We Study Billionaires - The Investor’s Podcast Network - TIP451: The Story of Bill Gross aka The Bond King W/ Mary Childs

Starting point is 00:00:00 You're listening to TIP. My guest today is Mary Childs. Mary is the author of the new book The Bond King, How One Man Made a Market, Built an Empire, and Lost It All. It's the story of legendary bond investor, Bill Gross. Mary is also a co-host and correspondent for NPR's Planet Money podcast. In this episode, we discuss how Ed Thorpe influenced Bill Gross in the early days, how Bill pioneered a market for trading bonds,

Starting point is 00:00:27 how Bill stood up Pemco and the famous total return fund, how they successfully navigated the global financial crisis and established an abnormal relationship with the government along the way, the trade that began the decline of Bill's time at Pemco, Bill's own autobiography recently released, and a whole lot more. Mary is a phenomenal journalist and has written a fantastic book. If you're curious about the bond market in general, this is a great place to start. So without further ado, here's my conversation with Mary Childs. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. Welcome to The Investors Podcast. I'm your host, Trey Lockerbie. And today, I'm really excited to have Mary Childs.

Starting point is 00:01:28 Welcome to the show, Mary. Thank you for having me. Well, I know that we're going to spend most of this conversation talking about your new book, which is so, fantastic. It's right here. It's called The Bond King, the story of Bill Gross, how one man built an empire and lost it all. And it lives up to that title in the book. Thank you. That's good. That's good to hear. I know that a big passion of yours for writing this book appears to be to educate the wider public about bonds, generally speaking, right? So what about bonds? Are you attracted to or you find most interesting? I think that I felt a little cheated when I got

Starting point is 00:02:06 into the world of reporting on financial markets or when I started to understand what was going on because we talked so much about stocks in the broader world. And I thought that that was where things mattered. And so then when I found out about the bond market, I was like, wait, y'all have been distracting me with this like funny, shiny world when there's this other largely, I would argue, more influential world sitting above it where if we're actually bond investors, we can talk to a company and be like, actually, I don't like how you're doing X, Y, is it? You know, there's just so much more ability to kind of have your hands on the levers. And I know, Bill Ackman might disagree with me on that, but difference of opinion. And I think that like that disparity

Starting point is 00:02:41 between the kind of public awareness and the actual influence of the bond market, for a journalist, that's exactly where I should sit, right? I need to kind of be the person translating and saying, hey, look over here. Like there's this thing that people kind of have an interest in you not paying attention to and you not understanding. And as a financial journalist, my role is to enlighten, elucidate, bring that world to life and make people aware, but also interested and realize that they're fun and exciting and not boring and complicated, although they are also complicated. They can get complicated. But to your point about focusing on the stock market, it's kind of interesting, right, because, you know, the bond market is something like $120 trillion right now.

Starting point is 00:03:20 I mean, it's so much bigger than the stock market. It's funny that it doesn't get the same amount of attention you would think it would. And it might sometime soon. Let's preface that. Yeah, right now, as we speak. I didn't mean to write such a timely book, exactly. It is a very timely book. But to your point about the, being complicated. I love this analogy by Howard Rakoff in the book who's talking about how bonds are like LA traffic, which I could relate to because I'm in LA. But talk to us about what he meant by that. So basically, yeah, Howard Rakoff was one of the kind of evangelists of active bond trading back in the day when that really wasn't a thing. And he likened it to sitting in traffic

Starting point is 00:03:56 in LA. You know, that's the buy and hold. That's the way that people had been trading bonds was just sitting in that one lane of traffic, traveling forward, clipping your coupon, minding your own business and going home. But what he thought was, you know, this revolutionary thought that he had was, why don't I change lanes and trade this bond for that by a new bond that suits my needs better, that I think will go up in price for whatever reason and better my situation. You know, I'm no longer just in this lane taking what I've been given. I'm now changing lanes. I'm passing the person on the left, on the right. I'm doing all these different things that allow me to get home faster. So, you know, the get home faster to him was price appreciation, which was here tofore not really a

Starting point is 00:04:32 thing in the bond market. So I like this one because you understand everyone thinks they're a good driver, especially in LA traffic, where you're like, I'm going to just outsmart this next person. It doesn't much work, which is also true in bond trading. But you know, you think you have an edge. You think you're going to be able to kind of maneuver your way home a little bit faster than just sitting in that one lane. And the book really covers in depth how these guys pioneered the bond market. And we're going to talk a little bit about that. But Bill Gross is sort of at the helm of this story. And I want to talk about the first experience you had meeting Bill. And did your interest in bonds begin there or sometime before that?

Starting point is 00:05:08 My interest in bonds began before that. I had actually been covering bonds by that time for about three years full time, I think, at Bloomberg News. So, you know, that was a very intense team, a very smart team. And I learned so much being on that team. And, you know, that conversation with Bill was definitely like, I'd already written a story that I had made a mistake in this story that was so like did not reflect that I had been covering credit for three years. I just made like a very, you know, when you're fact checking your story at nine o'clock at night and you've been working on it for months, you just like miss the forest for trees. Did you really miss them? Because I remember you called Bill and he was like, well, you have your numbers. I have mine. Right. It was just,

Starting point is 00:05:43 yeah. So what happened was I had cited the price return, not total return of the total return funds performance. And you know, that's like, I just looked at the wrong column when I wrote down the thing, which is very silly and embarrassing. And like, it's a little embarrassing. to put that in my opening. I'm like, neither of us are quite reliable narrators, right?

Starting point is 00:06:00 But I do think that that was an interesting interaction with Bill Gross because he's on Bloomberg radio after that story comes out and he's like, Mary Childs needs to get her facts straight,

Starting point is 00:06:09 which is just absolutely devastating. You know, I was like just freaking out and then tried to replicate the numbers that he said, he said that total return was beating the benchmark by 75 basis points.

