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The secret in a negative interest rate world that poses extraordinary duration risk for AAA sovereign bonds is to (1) keep bond maturities short and (2) borrow

The secret in a negative interest rate world that poses extraordinary duration risk for AAA sovereign bonds is to (1) keep bond maturities short and (2) borrow at those attractive yields in a mildly levered form that provides a yield (and expected return) of 5-6%. Janus unconstrained portfolios attempt to do that and are inching to the head of its asset universe day by day. No guarantees. The advice about borrowing at low yields above obviously has to be matched with investments that are less volatile and least affected by the evolving changes of our monetary system. But it can be done. Closed end funds at deep discounts, highly certain acquisition arbitrage stocks, as well as volatility sales at tails are general examples. Gross spends 5 pages exposing the flaws of the current financial/economic investing climate, then does a 180 and says the model is fine, and that Janus has some vague advantage in reliably finding a) discounts b) arbitrage and c) tail-end volatility - short term profit centers that all banks are searching frantically for right now. Seems like a rather strange and disconcerting investment outlook, with Gross ultimately resigning to do his best within a broken system. Does not bode well as an outlook for actual reformation of the system or a call to action in this direction.

mathattack 11y ago
It's called "Talking your book". :-) The idea of borrowing cheap in one place and investing for higher yield isn't new. Banks and investors borrowed German bonds to invest in Greek bonds, and investors borrowed in Japan to invest in Iceland. It works for a while until it doesn't. When you're levered the end goes from bad to worse, and usually has cyclical implications. (Forced sales to make margin calls depresses the stocks even more as people rush the exits)
- roymurdock 11y ago
  Yes, I guess this was written to appeal to everyone who agrees that the finance/econ system is screwed. Gross is saying "I get it, I agree, no one understands this better than me," which differentiates him from a lot of other managers who like to reiterate that things are fine, don't take your money out of our funds, thank you. An interesting but self-defeating ploy. If the system is set up to shrink/collapse, I'm not going to put my money into said system, even if you vaguely promise me 5-6% returns until collapse. Not that my opinion matters as my net worth is marginal, and this outlook will probably get some of the doom and gloom crowd to sign up with his fund. Funny how much of finance is marketing...how much of everything is marketing...
- fensterblick 11y ago
  "Talking your book" == putting money where your mouth is. Bill Gross, especially when he was at PIMCO running the world's largest bond fund, had to invest in what he believed in. They couldn't market themselves out of a losing position.
  - mathattack 11y ago
    I respectfully think you have it backwards. Generally financiers put their mouth where their money is, not the other way around. (They talk up where they are investing, not choosing to back their ideas up with investments) They're in the investment business, not the talking business. This isn't a comment on their ethics, just their incentives. Talking their book helps them in winning positions too - it can provide greater liquidity. If it was positive NPV for them to keep quiet, every investor would.
    - drumdance 11y ago
      Maybe if you're Bill Gross this is true, but the vast majority of fund managers never get on TV to talk their book in the first place. Just like (good) VCs have an investment thesis, most fund managers do too.
      - mathattack 11y ago
        Going public can be a risky strategy. You only want to do it when you benefit from the exposure. You do it after you're already in the position and won't want to get more. (For instance, "I am long High Yield credit") If you're still accumulating something harder to access ("I'm buying Inverse Mortgages") then you don't want to be public. You also hold yourself up to be second-guessed. It's a tradeoff. CNBC and Bloomberg TV are full of talking heads all day long, though they only scratch the surface on potential fund managers.
jsprogrammer 11y ago
Seems like a rather strange business model: don't produce any actual good, but find enough pieces of paper that award enough numbers to sit back and collect short term profit. Surely the model is not perpetually sustainable?
- AJ007 11y ago
  The underpinning to this business model is to receive capital which governments decide must be expended to meet some goal -- be it GDP, exports, local currency exchange rate. In other terms it could be viewed as arbitraging participants who don't care to participate in the market for a marketable good. For example, if Jet.com was selling an item at a fixed loss (to expand marketshare or hit some VC targeted numbers, etc) and you just kept buying that item and selling it at the market rate on another exchange. The other piece to this is that one is not simply just sitting back and doing nothing but rather accumulating a lot of risk from other parties who do not wish to do so. In itself that is reasonable, but when the parties involved don't have the capital to cover losses should they appear, that is another issue.
  - jsprogrammer 11y ago
    I don't think a comparison with physical goods markets is applicable. Moving physical goods from market to market takes enormous work and space compared to the work and space needed to transmit some bits around to account for paper/electronic transactions. Accumulating risk might be an apt description of the model. However, the risk is not isolated. Do we really want people not only sitting back, doing nothing, but actively accumulating risk? Sounds like a disaster waiting to happen. When an involved party is a bank, they, by charter, will not have enough capital to survive some losses.

