It has been reported by the New York Times, that the S.E.C. is investigating giant Bond Fund Company PIMCO and its’ high profile manager, Bill Gross, for playing reckless with the truth in reporting the earned rate of return for an Exchange Traded Fund under management. The fund in question was designed to mirror PIMCO’ s $220 billion Total Return Fund so as to allow for, maybe, a better rate of return for smaller investors. Year to date figures for this ETF published by PIMCO indicate an earned annual rate of return of 5.46% as opposed to the benchmark Index of 4.81%.
If it were not for the players involved and the subject matter, namely the true rates of return earned by the Fund Industry this latest rant might smack of a ‘storm in a teacup’ But my intuition tells me there is much more to it.
Bill Gross has the rather thankless task of managing huge amounts of money at a time when the Federal Reserve Bank of New York, and the US Treasury, are hell-bent on debasing the currency, and thus reducing the value of all bonds. As befitting his status, as a steward of his client’s money, Bill has been very verbal about monetary policy since the financial collapse of 2008.
He believes, as do many bond investors, that the US dollar will be downgraded from its triple A rating, and that the FED will not be willing, or able, to control the inflation that must surely follow the printing of trillions of dollars in pursuit of the policy of “Quantitative Easing. In support of this belief PIMCO is no longer a buyer of Long US Treasury Bonds.
In reality, Bill Gross has joined battle with the most powerful institutions in the World, and, on behalf of his Bondholders has fired the first shots in a war, he will likely, win.
I cannot match the wonderful and witty descriptions of the Bond Market as told by Michael Lewis in his books about Wall Street. (Liar’s Poker, The Big Short) He remains true to form with his conclusions that “the bond market always wins” and I cannot see how it will be any different this time around.
The players are different and the numbers are much larger than they were in 1944 at Breton Woods when the US dollar was established as the standard currency of international exchange. Now the US will have to contend with the fact that the nation has frittered away its financial might on useless wars, and, as a debtor of unimaginable proportions, can no longer solely dictate the terms of rescue.
An investigation of the number crunchers of PIMCO has the earmarks of the LIBOR (London Interbank Offer Rate) investigation, in that small percentages on very large numbers are involved. PIMCO is owned by German Insurance Giant, Allianz, a huge company, not unlike Warren Buffets Re Insurance, that has reserves set aside for unexpected redemptions in its managed funds.
More likely than a grand conspiracy to rig returns, is the role of ‘the quants’ (mathematicians) in managing derivatives and odd lot trades for the Exchange Traded Fund, a practice only understood by other ‘Quants’ most of whom do not work for the SEC.
The subject of published rates of return claimed by money managers of all kinds is a very different proposition and one that likely deserves a critical appraisal.
It is a demonstrable economic fact that the true long-term annualized real rate of return on capital adjusted for inflation is between 3.5 and 4.0%. This does not mean this rate is the norm, or the average, and annual rates may vary according to World Wide economic conditions in addition to the prowess of the investor. It may also be a useful benchmark to try to wring some reason from the nonsense that is espoused by the money fund industry as they trumpet their results for the benefit of their sales force.
I suspect that If the majority of the published rates of return for the trillion-dollar Fund Industry accrued to the investor in cash, the deficit in US national accounts would be eliminated in short order. The proof of this hypothesis may be found in recent history. The last time the US Treasury did not run a deficit was during the insanity of the DOT.COM boom (The period of Irrational Exuberance)
Assets Bubbles are very profitable for the taxing authorities, as they are with politicians, because it appears as though everyone is making buckets of money. The allusion only become clear after the bust, that follows the bubble, and this is when the investigations begin.
So when assets values correct, as they surely will, in the near future, when the Bond Market pushes up Interest rates we can expect an investigation of the lies that got us into the predicament, and stock market returns will front and center.