Starting point is 00:06:17 And like, I had worked at Bloomberg for three years. I knew how to, four years at that time. I knew how to check these things. I was typing it in over and over and over and I couldn't get 75 basis points.

Starting point is 00:06:25 And I was like, I'm losing my mind here. So finally he calls me and I'm just like, you know, sorry about the mistake. I apologize, but can you help me get this number? And he's like, you have your numbers. I have mine. I'm just like, did you just say that? Did you tell me that?

Starting point is 00:06:37 I'm a reporter. Like, should I write that? And I guess I did write it down. It took me a long time. Very revealing as we'll kind of get into the story a little bit more. But yeah, the guys, these guys at the top is so fascinating. Let's talk about Bill's early days. He was really influenced by Ed Thorpe.

Starting point is 00:06:54 And Ed's actually been a guest on our show. show. He's a legend. And Bill essentially uses the Ed Thorpe method of counting cards to pay his way through college, right? He kind of teaches himself in a way, starts gambling, I think gets up to 10 grand to pay through school. And they become actually friendly in life, which is great to read as well. But that said, in your opinion, how did his early days of gambling contribute to his strategies in the bond market, given that you focused on it in the book? Yeah, I think it's really relevant, Right. Like he learned in Vegas not to bet all of his chips on one thing, not to kind of wantonly and recklessly bet. He learned to use Edthorpe strategies to very carefully and cautiously figure out where he was in the deck. When the dealer is shuffling out the cards, if you count cards, you can figure out with some degree of accuracy, what's going to happen next. So, you know, not total accuracy. Of course, no one is psychic here. But I think that just knowing that there was a way to beat the system gave him confidence in his own ability to find a way to. beat the system to find market inefficiencies and exploit them before other people found them.

Starting point is 00:07:57 And then it also helped him learn basically risk management where he was using the Kelly criterion in the strategy and the card counting strategy to not bet too much to say, okay, you know, I think I have this amount of edge, therefore I will bet this amount. If I have a little tiny bit of edge, maybe I won't bet that much. And that I think served him pretty well throughout his career where he had a sense. It's also, I'm not sure if other, you know, card counters would agree with this, but I did card counting. I learned how to card count for this book.

Starting point is 00:08:23 And I was in Vegas with a hedge fund manager teaching me, which was so fun. But it was also, it helped me realize that it's such a more visceral and like almost emotional. Like it's like a living thing, feeling that risk and the way the table changes and heats up and cools down. And I think that that is really applicable in markets and bringing that sensibility and that ability to feel the ebbs and flows of risk and of your edge was super informative for him. Yeah, that's what I loved about how you described in the book of this intuition he seems to have gotten. from it and knowing when to go in strong or cool off. I think if there's a pattern recognition of sorts there that you kind of pick up at the tables, it would see from his experience as well.

Starting point is 00:09:02 Yeah. And it's mathematical, but it's emotion, right? Like it's intuition. Like you're saying, it's you can do the math or you can learn to feel it or both. And I think in Bill's case, it was both where he both got the pattern recognition from the mathematical perspective, but then having that mathematical underpinning helps you learn the intuition, helps you feel it. It's kind of like when you're a Jedi, right?

Starting point is 00:09:20 and you kind of get it. It's just like that. Exactly right. So let's talk about Bill's early days in founding Pimco. He's, you know, he gets his first job out of college at Pacific Mutual. And one day he's sitting around clipping coupons, you know, in the old days trying to get those yields, mailed back to them. And, you know, they come up with this idea of that bond should be traded in a liquid market. So walk us through how Bill stood up Pimco, which later became, you know, the leading powerhouse in the industry. Absolutely. So basically what went down is, is Bill Gross is at Pacific Mutual doing this kind of boring job, as you say, clipping coupons and and also kind of analyzing credits, people who corporations as they came in saying, you know,

Starting point is 00:09:59 I want to borrow money and, you know, they would evaluate. And Bill Gross was the person who did that evaluation. And at the time, inflation was really high. So I think the argument was, hey, why are you letting these bonds in the basement just erode in value? They're just sitting there, like decaying because of inflation. When I could be trading them, like, why don't we try this? This radical new idea. It's a little bananas. It's a little out there for, you know, an insurance company that likes to just kind of clip coupons and do what it has been doing for so long. You know, insurance companies are not necessarily known for embracing risk and innovative strategies. No offense to them. But, you know, he made this pitch to his boss. And his boss was like, okay, here's $5 million.

Starting point is 00:10:34 Have fun. And so for five years, it kind of didn't make sense. And the higher ups at Pacific Mutual were like, what are you doing? Like, can you please make this business work yet? We're going to shut you down. And eventually they managed to establish this track record. I think the recession in the early 80s. They were right on that. And from there, that kicked off an enormous rally in bonds for decades. And Bill Gross and his team were kind of at the forefront of that. Yeah, I was curious why it took so long of five years. Was it the five million, the small dollar amount? Was it just kind of going up drumming up interest in this brand new thing and trying to educate people on how to even participate in it? That was a lot of it. And I think, too, you know, Jim Muzzy started out a portfolio manager.

Starting point is 00:11:12 He didn't love it. So some of it was just like everybody getting there, getting situated and getting their roles, right? And I think also, like, the market was not as directional. And they were, I think they were just getting their footing. The market was so nascent. And it took until, I think, really the mid-80s before they had their firm footing in the contracts that they really, really, where they really excelled, like mortgages and futures and derivatives, like that world of basically extreme complexity. You know, we're kind of out on the spectrum of complexity there. And that's, I think, where they were able to do the best work, especially in those early days, and also catching that wind of the market being in their favor.

