Pimco fund manager on the commodity boom

Dramatic gains that we’ve seen, primarily liquidity driven, are unlikely to be repeated [in the next three to six months].

Large parts of the global population, particularly in China and India, are going through a particularly commodity-intense growth phase, [which bodes well for commodities’s longer-term prospects]. We see significant supply-and-demand mismatch.

~ Mihir Worah, portfolio manager with Pimco who leads several of the firm’s top performing commodity-based funds, "Why commodities still belong in your portfolio," MarketWatch.com, June 10, 2011

Janet Tavakoli on how Bill Gross's Pimco Total Return Fund benefitted from Fed intervention in 2008

On July 15, 2008, ex - Goldman Sachs banker and then Treasury Secretary Henry ( “ Hank ” ) Paulson asked Congress for the authority to buy stakes in Fannie Mae and Freddie Mac. Paulson asserted: “ If you have a bazooka in your pocket, and people know you have a bazooka, you may never have to take it out. ” In my experience, boasting about a big bazooka just tempts the curious to see how you measure up in exciting circumstances, and the person to do that might be named Mr. Gross. Bill Gross manages the Pimco Total Return Fund, the world’s largest bond fund with large exposures to Fannie Mae and Freddie Mac (and AIG along with a number of investment banks as of September 2008). Gross is a fan of Fed intervention, and his investments reflected it. His fund reportedly gained $1.7 billion after the U.S. government took over Fannie Mae and Freddie Mac on Sept 7, 2008.

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Bill Gross’s Pimco Total Return Fund had sold $760 million of default guarantees (as credit default swaps) on AIG, and it would have cost him if AIG went under. 22 Mr. Gross might have thought he had a good idea of how the Fed would behave. Pimco had hired Alan Greenspan as a consultant. I was not surprised when Bill Gross said the Fed intervention was a “ necessary step. ”

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Pimco ’ s Bill Gross found there is a limit to the Fed’s largesse, and his Lehman investment lost money. In March, Bear Stearns, the fifth largest investment bank, was deemed too big to fail, but the Fed refused to help Lehman, the fourth largest investment bank. As Jim Rogers predicted, larger investment banks than Bear Stearns had problems, and the Fed had other problems besides investment banks — Fannie, Freddie, and AIG. Pimco’s investments were only partially protected by the Fed. The Total Return Fund’s return slumped, and it will be interesting to see if Gross ends up a net winner or a net loser as the market struggles for balance.

~ Janet M. Tavakoli, Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street, Chapter 10

David Stockman on Bill Gross, Pimco, crony capitalism, and gaming the drive to homeownership

Some raids on the US Treasury by America's crony capitalists are so egregious as to provoke a rant -- even if you aren't Rick Santelli. One such rant-worthy provocation is Pimco latest scheme to loot Uncle Sam's depleted exchequer.

According to Bill Gross, who heads what appears to be the firm's squad of public policy front runners, the American economy can be saved only through "full nationalization" of the mortgage finance system and a massive "jubilee" of debt forgiveness for millions of underwater homeowners. If nothing else, these blatantly self-serving recommendations demonstrate that Matt Taibbi was slightly off the mark in his famed Rolling Stone diatribe. It turns out that the real vampire squid wrapped around the face of the American taxpayer isn't Goldman Sachs (GS) after all. Instead, it's surely the Pacific Investment Management Co.

As overlord of the fixed-income finance market, the latter generates billions annually in effort-free profits from its trove of essentially riskless US Treasury securities and federally guaranteed housing paper. Now Pimco wants to swell Uncle Sam's supply of this no-brainer paper even further -- adding upward of $2 trillion per year of what would be "government-issue" mortgages on top of the existing $1.5 trillion in general fund deficits.

This final transformation of American taxpayers into indentured servants of HIDC (the Housing Investment & Debt Complex) has been underway for a long time, and is now unstoppable because all principled political opposition to Pimco-style crony capitalism has been extinguished. Indeed, the magnitude of the burden already created is staggering. Before Richard Nixon initiated the era of Republican "me-too" Big Government in the early 1970s -- including his massive expansion of subsidized housing programs -- there was about $475 billion of real estate mortgage debt outstanding, representing a little more than 47% of GDP.

Had sound risk management and financial rectitude, as it had come to be defined under the relatively relaxed standards of post-war America, remained in tact, mortgage debt today would be about $7 trillion at the pre-Nixon GDP ratio. In fact, at $14 trillion or 100% of GDP the current figure is double that, implying that American real estate owners have been induced to shoulder an incremental mortgage burden that amounts to nearly half the nation's current economic output.

There's no mystery as to how America got hooked on this 40-year mortgage debt binge. At the heart of the matter is the statist Big Lie trumpeting the alleged public welfare benefits of the home-ownership society and subsidized real estate finance. Once the conservative party embraced this alluring but dangerously destructive idea, the cronies of capitalism have had a field day conducting a Washington bidding war between the two parties which is now in its fifth decade

During this time span all of the congregates of the HIDC lobby -- homebuilders, mortgage bankers, real estate brokers, Wall Street securitizers, property appraisers and lawyers, landscapers and land speculators, home improvement retailers and the rest -- have gotten their fill at the Federal trough. But the most senseless gift -- the extra-fat risk-free spread on Freddie and Fannie paper -- went to the great enablers of the mortgage debt boom, that is, the mega-funds like Pimco, which did little more than hang out an "open to buy" shingle as billions poured in year after year. Sadly, there isn't a shred of evidence that all of this largese serves any legitimate public purpose whatsoever, and plenty of evidence that the HIDC boom has been deeply destructive. But the intellectual cobwebs spun by the housing cronies so obfuscate these truths that the only way to grasp them is through an examination of the contra-factual -- a postulated world without Freddie/Fannie/FHA and the $100 billion annual tax subsidy on mortgage interest.

In that world, households would be tax-indifferent as to whether they acquired shelter services through renting or owning, and appropriately so. There's simply no evidence that home ownership produces any externality or "public good," such as making people better citizens, causing them to work harder or aspire higher, turning them into better neighbors, or even growing hair on their chests. Housing is a commodity like furniture and automobiles, and inducing citizens to buy more of it is no business of the state.

~ David Stockman, "How Pimco Is Holding American Homeowners Hostage," Minyanville.com, August 27, 2010