PIMCO's Battle Call to Bond Vigilantes

Feb. 06, 2011 6:14 AM ETTLT, TBT, IEF26 Comments
Balance Junkie profile picture
Balance Junkie

Is it just me or did Bill Gross just pull the pin on the bond vigilante grenade and lob it in the general direction of the Federal Reserve? I haven't read any analysis of his recent investment outlook (Devil's Bargain) that pointed this out directly, so maybe I'm off-base here. I'll go over what I read and what I understood it to mean. I'm sure someone will be more than happy to correct me if I'm wrong.

It seems to me that Mr. Gross may have signaled that PIMCO wants out of its devil's bargain and is willing to sell Treasuries to do so. More importantly, they are recommending that investors who are tired of negative real returns and talk of bondholder haircuts may want to do the same: "Bondholders and citizens of America unite!"

Hang Your Heads, Moneychangers

Gross begins his outlook with a stinging critique of his own industry, lamenting the increased financialization of our economy and lambasting those who have profited by it at the expense of others. Here are some highlights:

  • Financial entities like bankers and ratings agencies have been at the root of many financial crises over the years: "The S&L debacle of the early 1980s, the Asian crisis, LTCM, dotcoms, subprimes, Lehman and the resurrection, instead of the reformation, of Wall Street, are major sins of the modern era of money."
  • "As a profession we have failed miserably at our primary function – the efficient and productive allocation of capital."
  • While he believes PIMCO's advice has been genuinely helpful to clients, Mr. Gross is highly critical of "rating agencies that perpetually fail at commonsensical quality judgments, bankers that make loans to subterranean credits and then extend the beggar’s bowl for themselves, and 80% of active money managers that underperform the market."
  • "How can bond

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