Starting point is 00:11:48 All right. So they come up with this thing called the Total Return Fund, as you mentioned earlier. What made this thing so special? You talk in the book about how they were unable to take the secret sauce of derivatives over to their ETF later on in the book. But what types of strategies with these derivatives made the fund so successful? So a lot of Bill's strategies over the years have centered around this idea that he was a psych major at Duke.

Starting point is 00:12:12 So I think a lot of these are psychological, where he identifies. that other people are, for example, less comfortable with risk, and he's just more comfortable. So one of the things that he would do would be, you know, sell strangles, kind of identify a range in which he thinks that a market will trade and sell options around that just kind of ring fencing that range and saying, I don't think it's going to trade outside of this. Other people are more than happy to buy that insurance from him and say, great, I'm offsetting my risk here. I feel better about this. And he collects that premium. And he can just do that over and over and over. And what the effect of that is, he's collecting all this money. And, you know, he was pretty good at

Starting point is 00:12:46 delineating these ranges and predicting these ranges. So for on net, this was a beneficial and profitable strategy for him. The trade works and is so robust and kind of persistent because people want to offset their risk. That's a reasonable thing that I probably would be doing. I'm like, I want to hedge this. I don't want to be stressed about it. And Bill Gras is like, I'm happy to be stressed. Bring it on. Like, let me take your money for that. And options were really the way that he was able to express that. There's a very complicated trade from 1983, the Jenny Mae CDR trade, which is a futures contract, which no longer exists because it basically got broken by Pimpco's trading. It's a fun story. It's a lark. So just to cover that strategy a little bit more in depth, the strangle, right? You're basically you're selling a call or a put either above or below the price range that you think it's going to

Starting point is 00:13:28 trade in. And you basically profit off of that premium that you got from selling it. And you're just letting it die out probably, right? The duration of the contract just flows out. As long as a state in that range, you make some money. Yes. Yes, exactly. You just cross your fingers for the duration of the contract. It's really impressive. It's hard to do, especially in early days of a bond market. It's fascinating. But to your point there about the complex trade and how complex it got, I'd like to talk about this because this seems like their first big home run. And the way you lay it out in the book, it feels like a movie in which at one point, it's like a bank robbery because they end up showing up at these banks, like walking out with suitcases full of contracts because they've cornered the

Starting point is 00:14:06 markets. So walk us through this story. It's amazing. It was a new contract. It was called a Ginny ACDR collateralized depository receipt. And basically, it's not dissimilar to, you know, regular mortgage pools where you just slice it up by risk. But in this one, the flaw was that they had kind of too many different levers and too many options. It's really two trades that I've kind made sequential, but it's actually like it had one problem where it had a perpetual. You could convert it to a perpetual security. So that's one thing. And that was like your downside. If like, you know, rates are falling and you want to just like stop. You want an eight percent forever. Congratulations, you've got it. And on the other side, there were basically,

Starting point is 00:14:41 the market hadn't realized that because of negative convexity and the fact that rates were turning right then, the number of the cheapest to deliver bonds that would actually help settle this trade if you wanted physical delivery were very finite. And like actually the kind of, they were no longer making this cheapest to deliver. And I think people hadn't really realized that. And like, you can go along happily down a path for a long time if no one tells you that the underlying assumptions are all wrong. And I think when rates start to go up, you reveal a lot of these assumptions, right? Like suddenly we're all going to learn about a lot of assumptions that we didn't know that we're making throughout the financial market, like right now. So exciting times. But basically, because of negative convexity, the lower coupon,

Starting point is 00:15:18 Ginny Mays are worth way more. And so the higher coupon, the highest coupon, I think, was like 17%. And those were the cheapest to deliver. So Pimco realizes that there aren't enough of the cheapest to deliver. And they actually end up going out to all of their clients and being like, do you want to trade futures in your pension? Do you mind just because it's a really good idea? We have this great trade. Like, it's this hilarious. And these like very, you know, conservative pensions are like, well, all right. let's go for it. Why not? Let's try it. And like, it was a good trade. So it worked out. But it's definitely opened the door for this kind of liberal embrace of derivatives and options that started here.

Starting point is 00:15:49 So they decide to basically amass an enormous position in these contracts and then force physical settlement. And so then they go around to each of their counterparties and say, hi, hi, excuse me, sorry. So we've got this contract. And we'd like to settle physically. We'd like, we'd like physical delivery. And the counterparty would be like, oh, I only have a couple of these cheapest to delivers. Oh, no. I actually hadn't accounted for this because they'd amassed such a big position, it basically outsized the existing inventory of the existing everything of these genie maids. So yeah, they went around with duffel bags and picked up all these jinnies that were, you know, lower and lower coupons as these counterparties realized that they couldn't settle with the cheapest to deliver,

Starting point is 00:16:25 they'd run out. So Pimco just collected and collected on that and then on the perpetual. And Bill Gross, I will say only Bill remembers this, but he also said it in his own memoir, so he like very much remembers this moment. He says that he met up with Solomon Brothers at an L.A. Airbrose. guest room to negotiate an exit without having to face regulators about a squeeze. So the eventual exit was that regulators were kind of like, and like, you know, the Chicago board was, like, there were a lot of people looking at this and being like, was that strictly speaking legal? Was that okay? What just happened? Like, what just happened? And so Bill says they settled in an airport hotel guest room, which is, yes, I love the movie version of this. It's so beautiful. It's perfect for that.

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Starting point is 00:21:07 dot com slash WSB. That's Shopify. dot com slash WSB. All right. Back to the show. You know, another masterful stroke by Gross was profiting handsomely off of the global financial crisis when the housing market crashed. Surprisingly, he wasn't featured in the movie The Big Short.

Starting point is 00:21:30 I guess he's because he didn't technically short subprimes. And I think Gross has a bit of a chip on his shoulder for not being featured in that. It would seem. But that's besides the point. That is he did pitch himself to Michael Lewis. I think Michael Lewis did. They are a little bit in the movie, I'm told. I haven't rewatched that movie for like 10 years.

