Wickware Quarterly – Fall 2011
What better way to gain economic insight than to pose as a regular everyday consumer?
It helped Bill Gross and PIMCO sidestep an economic landmine.
This past summer, Gross told Diane Brady of Bloomberg Businessweek that he saw a “highly leveraged Ponzi economy” back in 2006, and that housing was at the pinnacle of the leverage. Although Gross felt that his home turf of Orange Country, California was usually a reliable proxy for the overall U.S. housing market, it occurred to him one day, as he was going across the street for his daily yoga session, that he needed to get a feel for the rest of the country.
“We had 40 credit analysts covering companies like IBM and General Motors,” remembers Gross. “I thought: Why not take 10 of these people and turn them into pretend real estate buyers? Instead of sending them to Armonk to interview the treasurer of IBM, let’s send them to places like Detroit, Miami, or Vegas to pretend to be in the market to buy a house. They didn’t have a bankroll, and they obviously weren’t going to buy a house. Nonetheless, I gave each of them a territory and told them to go there two or three times a month until June 2008. They were told to be serious buyers, to get serious information.”
Ethical dilemma?
Gross says his analysts were happy to oblige, even as he questioned the ethics of sending out an armada of undercover analysts.
The cost of acting on this information was significant, at least at first. Gross says PIMCO underperformed for as much as a year before Lehman Brothers hit. There was lots of internal questioning and debate, and it took discipline to sit on the sidelines.
“Every investor has an alarm clock. I wish I could get up at six every morning and time things just right. I probably get up at 4:30. There’s a cost to that hour and a half, where you sit around the table and acknowledge your competitors are having your lunch. But it’s better than getting up too late.”
Our view
As arcane economic theories and impenetrable quant models become more and more prevalent, it’s interesting to see one of the world’s most successful investment firms prosper with good old-fashioned legwork and common sense.
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