The New Odd Couple: Bill Gross and Alan Greenspan

by: Tim Iacono

It's too early to really say with any certainty, but so far the whole idea that Bill Gross (aka "The Bond King") at Pacific Investment Management Co. (aka Pimco) would team up with former Fed chairman Alan Greenspan (aka "The Maestro") just seems odd.

First, and most importantly, they appear to have very different views on the future path of interest rates, the former Fed chairman seeing an upward path and the manager of the world's largest bond fund seeing them going down.

Of course if you manage a bond fund, you'd better tell the world that interest rates are going down - since the price of bonds moves in the opposite direction as interest rates, predicting higher interest rates is akin to a stock promoter telling potential customers that he sees share prices going down.

In this story($) from the Wall Street Journal, Fed-channeler Greg Ip explains the new working relationship:

Under the arrangement, signed this week, Mr. Greenspan will participate once each quarter in a strategy session with executives of Pimco, based in Newport Beach, Calif., including Mr. Gross. He will also speak with them as often as twice a week via conference call and email. Dropping a self-imposed prohibition he has observed since leaving the Fed in January 2006, he will also discuss Fed interest-rate policy with the firm, provided those conversations are private.

With about $680 billion under management, 95% of it in fixed income, Pimco and Mr. Gross regularly move the bond market. But their influence pales in comparison with that once wielded by Mr. Greenspan, nicknamed the "Maestro," after the 2000 biography of the same name by Bob Woodward.

Since his retirement, the 81-year-old Mr. Greenspan has roiled markets several times with comments to paying, often-private, audiences. A week after he left office, his comments to a private Lehman Brothers event were interpreted as meaning interest rates were headed higher. In February, his suggestion that the U.S. could slip into recession this year was blamed by some for helping trigger a global stock selloff.

Some outsiders have criticized these comments as making life difficult for his successor, Ben Bernanke.

Mr. Greenspan said in an interview that he didn't comment on Fed policy for a year because of his knowledge of confidential Fed deliberations in his last days there, and to avoid comparisons with Mr. Bernanke. "Now that more than a year has elapsed, private conversations [about monetary policy] are appropriate," he said. "I will continue to refrain from public comments on monetary policy."

Mr. Gross said Mr. Greenspan's words as Fed chairman were constrained by his position. "Now that he's on the team, we would expect for him to be open and expressive in terms of his views." For example, he said Pimco's Fed watchers, Paul McCulley and Richard Clarida, will run their Fed analysis by Mr. Greenspan.

Mr. Gross has long had a reputation as one of the savviest bond-fund managers around. His main charge, Pimco's $104 billion Total Return Fund, has beaten 97% of the competition in the past ten years, with a 6.9% average annual return, according to Morningstar Inc. Lately, however, Mr. Gross's fund has been struggling. In the past year, the fund has trailed roughly three-quarters of similar funds, and so far this year, it is in the bottom 20% of its peer group.

In addition to differences on the interest rate outlook, Bill Gross and other folks at Pimco have been ardent critics of the mess that was left behind when Ben Bernanke took over at the Federal Reserve in February of 2006 - the housing boom that is slowly going bust.

One staff member has gone so far as to write about how he sold his overpriced Southern California digs and is now renting while he awaits the slow-coming, but inevitable plunge in home values.

According to the WSJ report, in 2005, the Bond King told BusinessWeek, "I like Bernanke better. Greenspan's approach in terms of throwing money at the problem, lowering rates whenever there was a crisis -- it appears to have worked. At the same time, it has led to a substantially leveraged U.S. economy. That's the legacy he leaves Mr. Bernanke."

In the most recent Investment Outlook at Pimco, the tone has changed dramatically:

China may still be exporting deflation to Asia and Euroland, but it clearly is beginning to export mild inflation to Japan and the U.S. And, although China and other BRICs/developing nations will undoubtedly remain mercantilistic exporters for years to come, an internal orientation is developing which at the margin absorbs excess savings, increases aggregate demand, and tilts global inflation upward. Importantly, special consultant to PIMCO Alan Greenspan has pointed out that the process of transitioning hundreds of millions of workers from planned economies to a market environment may peak in the next 2-3 years in terms of its rate of growth, reducing the disinflationary impact.

With a bond fund that has performed poorly lately, it now sounds like Bill Gross is the one "throwing money at the problem" - if there's one thing that a retired Alan Greenspan is not, it is cheap.