Starting point is 00:21:45 So I don't remember. But I do think that he has pitched their story to Michael Lewis at least once, maybe twice. That makes sense. I mean, because of that movie, it's easy for most to understand how Pimco could see things coming and position itself to make a profit. But what's not often told or examined is just how much they were able to front run the Fed ultimately and then partner with the government. Talk to us about these inner workings of the partnership that developed between PIMCO and the government. Yeah, I mean, there were formal relationships where the government needed to value or trade securities that it really had previously not done. So, at least in this degree at this scale.

Starting point is 00:22:23 So in multiple different markets, they ended up literally partnering with asset managers, including PIMCO. And PIMCO was like a kind of a big one of those. And they also had this informal thing where PIMCO is at the center of this market, of the of the more. mortgage market. And the crisis was obviously very much in the mortgage market. So it had the effect of Pimco's trading and Pimco's view being so central to what the government needed to do. So the government had this enormous problem in the form of Freddie and Fannie, which at that time directly or indirectly backed $5 trillion worth of debt, which is absolutely ridiculous. And a lot of that debt was underwater or people were defaulting, people were unable to make their payments. And Pimco is basically,

Starting point is 00:23:08 like, yeah, I know, that's rough, isn't it? That's a real bummer. You're going to have to make explicit that government guarantee. Because to that point, it hadn't really been clear how much the government, you know, they were government sponsored, but how much. And so this moment in time, Pimco is just like, go ahead, like, say that you're going to just back them. And eventually, that's indeed what the government ended up doing. So to me, that's the moment where they're the most powerful, where they are at the epicenter of this crucial moment and wielding such influence in this enormous market that affects really literally all of us. us, you know, we all live in a house. We all either rent or own or, you know, we want to do one of

Starting point is 00:23:44 those things. It affects everyone. The price of housing affects everyone. And not only that, as taxpayers, there's this moment where the U.S. government sort of ends up, maybe by accident, ranking PIMCO Total Return clients over taxpayers. Like, they get more or less the kind of bailout or the aid and then taxpayers are more or less kind of paying into that, which is bananas. And again, I'm not sure if that was super structurally intentional, but it is the kind of outcome. You know, the other one that, the other major trade that I think you mentioned, this partnering with the government, is the umbrella trade where Pimco decided in the aftermath of the crisis. And I think they saw this more clearly than a lot of people than probably most people, that whatever the government thought would be

Starting point is 00:24:25 too big to fail, thought would be systemically significant, important, that that would get bailed out, that they would find some way to fix the problem. And so Pimco just was like, all right, let's pick out who that is and just buy those securities. And then if the government wants to those out or buy those securities from us. We're so happy to do that. And there are multiple examples of this. You know, there were bank prefers. There was this kind of infamous example with GMAC, the General Motors, like it ended up converting into a bank holding company. So I think the idea there is there are multiple ways in which Pimco partnered with or basically front ran the government to its great benefit to Pimco total returns great benefit. Yeah. It used its power to basically

Starting point is 00:25:02 play chicken with the government, it seems. And you mentioned that last point about them making money every which way from, you know, the collapse of our economy. You know, how are we supposed to feel about these corners of capitalism when it looks a little ethically gray? Yeah, it's like we really have built so many structures just accidentally. And I think, you know, I say in the intro that what we delineate as relevant to financial analysis and relevant to corporate earnings, it's a little nonsensical. We just picked kind of randomly. And the people who picked a lot of these things are like, no, yeah, that was random. We did not actually. This should not be any, you know, the guy who created GDP is like, don't use this. Don't use this measure. The people who help delineate corporate

Starting point is 00:25:40 earnings are like, eh, this is a little imperfect. Hope you all iterate. We just don't. We just like, there's community adjusted. That's the last innovation I'm aware of. But I think that there's like this accidental agreement that we've made. I am saying accidental out of hope that this is okay, that we want what we call free markets. I don't know. I've recently come to the opinion that there's literally no such thing as free markets and we should all stop saying that because it doesn't make any sense. And if there is literally a free market somewhere in the world, like let me know. I'd be happy to see it. I'm so interested.

Starting point is 00:26:08 But there's always government interference in some way, shape, or form. There's never, I am unaware of like any society. I don't know. I mean, can you think of one? I mean, like, bartering. I don't know. There's a social contract no matter what. Yeah, it's interesting.

Starting point is 00:26:22 I always go back and forth on this point because it's like the grass is always greener a little bit sometimes where everyone today is like, we need free and open markets. And we're like, well, we used to have that. And things weren't so good. I mean, we saw these major volatility. and lots of bank runs, like all kinds of stuff that just would not be really good for most people financially, which is why, you know, so it's like the road to ruin is paid with good intentions, right? So here we are. or just not looking closely at these agreements. And that's the thing that I think there was so much going on in the crisis that we did a bunch of slap dash things. And I feel like we were like, we'll come back to this. Like we'll look at this again later. And we just, you know, time marches on. We got new crises. We didn't have a chance to look back. And I think that that's dangerous. All of these things have persisted. And in large part, that's why you see a lot of this social unrest. Like you're saying, these free and open markets hurt people. There's real pain from still from the crisis where people, you know, their savings were totally wiped out. And you see this. cropping up with Occupy, you see this cropping up with the populist movements around the world, too.

Starting point is 00:27:21 So I think there is this like, I kind of wish we were better than we are, that we had some better balance or we'd achieved some sort of aha moment and like figured out something that was more effective than just simply replicating all our societal problems and amplifying them. Like to me, this has all just served, you know, the financial system that we have today really just serves to amplify. And is that what we wanted? Maybe it is. It's almost like we need a decentralized monetary network.

