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Bill Gross Apologizes for Betting On Recovery

A miserable survey on consumer confidence sent stocks down early today, though they have recovered. But the response has been predictable on another front: with bad economic news comes a smaller appetite for risk, and a headlong rush into US Treasuries, the very instrument that Standard and Poor’s downgraded a few weeks ago.

In afternoon trading, the 10-year Treasury note was up 68.75 cents for every $100 invested. Its yield fell to 2.18 percent from 2.24 percent late Monday. The 30-year note was up $1.22 for every $100 invested. Its yield fell to 3.53 percent from 3.61 percent late Monday. Bond yields fall as their prices rise.

The 10-year yield is down to 2.167% right now.

This comes as Bill Gross, the Pimco chairman, made an unusual apology for his bet against US Treasuries earlier in the year, on the mistaken belief that the economy had turned a corner:

Showing a more bearish view on the U.S. economy, Gross said PIMCO had initially dumped all of its U.S. debt holdings in March as he expected economic growth to be higher, resulting in inflation down the road.

That decision greatly undermined the performance of PIMCO’s Total Return Fund (PTTRX.O). As Treasuries prices rallied, the fund lost 0.97 percent in the past four weeks, while the benchmark Barclay’s U.S. Aggregated Bond Index rose 0.23 percent in the same period, according to Lipper data.

“When you’re underperforming the index, you go home at night and cry in your beer,” the Financial Times, in its online edition, quoted Gross as saying. “It’s not fun, but who said this business should be fun. We’re too well paid to hang our heads and say boo hoo.” […]

“I get that it was my/our mistake in thinking that the U.S. economy can chug along at 2 per cent real growth rates. It doesn’t look like it can.”

It took a long, long time for this sunnier viewpoint of the state of the economy to dissipate. For Gross it had to go along with his stock portfolio. But as Digby writes, Gross’ bet against Treasuries was an important moment that signaled the expectation of higher inflation, increased deficit fears and led to the budget deficit feedback loop we see in Washington.

Gross wasn’t a politico making some kind of ideological point. He lost a lot of money for his rich clients on that bet. And it was a bet that a fair number of people said at the time (including dumb old me, who has the financial savvy of a spider mite)was inexplicable. But he believed the hype, and in doing so, he convinced a whole bunch of other people that it must be right. After all, he’s one of the oracle’s — a Very Serious Person of the highest order […]

Gamblers make bad bets. Nobody wins every hand. But this one had huge ramifications to government policy because the person who was making it is such a revered person in the field. And because there has been so much of this over the past few years, among so many different members of our elite world leadership, I’ve finally concluded that it must have as much to do with epistemology as psychology or character. There is a systemic flaw in the way our elites are processing information and understanding the world around them. They may be hampered by their cramped social caste and worldview, and corruption is not a negligible factor, but the problem is obviously bigger than that. And I haven’t got a clue about what it is.

The systemic flaw, to my mind, is as simple as an inability to ever admit that they were wrong about any one thing. They have a political system in their hands that allows them this conceit, and will take up for their failures and pay them back. But when the economy proves them wrong, they find it best to just ignore the contradictory data until they cannot ignore it anymore. In this case, we should have known the economy was sick and inflation was not a concern years ago. But the Bill Grosses of the world believed what the suits in Aspen and Davos were telling them. After all, I’m sure all his friends were doing fine. How could there be a recession?

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David Dayen

David Dayen

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