not his theory about card counting worked. I didn’t have a computer, but I would play thousands of hands of blackjack back and forth, back and forth. And — and I discovered it worked.
And so, when I graduated from Duke in May of ’66 and before I was going into the Navy, and ultimately the Vietnam four months later, I — I went Las Vegas. I hopped on a freight train. I had $200. That’s all I could afford to put on the tables and took freight trains, took seven days to Vegas, got off at the Golden Nugget right in downtown, and — and rented a $6 a day motel — oh, a $0.95 of free nickels and a — a free breakfast.
And so, I started playing blackjack that — that basically taught me, I — I ultimately turned it into $10,000 and it paid for my graduate school, but it taught me about money management. It basically — it — it worked off to what they call the Kelly system, the system where you can’t bet more than two percent of your — your –your stake even if the odds are tremendously in your favor because things can go wrong.
And so, when I ultimately went to Pacific Mutual and then the PIMCO, it — it became an instrumental part of risk management for me because it made a lot of sense and — and it still does. But, you know, Vegas, for me, was — was — was the heart of — of my career. Ultimately as — as it came to pass, it — it taught me what I like to do just to bet against the house and to make money and provide a system of money management. And ultimately, I would alter to add (inaudible).
Eventually, I met — he lives out here in …
RITHOLTZ: Yeah.
GROSS: … in Newport Beach, Irvine, he was a mathematics professor. And we came together to — to fund a stem cell research center at $10 million, you know, at UC Irvine. And — and so we — we contact each other once in a while. He’s a very smart guy, smarter than me, but, you know, very fun to talk to and — and to talk about his times in Las Vegas, which were much, much larger than my ultimate $10,000.
RITHOLTZ: Did — did you ever run into any of the trouble he did? Vegas is not fond of either people who win money from them and especially not fond of card counters as they’re known. Did you have the same sort of problems of getting chased from casino to casino like he did?
GROSS: Yeah, I get chased from a few, and I was very proud of that. It was like a badge of honor to be — to be kicked out. I — I would wear different disguises. I would wear a hat. I would wear different clothes to the extent that I had them, but they could eventually track a card counter simply by watching the size of their bets. You know, I — I would bet $2 and then $10, and then $3 and $15 back and forth, back and forth. And they could ultimately watch my eyes and see me covering the table in three or four seconds in terms of counting the card.
So was I killing the casinos with my $10,000 winnings? No, but they simply didn’t like the trend. And so, yeah, I got booted a few times.
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RITHOLTZ: So last question before I get to my favorite questions that we ask all our guests, in the book you talk about having a mild case of Asperger’s syndrome. Tell us about that. How has this affected your life? How is it manifested? A number of other great investors have either discussed being on the spectrum or wondered if they’re on the spectrum. Tell us about your experience with Asperger’s syndrome.
GROSS: Well, I was never aware of it until I — I read Michael Lewis’ book, “The Big Short.” And — and one of the chapters he talks about an individual called Michael Burry who still is prominent in — in the press, I guess, with shorting and managing money, but he — he was either he or his son, I think it’s probably him that had Asperger’s and he listed like 10 things that — that alert (ph) (inaudible) 01:39:28 due to the fact that he had it and — and, therefore, I might have it, and — and one of them was not looking people in the eye or never observing the color of their eyes.
And to tell you the truth, I — I — my ex-wife, I didn’t know she had brown eyes until seven years into the marriage. And — and so there were other things too about the characteristics. And I — I took this page out of the kitchen (ph) 01:40:00 to my ex-wife, and I said, “Look at this, look at this.” I said, “I think I have Asperger’s,” and she goes, “You do,” with certainty. And I — I said, “How do you know?” She said, “Well, we were up at Bill Gates house in Seattle on an open house about four years ago and I was watching Gates and he’s watching you, you’re at the same table. And you were doing the same thing he was doing. He was doing the same thing you were doing, looking down at the table, not being engaging, that type of thing.
And I had heard that Gates had a mild case of Asperger’s and — and so I — I went to a psychologist on my own and described the symptoms, and she said, “He does. He has an Asperger.” And so, that’s how I — I discovered and I — ultimately after my divorce, I went to a psychologist, and after their first meeting, I — I — as my closing question, I said. “Do you think I have Asperger’s?” And she said, “Most definitely.” And so, that’s how I became aware of it.
And what — what are the — the — the symptoms or the characteristics or how has it affected my life, I — I — I think what it does is it allows me to — to screen out of, you know, minutia (ph) and — and everything that’s going on. For instance, example, when I played golf with Tiger Woods and Phil Mickelson at AT&T, you know, people would say, “How do you do it?” You know, I’m afraid of hitting my drive into the crowd. I go, “I never see the crowd.” I know they’re there, but I never see them.” And — and so, you know, in — in terms of — of PIMCO and in terms of managing money, I — I rarely see the minutia, I see the big picture because of my Asperger’s. That’s just what Asperger’s at the spectrum do. And so, I think it’s been very helpful. I — I owe a lot to Asperger.