Starting point is 00:27:48 I walked right into that, right into it. We won't go there. But I am curious about this point you made earlier about this big bull market that happened post the 80s, when the interest rates really were, you know, the 18 point. I mean, at the highest peak was 18.63. And so we just covered a couple of Bill Gross's masterful strokes of genius. But I'm kind of curious, right? because a lot of this seems like timing.

Starting point is 00:28:14 I know what's coming. I mean, the interest rates proceeded to fall for 40 years straight. So not to discredit his success, obviously, but how much of this tailwind factored in, in your opinion? He was massively lucky in terms of timing. And that is the biggest reason for his success. And I see that.

Starting point is 00:28:35 I get that. And he would own that too. He absolutely has owned that over the years. He's like, I was a beneficiary of this massive run in bonds. and like, yeah, for sure. But so were a bigillion other people. And none of them are Bill Gross, but Bill Gross. So I do

Starting point is 00:28:48 think that he did have insights. He did have true insights into, you know, he identified these factors that were persistent and robust across time. Like, that is a real thing. And I think that the timing question is, I don't know, everyone was playing in the same field. So it seems like there's no counterfactual. We can't. I mean, there is a little bit where he went to Janus, but it's not an A-B test. It's not a

Starting point is 00:29:08 clean control because he had so many other factors that were changing his, I think changing his investment strategy, like his emotional situation from the ouster from him. So at Janus, he did not perform as he had at Pimco over many decades. And it was this kind of sad last chapter where I think it threw a lot of his investing prowess into question where rates did rise over his time at Janus. And I think you can't really, I mean, you can compare them, but I think it's messy. So both can be true. He was the great beneficiary of an enormous run in rates. Yes, absolutely. Enormous bond rally. But also, he did have these insights. He did manage to generate alpha. He did identify these market inefficiencies and these kind of what he calls structural alpha, these trades that did

Starting point is 00:29:51 generate outperformance over time. Well put. Let's talk a little bit more about Bill the man, right? So Bill, he becomes very wealthy early on, especially once the total return fund becomes wildly successful. But makes it a point to be the face in the media. And, you know, he had this quote to win forever. I love that one. What is the driving force behind Bill's desire, both for success but also the fame? Yeah. So this is actually one of the things that I think people have responded the strongest

Starting point is 00:30:23 to from the book, this idea that when Bill used to interview potential employees for Pimco, he would ask them, what do you want? Fame, money, or power? You know, he liked this question because it made people uncomfortable. It made them kind of think what he wanted them to answer. It opened up a vulnerability, no matter which way you answer it. But for him, the answer was always fame. He always wanted to be famous and he would tell anybody that and it was true from the get-go and he knew it.

Starting point is 00:30:44 And in conversations over many years, he's told me, and others, I'm, you know, I'm kind of sometimes just the vehicle or the vessel. But he's told people that it's basically this idea that he had these cold Canadian parents. His parents weren't huggers and they weren't affectionate. And he has kind of limited memories of joyous, affectionate moments with them. And he says that this is what motivated him to be famous, to want to be famous. because he equated fame with love, which I think it's just so poignant and like, what clarity, you know, what mental clarity to be able to see that this is what's making you, you know, this is the fundamental engine behind everything. And I think that that's unusual for a bond

Starting point is 00:31:22 manager, but that also explains, like you're saying, he was the face of the firm for so long. He was like, Mr. Bond market for basically decades, right? The Bond King. So I think it filled that. It did what he wanted it to, but as we all know, it's a very ephemeral thing. It slips through your fingers the minute you get it. So it's like you're on to the next headline. You're constantly chasing this thing. And I think that that did not serve him in the end. He was almost like the Buffett of the bond market. And there's some similarities there as well because in the media, he comes across as very fulksy. So self-effacing sometimes. And, you know, Bill behind closed doors, though, at Pimco seems to be a different story. Talk to us about the dichotomy happening there. Yeah. So this actually

Starting point is 00:32:05 starts to verge on, I think you're right that there is this interesting dichotomy between the public perception and the kind of lived reality, if you will, of everyone who worked at PIMCO and everyone in Bill's orbit. He was this folksy, eccentric, accessible guy, very, you know, normal guy, always sharing these embarrassing moments in his monthly investment outlooks. And that was like his charm. People really responded very strongly to that. But then on the PIMCO trade floor, he was intensely focused. He did not like to be disturbed, interrupted. He had kind of rigid rules of about, you know, when he did what and, you know, he didn't want to be pulled into client meetings. He would do them, but he didn't want to. And he was very hard on people in investment committee.

Starting point is 00:32:43 So there was this distance between what people perceive, what people saw on TV, and then the people who actually interacted with him, what they got. And I've been thinking a lot about this. And Bill was diagnosed late in life with Asperger's. And I think that's really relevant here. If you think about other public figures, you know, you think about David Byrne, for example, he has talked widely about being autistic. And I think there is, I'm not a psychologist. not licensed to talk about this in any way, but I think there is this distance that's comfortable, where if you get on a stage, you're wearing a mask, you know, you're performing, but no one's interacting with you. You're interacting at them, basically. And I think that's relevant for Bill Gross,

Starting point is 00:33:18 where he was able to be this self-effacing folks the accessible, kind of adorable guy on TV, and then he would, like, get off screen and act normal, and that difference for him is not dissonant, and those live together, right? There's this performance bill, and then there's, like, Life Bill. And life, Bill, I think a lot of those behaviors that people objected to that people thought were mean or aggressive or too intense or all these different adjectives that I've heard over the many, many years, I think a lot of those are sort of not quite appreciating that they're dealing with someone who's neurodivergent where, you know, he doesn't want to make eye contact not because he doesn't like you, but because he doesn't want to make eye contact. And like, he's allowed to do that. But there's also this

Starting point is 00:33:56 interesting thing where because he was so powerful and so important, especially within PIMCO, right? Like everything lived or died by what Bill thought of it. And of me, he's allowed. And of me, you know, that includes the employees. They're just searching for Bill's approval. They're trying to like make a connection with him and he does not want to do that. So it's super relevant to the way that he was perceived and the way that he like showed up in the world. And I think it was underappreciated for a really long time.

