Professional Documents
Culture Documents
Bill
Gross
Outlook
February 2002
"Kennethed"
Behind Every Great Fortune
There is a Crime
Honore de Balzac
1799-1850
Piling on Enron these days is all the rage scathing indictment of any and indeed
so I thought I might as well give it a try. all of us who aspire to the aggrandize-
There's not much there to be loved ment of wealth. Discriminating between
except the company's innocent employ- a great/small fortune or even a healthy
ees and finding them seems harder than 401k does one little good according to
ferreting out Osama Bin Laden from an Balzac's definition: it becomes only a
Afghan cave. Enron has rather quickly question of the size of the crime. Balzac,
morphed from the paragon of capitalistic however, lived in a pre-capitalistic age
virtue into the whipping boy for its where wealth was created very slowly if
seamy side. An article in the Wall Street at all. There were no Robert Fultons,
Journal several weeks ago spoke to how Henry Fords, or Sam Waltons to point to
certain nouns or pronouns in the English who legitimately increased the welfare of
language were being turned into intran- the planet via new ideas that ultimately
sitive verbs - as in "you've been enhanced productivity and therefore
NASDAQed" - to indicate a sudden GDP. But to Balzac, if you were rich you
plunge in personal fortune. After that were a thief, either through the actual
article I had thought that being taking, or via inheritance which when
"ENRONed" might find its way into your followed far enough back in time, was a
Funk & Wagnalls just as easily but this stolen good as well.
Outlook brought to my cerebral cortex
an even better prospect which plays off As Walton's Wal-Mart proves, though,
of the name of its now infamous chair- not all capitalists can be classified as
man Kenneth Lay. And if you think that criminals and thank goodness for that,
being "Kennethed" is a little too awk- but some of them clearly can be and that
ward for the American public, you have is what bothers me at the moment. If the
only to use your imagination to conjure 1990s go down as one of the gilded ages
up the better alternative. of capitalism, then surely we have
turned the corner, or better yet, begun to
This search for the perfect description of change the color of how we look at our
modern day capitalism brought to mind captains of 21st century industry. Instead
a quote from another era by noted author of being green with envy, our fickle
Honore de Balzac. It has bothered me for chameleon-like public opinion is slowly
years because, if leapfrogged from the turning into a raging capillary bursting
19th to the 21st century, it is indeed a red. We're discovering that we've been
Investment Outlook
"Kennethed" all right, but not just by time, the man has fostered prosperity for
ENRON. Arthur Andersen LLP, Henry most of his 15 years in office. That he has
Blodgett and Blodgett-like clones, as well had to use up most of the tricks in his
as much of Wall Street and points west magical monetary bag to steady our
have participated in the implicit bilking economic boat is more our fault than his.
of the American public. Sure there's a We as a public spend too much money,
sucker born every minute and you can not too little, as President Bush suggests,
fool some of the people all of the time, and it has been that way for nearly
but there are laws and regulations to 40 years. The jig is about up whether it be
minimize the tomfoolery. That the the irrational expectations for stock
accounting profession had only inter- market appreciation, the near 0% con-
nally enforced rules, and was perhaps sumer savings rate, or the unwarranted
internally conflicted in providing both level of the dollar vs. Europe's new Euro.
accounting and consulting services for The American capitalistic model is about
the same client was perhaps the fore- to come under attack and as Pogo might
most of today's Balzacian transgressions. put it, the problem is not Greenspan, "the
And if not a crime, then the industry's problem is us." Sooner or later the rest of
near unanimous acceptance of "pro- the world - which are the true lenders of
forma" earnings was certainly last resort - will balk, as will the domestic
a travesty. Those things are about to PIMCOs and the game will be over.
change. Instead of "deregulation," the The question is not really if, but when.
operative word for the upcoming decade
will be "reregulation." Much like the One early sign of things to come and the
American public's apparent willingness increasing frustration that must now be
to exchange a piece of personal freedom Alan Greenspan's, lies in the shape and
for increased safety from terrorist at- indeed the level of the U.S. yield curve.