RITHOLTZ: That’s interesting. And — and I’m glad you brought up Tiger Woods because that could be my favorite story in the entire book. You — you talk about almost missing a golf Pro-Am game with him. Tell us about that story.
GROSS: OK, this wasn’t a set-up, this isn’t a question of paying $10,000 to play with Tiger Woods, this was the AT&T Pro-Am, this was big time.
RITHOLTZ: You got to qualify, right? You got to hit your way into the actual game.
GROSS: Right, the first three days you qualify, and if you have a certain score you make it into Sunday. And so, when Bill Thompson and I, the CEO, went up there in 2002, you know, the rumor was that you needed to be 19 under as a team in order to qualify for Sunday, and so I — I finished my round on Saturday and Thompson came up, and he had been 14 under. And he said, “What are you?” I said, “1,600.” He said, “Well, let’s go home because 1,900 makes the cut.” I said, “I don’t know. Maybe we should stay.” And he goes, “No, let’s go.” So, I went to the airport and we’re waiting in line.
And this guy from a local country club had a cell phone and — and cell phones weren’t that popular back then. I certainly didn’t have one. And he said, “Bill, how did you do?” I said, “Sixteen under, probably missed the cut by two.” And he goes, no, I said — he said, “I just checked.” He said 16 under is — and a card off. I go, “Oh, OK.” And so, I told Thompson he better go home and I better go back to the hotel, so I went back to the hotel. And at nine o’clock, my caddy calls up and — and he says, “Mr. Gross, we made the cut — the card off. We made the cut. And guess who we’re playing with at 8:30 in the morning?” I go, “Who?” He goes, Tiger. And I almost fainted and, of course, never slept.
But if that gentleman hadn’t seen me at the airport check-in line and told me I had a chance, I would have been sleeping Sunday morning in Newport Beach while Tiger was waiting for me to — to meet him on the first day. It — it was incredible luck, incredible luck.
RITHOLTZ: That’s just an amazing story, and — and sometimes right place, right time is — is all that matters. All right. So, I’ve kept you for two hours far longer than I usual. Let me jump to my favorite questions we ask all our guests starting with something that you actually mentioned earlier. Tell us what you’re streaming these days, what kept you busy during the lockdown on either Amazon Prime or Netflix or — or whatever you were entertained with.
GROSS: Well, I get up at 5:30. I’ve got a Bloomberg here and I’ve got a Bloomberg at my other homes, and so I get up and, you know, the markets here open up at 6:30, and so I start managing my portfolio, doing trading mostly in stocks these days, and — and stock options. But it occupies my time until market close at 12:30. Sometimes I take a nap because I had gotten up so early, and my lovely wife keeps me up until 11 o’clock to watch serial programs and — and so on. So, I don’t get that much sleep.
But in any case, I — I manage money. And then here I am out for eight months of the year out at the Vintage and Indian Wells, it’s 85 degrees. It’s almost always 75 to 85 degrees like Hawaii. And I’m looking out at the golf course. And I have a little lunch. I tap in my cart with Amy, and we go play golf in the afternoon. That’s like what? You know, this is — this was paradise. You know, family comes out here to visit, and it’s just the all-around best time I could ever imagine doing something I love in terms of investing and doing something I love in terms of golf, which I do every day. And so, that — that’s basically my day.
RITHOLTZ: Tell us about some of your early mentors who — who helped to shape your career.
GROSS: Well, to be honest, I’d say I — I only had one, and that was Walter Gerken who is the CEO and Chairman of the Board of Pacific Mutual. And it was Gerken that basically who — who is a risktaker for an insurance executive. It was Gerken who basically gave the go ahead and the all clear to — to start the $5 million bond fund. And — and — and the man would take me to New York for conferences and so on, and so on. And clearly, he was supporting me for some future role. I don’t think he necessarily knew that PIMCO is going to be raging success, but he — he was willing to take the chance and to give me his moral and, I guess, financial support because there was a time in the first few years of PIMCO we’re — we weren’t making any money and not getting very many clients.
And, you know, they — they could’ve canceled this straight away, but he didn’t. He supportive me, you know, throughout the five, 10, 15, 20 years that — that he was active within the industry. And so, I’ll say it was — Mr. Gerken who’s no longer with us.
RITHOLTZ: Let’s talk about books. What are some of your all-time favorites and — and what are you reading right now?
GROSS: Well, you know, all-time favorites is one thing, I guess. I — one of my favorite books, it was by a brilliant author who won the Pulitzer Prize Annie Dillard who wrote a — an incredible book called “Pilgrim at Tinker Creek,” which was about observation of life, nature, and — and personal reflections on — on both. And I — I would encourage any of your listeners to — to pick up Annie Dillard’s “Pilgrim at Tinker Creek.” She also wrote a book called “American Childhood,” which was much like mine. She’s the same age, grew up in Pittsburgh, and her childhood memories are — are quite similar to how I was — to how I was growing up.