Starting point is 00:34:16 So that's what I've been thinking about exactly that dissonance. I think that ended up being a big problem for him when the stories came out about his behavior behind those closed doors. I think people were like, oh my God, that cute, eccentric guy that I've been reading about for decades, he's actually kind of harsh and intense. But I think I have this theory that it is related to his neurodivist. divergence to his diagnosis that he had this kind of stage persona, if you will. I'm actually really glad you brought that up because I had a similar thesis there.

Starting point is 00:34:42 And, you know, he comes out later in life, much later in life announcing his diagnosis. And he's very proud of it. He really owns it. And it's kind of because he sees a lot of similarities. Elon Musk on SNL announced he had Asperger's. He talks about how Gates might have a mild case of it as well. And that all those people, and you could probably name more, have this reputation of being, you know, quote unquote, hard to work for.

Starting point is 00:35:03 You know? Right. And it's maybe it's just an interesting thought that now that we're kind of, it's getting more and more into the zeitgeist of sorts of people recognizing these diagnoses earlier and earlier. I wonder if that will stay the same or if there'll be a new appreciation there. So interesting point. Let's talk about some other characters that come up in the book. So Neil Cashkari, who at one point was the CEO of the Fed of Minneapolis, joins Pimco. And he at one point was in charge of the TARP program right after the global financial crisis. You write about him as being this. character who is obviously extremely bright, but he sort of stumbles his way into these very important roles. And not to discredit him, but it's just interesting. Talk to us a little bit about his storyline and how he plays into the story with Bill. Yeah, it is really interesting. So he had been just a regular, de regular investment banker at Goldman Sachs. And when Hank Paulson was going to treasury, he just like emailed him and was like, hey, can I come with you? And Hank was like, yes. And like all of that is so improbable. But he went and he had this kind of, it's called Break the Glass plan, like emergency plan for bank recapitalization. And then that emergency like kind

Starting point is 00:36:10 of joke draft. I'm not saying, I guess joke is a little harsh, but like they wrote it being like, blah, blah, yada, yada. I mean, maybe. And then it was like the real plan. And they were like, oh, okay. And like, he's talked openly about, oh, that $700 billion number that we asked Congress for. That was pulled out of thin air. We were just like, what's the biggest number we can get away with. Like, what do you think people? Like, it's not 800. That'll freak people right out. 700. Seven's, seven's pretty good. So anyway, yes. So he goes from basically this, you know, prestigious and really critical role in crisis management and fixing the crisis in the government to working at Pimco. And obviously, people had a lot of opinions at the time about the revolving door.

Starting point is 00:36:47 You know, he had kind of a, it was a prestigious and important job, but it was also kind of doomed because he was in charge of like, you know, new strategic initiatives included but not limited to equities. And equities at Pimco have always been cursed for some reason. They just, you know, it's a bond shop. The DNA is bond. It's just the stance is bond. Everything about it is bond. And I think this was kind of crystallized for me when a source from the equity side told me

Starting point is 00:37:10 that folks on the bond side would be like, you need to negotiate down this bid ask. And they're like, that's a commission. That's not how this works. Like it's just a different language. And I think that they kind of never bothered to appreciate that in some ways. Not that Neil, you know, I'm sure many people bothered a great deal. But somehow it just never really got in there. So yeah, so Neil had this relatively doomed assignment of, you know, just do new things at Pimco, especially and including stocks, which became a very important push and a very important reason. You know, it became this schism. It became this crack in the relationship between Bill and some of the others that Pimco for a lot of reasons. But Neil, yeah, I think another way in which Neil kind of didn't fit in is this one anecdote really stuck with me. A source told me that he was approaching the Pimco office one day, you know, coming back from lunch or whatever. And Neil's a little bit behind him. So he's a little bit behind him. So he's a little bit.

Starting point is 00:37:57 like holds the door for Neil, which is normal. You know, at Pimco, there's this like kind of hierarchical feeling and, you know, you hold the door and the person doesn't acknowledge you. They just walk right in. They they don't make eye contact. And then you're elevator together. It's really awkward. You don't talk. It's just, okay, but that's life. But Neil looks him in the eye and says thanks. And the guy's like, this guy's never going to make it here. So yes, Neil Keshkari has done in a phenomenal job, getting these amazing jobs. And I don't know. I think he's like very charismatic and I think he's brilliant and that's probably a lot of it. But it is also the one at Pimco was not, he was not set up for success. Let's take a quick break and hear from today's sponsors. No, it's not your imagination.

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Starting point is 00:42:10 Yeah. Okay. So Cullen had this blog post in 2011 where Bill Gros had just made this enormous call, this very, very big call in his portfolio and then publicly saying, you know, I hold no treasuries. I have sold 100% of total returns treasuries. I think the treasury market is doomed. The supportive measures from the Fed are being wound down. And that's going to leave a Fed-shaped hole in the market. And Colin wrote, he's been talking about some form of a bear market in bonds for over 10 years now. And that in between those calls, he has consistently maintained a very healthy holding and fixed income and U.S. Treasury correlates.

Starting point is 00:42:47 assets. So like, yeah, Colin was super right because Bill's like 1997 book, everything you know about investing is wrong, also was like, oh, this is kind of the end of the bond market. I mean, Bill's been calling the end of the bond market since like the beginning of the bond market. So there is some hilarious irony there speaking, you know, someone who's benefited so much from that lack of ending. But yeah, this was kind of a turning point, I think. You know, this is a weird call. This was kind of an enormous and very risky call, you know, you're benchmarked against the things that hold a lot of treasuries. So this is like a very bold call, but also it was wrong. It was just extremely off like the market, you know, treasuries rallied. And I think that this is one of the moments where

Starting point is 00:43:28 Bill Gross's armor gets dented. You know, at PIMCO in financial services, pretty large, but especially at Pimco, you're only as good as your last trade and how your performance is doing it. In this case, you know, Bill was spectacularly wrong. Apologized for it publicly to his credit, but also I think that's like got a bit of a mixed messaging internally and, you know, within financial services where you're kind of trained to hunt the week. And he's just like, yeah, I was wrong. But in a lot of the tellings that I came across, and I think it's true, this was kind of the beginning of the end.