mathattack 11y ago

It's called "Talking your book". :-) The idea of borrowing cheap in one place and investing for higher yield isn't new. Banks and investors borrowed German bonds to invest in Greek bonds, and investors borrowed in Japan to invest in Iceland. It works for a while until it doesn't. When you're levered the end goes from bad to worse, and usually has cyclical implications. (Forced sales to make margin calls depresses the stocks even more as people rush the exits)

roymurdock 11y ago
Yes, I guess this was written to appeal to everyone who agrees that the finance/econ system is screwed. Gross is saying "I get it, I agree, no one understands this better than me," which differentiates him from a lot of other managers who like to reiterate that things are fine, don't take your money out of our funds, thank you. An interesting but self-defeating ploy. If the system is set up to shrink/collapse, I'm not going to put my money into said system, even if you vaguely promise me 5-6% returns until collapse. Not that my opinion matters as my net worth is marginal, and this outlook will probably get some of the doom and gloom crowd to sign up with his fund. Funny how much of finance is marketing...how much of everything is marketing...
fensterblick 11y ago
"Talking your book" == putting money where your mouth is. Bill Gross, especially when he was at PIMCO running the world's largest bond fund, had to invest in what he believed in. They couldn't market themselves out of a losing position.
- mathattack 11y ago
  I respectfully think you have it backwards. Generally financiers put their mouth where their money is, not the other way around. (They talk up where they are investing, not choosing to back their ideas up with investments) They're in the investment business, not the talking business. This isn't a comment on their ethics, just their incentives. Talking their book helps them in winning positions too - it can provide greater liquidity. If it was positive NPV for them to keep quiet, every investor would.
  - drumdance 11y ago
    Maybe if you're Bill Gross this is true, but the vast majority of fund managers never get on TV to talk their book in the first place. Just like (good) VCs have an investment thesis, most fund managers do too.
    - mathattack 11y ago
      Going public can be a risky strategy. You only want to do it when you benefit from the exposure. You do it after you're already in the position and won't want to get more. (For instance, "I am long High Yield credit") If you're still accumulating something harder to access ("I'm buying Inverse Mortgages") then you don't want to be public. You also hold yourself up to be second-guessed. It's a tradeoff. CNBC and Bloomberg TV are full of talking heads all day long, though they only scratch the surface on potential fund managers.

jsprogrammer 11y ago

Seems like a rather strange business model: don't produce any actual good, but find enough pieces of paper that award enough numbers to sit back and collect short term profit. Surely the model is not perpetually sustainable?

AJ007 11y ago
The underpinning to this business model is to receive capital which governments decide must be expended to meet some goal -- be it GDP, exports, local currency exchange rate. In other terms it could be viewed as arbitraging participants who don't care to participate in the market for a marketable good. For example, if Jet.com was selling an item at a fixed loss (to expand marketshare or hit some VC targeted numbers, etc) and you just kept buying that item and selling it at the market rate on another exchange. The other piece to this is that one is not simply just sitting back and doing nothing but rather accumulating a lot of risk from other parties who do not wish to do so. In itself that is reasonable, but when the parties involved don't have the capital to cover losses should they appear, that is another issue.
- jsprogrammer 11y ago
  I don't think a comparison with physical goods markets is applicable. Moving physical goods from market to market takes enormous work and space compared to the work and space needed to transmit some bits around to account for paper/electronic transactions. Accumulating risk might be an apt description of the model. However, the risk is not isolated. Do we really want people not only sitting back, doing nothing, but actively accumulating risk? Sounds like a disaster waiting to happen. When an involved party is a bank, they, by charter, will not have enough capital to survive some losses.