I — I also recently — I recently bought — recently reading a book called “The Age of AI,” which is a — a book co-authored by Henry Kissinger and Eric Schmidt from Google and a third party who probably wrote most of it, but it’s very interesting about artificial intelligence in the future that it has for — for all of us going forward.
And — and then there’s another book, there’s an author called Julian Barnes who has written 15 books. I — he’s a wonderful writer, very introspective, and it’s called “Nothing to be Afraid of.” And it’s — it’s about death and dying and his thoughts going forward, which is sort of (inaudible) 77. I — I sort of say I’m in the — in the death zone at 77 because that’s when people find out they have prostate cancer, breast cancer or whatever. It — it’s — it’s not a good time going forward, and so it — you know, it — it’s very introspective. And the man has written other books that I think other people would enjoy Julian Barnes and “Nothing to be Afraid of.” So those are some of them.
RITHOLTZ: Really interesting stuff. Our final two questions, what sort of advice would you give to a recent college grad who is interested in a career in either investing or fixed income?
GROSS: Well, well, I would say this, I mean, the — the market is much different now than it was then. And I — I had an opening in terms of the line that, you know, even a 10-year-old could’ve run through, I — I guess. Now it’s a different story, but I — but I think finance will always be with us whether it’s stocks, bonds, real estate. You know, money is — is something that’s always been with us, and the making of money with money has always been with us. I don’t see that — I see it changing, but I don’t — I don’t see it declining in any form or fashion.
And so, I — I would advise those that are thinking about the industry. They do — do something like, you know, like Cathie Woods did. I mean, she — she innovated in terms of her ideas and in terms of her portfolio construction. She — she did take a risk in terms of her ideas.
I — I mentioned before that she didn’t pay too much attention to price, but obviously, she created this huge wedge and opening for herself with a product that no one else was thinking of. And so, what are those products? I don’t know. I’m past the stage of innovation, but yeah, I — I would say in addition to spending your one or two years at Goldman or whatever in terms of a background that, you know, you — you kind of go out on your own and innovate with some type of product that will — that will get you going, and — and make you a — a star and make you some money, and — and lead you to — hopefully to obsessive enjoyment of — of what you’re doing. You — you can’t succeed. I would tell them you can’t succeed unless you love what you’re doing.
RITHOLTZ: Really, really interesting. And our final question, what do you know about the world of finance today that you wish you knew 50 years or so ago when you were first getting started out?
GROSS: Oh, you know what I think it is, Barry, I — I think, you know, there was an old (inaudible) from Will Rogers, the old journalist in the 30’s, and he said a lot of funny things sort of like Yogi Berra he was known for, you know, funny quips and funny comments. And — and you remember him saying about the stock market. He — he said if he is — if you have a stock that goes up, buy it. And he goes, “If it doesn’t go up, don’t buy.” And I — I thought that was really funny. I didn’t — and I — I think he thought it was funny, too. I don’t think he knew what he was talking about. But it really refers to momentum.
If — if you find a stock to goes up, buy it. And if it goes down, don’t buy it because momentum is a very powerful force that I learned, you know, sort of in the last 10 or 15 years of — of managing money. It’s an alpha generator. It’s statistically proven to be an alpha generator. It can turn against you like in the last few months when momentum …
RITHOLTZ: Sure.
GROSS: … upward momentum turns negative, and it — it turns into downward momentum, but momentum is something that — that’s really predicated upon human nature. They — they do what has been successful before, and it continues until it doesn’t. And so, I — I think that’s what I’d — that’s what I was always skeptical. I was all skeptical of people that followed momentum because I thought I was just joining the crowd.
Well, joining the crowd works for a while until it doesn’t. And — and how do you measure it? Well, you can measure it with 200 moving day averages with (inaudible) or bins, with lots of different things, but it — it’s — it’s statistically an alpha generator in addition to several other things that I discovered before that. So, I’d — I’d say I — I should have been more appreciative of momentum not that — that PIMCO with its secular forecast wasn’t really doing the same thing and — and following momentum downward in terms of interest rates and upward in terms of bond prices. But I — I — I — I follow momentum today. It’s — it’s important.
RITHOLTZ: Really, really great stuff. Bill, thank you for being so — so generous with your time. We’ve been speaking with the Bond King, Bill Gross, Co-Founder of PIMCO, the man who managed more bond money than literally anybody else in the private sector has ever done.
If you enjoy this conversation, check out any of our previous 400 plus discussions we’ve held over the past eight years — iTunes, Spotify. Wherever you get your podcasts from, you’ll find Masters in Business.
We love your comments, feedback, and suggestions. Write to us at mibpodcast@bloomberg.net. You can sign up for my daily reading list at ritholtz.com. Follow me on Twitter @ritholtz.
I would be remiss if I did not thank the crack team that helps me put these conversations together each week. Katherine Silva silver is my Audio Engineer. Sean Russo is my Head of Research. Paris Wald is my Producer.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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