Starting point is 00:43:56 So Colin, I guess, called it. Yeah, it seems to be his first big blemish on his track record. It made it his reputation a little unsteady. And you're right. It did seem like the beginning of the end. And another point in time that felt like the beginning of the end was a ride around when Mohamed Al Aryan joined Pimco, another character. who was not really set up for success, it would seem.

Starting point is 00:44:18 But he leaves, and when he leaves, it creates these major headlines. And I believe that's what roped you into all this to begin with. Yes, that's correct. You know, I love that his lawyers, by the way, made sure to denote that he just left for personal reasons. And I'm sure there's some agreement. And I'm sure there's some agreement there. But anyway, it seems like this open secret that he and Bill's relationship soured.

Starting point is 00:44:40 But to what extent, in your opinion, from what you gathered in the research you did? It's a number of things. think at the beginning of Muhammad's second term at Pimco, because he was a previously an emerging market, you know, he was on the EM desk and did great, went to Harvard, came back to PIMCO as co-CEO and co-CIO in 2007. And that co-CEO and co-CIO is like bananas at Pimco. They had long touted this three-legged stool, this kind of clear division of labor as a big selling point that they had this structure that worked really well where, you know, the business guy is the business guy and Bill Gross is the investment guy and those things, you know,

Starting point is 00:45:12 narrow between shall meet. But Muhammad was both of those. And I talk about in the book, how he kind of made a request for that at the very last minute before he started at Pimco. And Bill Thompson, the outgoing CEO, who was not yet outgoing at the time. And Bill Gross were like, oh, okay, like uncomfortable. But Bill Gross was excited. And Bill Thompson was like, okay, like, let's see how this goes. And this is a little bit, I'm speculating a little bit here. But, you know, this was a deviation from what they had done in the past.

Starting point is 00:45:37 And this was like not really what they had meant to do. And I think that was kind of the beginning of the end of that relationship. Like, I don't know if they ever could have overcome that kind of structural problem. because of the way it came about, but also because of the deviation from how Pimco had operated. And then there's also just the fact of their like persona. Like I feel like both of them are just complete opposites. Bill Gross is in the weeds and he like wants to really understand the complexity and like really get in the details and he's really intense and he does not really care for niceties and he's just

Starting point is 00:46:04 going to do what he needs to do. And Muhammad is like super polished and like academic seeming and polite and very, you know, I don't know, has all these like great big macroeconomic thoughts. And I mean, fundamentally you have an economist. an investor. And they butted heads a lot. And there were also a lot of kind of managerial issues where Bill was not overly consistent in part because I think he cared not at all for kind of the managerial stuff and the like minutiae of business decisions. His stance was his stance. And he just kind of was like, all right, whatever y'all are doing, it's probably fine. But it's annoying to me when you hire people, et cetera. And Mohammed would just have to

Starting point is 00:46:35 kind of work around that all the time and do this like really annoying dance of trying to front run Bill's feelings and like accommodate for them. And then like try to fix it when he made a mess and then try to just like constantly managing the work. around Bill Gross. And I think either he didn't appreciate that that was part of the job or he didn't like that that was part of the job. You know, I'm not sure exactly what went down because he somewhat famously declined to talk to me for this book. But it was sort of oil and water, in my opinion, where they just were never going to necessarily see eye to eye. And that really came to a head in 2013 and 14. Also what happened in 2014 is Bill goes and speaks at this morning star conference.

Starting point is 00:47:11 And he goes on stage and he's talking. And then all of a sudden, he starts to get out of tangent a little bit. He brings up the movie, the Maturean candidate and ends up walking through the entire plot. So this seems like, again, the beginning of the end of the career, but people started really questioning his cognitive state of mind, you know, at this point. Did you see that when you were dealing with Bill throughout the book? And was there something there? Was this sort of looked, were people reading too much into that? It's a good question. And the way I have read it is it was kind of a cry for help, I think, or like a flare. You know, he was sending up a flare of like all's not well. While he was trying to say all as well, there's never been a happier

Starting point is 00:47:49 kingdom, it's obvious that he's like flailing around trying to regain control to tighten his grip in some way on the reins of this, you know, enormous company that is no longer truly his at this point. So I think that's what you're seeing is that like he's just kind of flailing around trying to reassert and trying to get his footing and in a very ineffective way. I will note that like what followed that sort of meandering explanation of the Manchurian candidate plot and also random references to Justin Bieber and Kim Kardashian. Like, it was a good speech. If you go watch it, it's actually like quite enlightening and like very helpful.

Starting point is 00:48:20 But no one listened to any of that because like you're saying, everyone was turning to each other being like, wait, is my money safe at Pimco? Like, this guy's not okay. So I certainly can't speak to the degree to which he is not okay or, you know, I can't diagnose anything. But I do think that within Pimco, that was certainly a subject of much speculation, you know, is he losing it? Yeah, I think that it was also such an emotional time that, you know, you just have so

Starting point is 00:48:42 much going on for him that he's responding to super emotionally. And I think that also complicates. Like it's when you're going through a horrible breakup or, you know, and you're really like going through it. You're not okay. Like it would be hard for anyone to take a diagnosis at that point. Yeah. I was just kind of curious, you know, going back to his demeanor in the media being very folksy and what we were talking about at work, you spent a lot of time with Bill. So I don't know if we've really quite covered that, but you spent years interacting with Bill. I'm kind of curious, did you see different sides of him over time? Oh, yeah.