tacks, they now seem inclined to trade a We all know of course that short-term
portion of deregulation's upside for rates are rock bottom low, but less well
the prophylactic comfort of not being observed is that throughout the entire
"Kennethed" one more time. The mood is journey from 61/2% to 13/4% Fed funds,
turning nasty and there will be more long-term yields and perhaps more
than Kenneth Lay's blood on the streets importantly home mortgage rates re-
before it is over and done with. mained relatively unchanged as seen
in the following chart.
There are those who suggest that Alan
Long Yields Actually Higher Now Than Before
Greenspan's head as well will eventually 6 6
join others in the basket at the bottom
5 5
of American public opinion's mercurial
scaffold, but I am not one of them. 4 4
Percent
Percent
February 2002
While lower short rates no doubt serve after one year with one year to go until
to lubricate the economy near term, it's maturity? At that time (as long as Alan
the longer portion of the curve and Greenspan keeps short-term rates low)
especially the 15-and 30-year fixed rate the investor will hold a one-year Trea-
mortgage rate that provides the gas that sury Note which yields 2%, not 3%
makes the American economic engine because that is today's existing yield. The
go. Those haven't moved and analysts investor's original two-year Treasury
and perhaps Alan Greenspan himself Note with a 3% fixed coupon will then be
must be wondering why. Is not inflation priced in the market at 101 not 100. In
coming down and should not this ulti- other words, in addition to the 3%
mate driver of interest rates be forcing current yield our "roll down investor"
down longer yields as well? Granted, the has earned a 1% capital gain for a total of
U.S. Federal surplus is turning to deficit 4% for the first year. Now granted, 4% is
and the Japanese economic sink hole still not a great return when compared to
may be pointing to some repatriation of a 51/2% long-term Treasury bond or a 61/2%
long-term investments, but surely the 1 to mortgage, but you can take this "roll
11/2% inflation that lies ahead in 2002 down" principle and apply it to five-year
should be having some effect on lower Treasuries or better yet five-year swaps
mortgage rates and long-term yields. and theoretically approximate those 6%+
yields and more with less risk because of
Not so, and not likely either. The answer, their shorter durations.
in addition to the above qualifications,
rests in a tricky phenomenon known as I introduce this well-known phenom-
"rolling down the yield curve." Here's why. enon not to confuse you or to suggest you
have to have a brilliant yet mottled mind
like that of John Nash in order to under-
Roll, Roll, Roll Your Note stand Greenspan's frustration, but the
phenomenon is quite significant. How
5 5
about this for a rather simplified conclu-
4 4
sion: The lower Greenspan takes short
Yield %
Mr. Gross is the manager of PIMCO Total Return Fund. The stock securities mentioned in the article are not holdings in the PIMCO Total Return Fund.
The Fund may invest up to 20% in foreign securities, which may entail greater risk due to foreign economic and political developments. Investment in
high-yield, lower-rated securities generally involves greater risk in principle than investment in higher-rated securities. Mortgage-backed securities
may be sensitive to changes in prevailing interest rates, when they rise the value generally declines. There is no assurance that the private guarantors or
insurers will meet their obligations. All holdings will be subject to change. Pimco Total Return help Enron as of 0.17% of its portfolio as of 12/31/01.
Each sector of the bond market entails some risk. Municipals may realize gains & may incur a tax liability from time to time. Treasuries and
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Mortgage-backed securities & Corporate Bonds may be sensitive to interest rates, when they rise the value generally declines and there is no
assurance that private guarantors or insurers will meet their obligations. An investment in high yield, lower rated securities generally involves
greater risk to principal than an investment in higher-rated bonds. Investing in foreign securities may entail risk due to foreign and economic
political developments and risk may be enhanced when investing in emerging markets.
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PA824.2/02