Assessing Bill Gross and His Twin Tails
Drilling down to the heart of the matter.
As I read his work, however, I found myself nodding my head in agreement on more than one occasion. In particular, he spoke of the potential for "a perfect storm" in 2012 following the calmer seas of 2011.
This vernacular shouldn't surprise Old School readers; Minyanville forecast the first phase of the financial crisis, offered that we were in The Eye of the Financial Storm the last year or so, and opined in August that The Second Side of the Financial Storm was about to arrive.
Mr. Gross and I have both been in the "de-leverage" camp for the past few years and we've been wrong, thanks to the obscene amounts of artificial stimuli injected into the veins of the system formerly known as capitalism.
What are new to his 2012 secular outlook are words like "implosion" and phrases like "bimodal fat-tailed" outcomes. This, too, should be familiar to ye faithful, although Minyanville used friendlier analogies such as "medicine that cures the disease (debt destruction) versus drugs that mask the symptoms" and wrote articles that attempted to dissect the dilemma, such as Pick a Side or Stand Aside.
Indeed, in my Ten Themes for 2012, which was published prior to the venerable Mr. Gross, when referring to the financial markets, I wrote:
Through a pure technical lens, the “reverse head & shoulders” pattern in the S&P that we’ve monitored in Minyanville for the past month has triggered, which “works” to S&P 1360.
From there—if and when—the European debt auctions will set the tone for global assets in the context of a secular bear market that has a few years to go before generational opportunities emerge in the back half of this decade.
In other words, it would appear Mr. Gross and I are aligned in our view. If sovereign governments can continue their cat juggling, asset classes will remain buoyant at the expense of currencies; if, however, markets are allowed to trade free—or, more likely, if markets overwhelm the best efforts of policymakers—we'll witness an inevitable comeuppance that is cumulative in both size and scope.
Mr. Gross also spent a fair amount of time and energy discussing the notion of Zero Hour (when lower rates fail to "matter" anymore). This was first introduced by our dearly departed colleague Bennet Sedacca back in 2007 and 2008, and has recently been revised by his talented son, Michael, in Central Bank Easing: Zero Hour Has Arrived.
While Mr. Gross offered that "bimodal tail risk was seemingly invisible in 2008," I'll humbly disagree with him on that point (we mapped it in Minyanville, before it happened). What is also unclear is the timing, which is half the battle in the war of time and price.
Before the holiday, I penned a column titled, The Smartest Guys in the Room are Screaming "Get Out of the Markets" that explained how many fund managers are "risk off" and some of the biggest players in the market are "all cash." In addition to those anecdotal data points, Bloomberg recently ran an article that detailed how forecasters at securities firms are more conservative on US stocks than any time in the past seven years.
Being a contrarian isn't reason enough to risk capital, particularly when the consensus view shifts on a daily basis. It is a piece to the puzzle, however, and when you factor in the aforementioned technical pattern (which, in a vacuum devoid of fundamentals, structural and psychological metrics, "works" to S&P 1360) with an election year (where agendas abound), the path of maximum frustration may dictate that the financial markets have a window of opportunity to the upside—and it's just that, a window—before reality bites later this year.
That's pure conjecture and should be treated as such; nobody is smarter than the market and I learned a long time ago to stay humble or the market will do it for you. There is a distinctly binary flavor to the current market climate, unlike last year where despite the volatility, the S&P closed flat, almost to the penny. This is where syncing your time horizon and risk profile is critical. If you’ve got a 10- or 20-year time horizon, turn off the noise and find yourself some good companies at compelling valuations.
Old-school Minyans will note a gradual shift in my long-term outlook. I was extremely bearish in 2000, increasingly cautious into the 2008 crash and now, as the sovereign sequel we’ve been mapping for two years is front page news, I’ve adopted a more constructive stance once we get through the other side of this very dangerous stretch. The markets are a forward-looking discounting mechanism, however, and the news is best at the top and worst at the bottom (and yes, we’ve got work to do before we get there).
My stair-step process remains constant; I've got a long-term bucket that I want to keep dry (been all cash since 2007) and an active account where I take two-sided risks (my sole position at the moment is Research in Motion (RIMM), which I carried over the holiday break). Add to that "risk profile" the fact that we bought our first home (consistent with my 10 themes for the coming year) and you've got a snapshot of my current financial positioning.
Good luck today and as always, I’ll see you over on the Buzz & Banter.
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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