Starting point is 00:49:14 And what did that kind of look like to you? The thing about him, and I think some of my sources, but not all would agree with this. He always makes some sense. Like, he has rules. There are very real, almost tangible rules for him and for the way his world operates. And he's completely 100% fine if you write an article. Like, he's so open about his failings, his mistakes. He apologized for a bad treat.

Starting point is 00:49:41 Like, who does? that. But if you break his rules, if you go outside the bounds of what he has delineated as fair, he gets mad. So I think it's different from how a lot of other billionaires that I've covered act. Like, if I choose an adjective wrong in some story about another billionaire, oh my God, like, I've gotten calls where they're like, I'm just disappointed. And there's just all this kind of intense and like unearned desire to weigh in on what I do. And to his great credit, I think, Bill understands media and leaves that distance. So yes, he's definitely been mad at me. He's definitely disliked some of my stories. He's definitely, like, I've experienced the negative side as well, but I think that

Starting point is 00:50:19 I have come to understand. And I should also note, like, his rules are not irrational or they're not unreasonable in my experience. And I'm sure other people's mileage may vary, like maybe his next door neighbor in Laguna. But I think he just wants to be treated fairly. And if he thinks that you're treating him fairly, he's like, okay, that's it. That's fine. All's fair. I don't know. I really respect that because I've experienced a lot of other approaches and I enjoy them far less. So it's been, yes, he is multifaceted and yes, he certainly has this intensity and this ferocity in a way. But I think a lot of people have that ferocity. And I think that he is pretty judicious about how he doles it out and why. He appears to be very amenable to your work as you were writing this book and he was contributing

Starting point is 00:51:03 to your questions that you were asking. But then he kind of diverges again and he goes off and writes his own autobiography that just so happens to be released right about the time yours is. So I'm kind of curious what your first reaction was learning about his new book. So at first I was a little incredulous. Just because it came out of nowhere. It had been seven years, basically. I found out, I guess he put it in an investment outlook that he was writing his own book in January 2022. And, you know, I'd been talking to him since literally 2014 and I guess 13, actually and like had never heard about this but I you know it's also like I had been in edit mode deep in edit mode for years at this point so I'm not like emailing him on a daily basis or even monthly

Starting point is 00:51:43 I'm not I'm trying to not bother him that much you know he's literally a busy person he has given me the kindness of sitting down for all these interviews but he doesn't owe me all that time and he was super helpful in fact checking like all this stuff so I'm trying not to bug him but I think when he saw the questions from the fact checker I think he was like oh this is stacking up in a way that I don't really like like this isn't the book I wish it had been and And which I totally understand, but I think that was kind of the impetus for him to write his own narrative. And he's completely entitled to that. And frankly, I think it helped me. You know, he's been out there doing all this publicity and that doesn't not help me. You know, we both have a book about Bill Gross out right now. So I think people thought I'd be mad or sad or something or like maybe that it would like take the whit out of my sales. But I think the opposite is true. It's also like journalistically super interesting. Because you can read my book and kind of align his account next to my book in a way that's really interesting. very rare. Like there's so many reported works of nonfiction that are so deeply investigated and

Starting point is 00:52:40 you never know what thread is what, where the journalist, where they're drawing stuff from, which is of course part of the adventure. You know, you're trusting the journalist to have done all this work. But it's so interesting, I think. I mean, obviously I think Bill Gross is interesting. I wrote a whole book about him. But I think like if you read his account and see where it lines up with mine and where it diverges. And you, I don't know, I think it's a really interesting kind of experiment. So. Well, your book, even though it's nonfiction, it really feels like a novel. the way it's written. It's very well done. Thank you.

Starting point is 00:53:06 You know, Bill certainly comes across in the book is sort of restless. And, you know, you mentioned he went to Janus from Pimco, a major move that disrupted the markets. Even people were really, I mean, that's how much of a titan he was. He goes to Janus and has somewhat of an underwhelming experience there and ultimately retired recently. I'm kind of curious, in your opinion and your experience with him, is he capable of finding peace?

Starting point is 00:53:29 Do you think he's found peace in retirement or you think the restless nature still lives on? I think it's a case, again, of both are true. I can't imagine a world in which Bill Gross is like, okay, I did it. I'm done now. I relax. Like, he's still trading. He traded GameStop. You know, I think once he lets go of all of that, I mean, I think he'll have to be dead.

Starting point is 00:53:48 I'm not him. I can't imagine, but I think that he just needs to, you know, he just does stuff. He's not a relaxer. Like, his hobby was collecting stamps and, like, charting the price of various stamps against the various benchmarks. That's his hobby. So, yeah, so the first one is like, yeah, he can achieve. of happiness. He says that he's happy now and I'm so glad for that. But I also think the restlessness is

Starting point is 00:54:08 just sort of part of his nature. And whether that's going to manifest as messing with his neighbors or perfecting his golf game, I think is the real question. So maybe there'll be a sequel if he's, if he keeps up his activity. Speaking of which, it took quite a long time to finish this book, as you kind of mentioned, because he's still active. He's still out there doing stuff, creating headlines. So what was that like trying to close out the book? And when was the moment you said, okay, here's a good spot to end on. Stopping point right now would be when I've stopped.

Starting point is 00:54:39 I literally like, you know, at first I tried to end the narrative in 2014 because it seemed like that's when the narrative ended, right? You know, he goes to Janus, yada, yada, like, whatever. But then it took me so long, as you say, but also like, I don't know, the Coda at Janus just kept kind of rolling for, you know, he sued Pimco and then they settled and then he, it just, things kept happening. And I remember going to a dinner party in 2018 or 19. And a friend, I was sitting next to a friend and they were like, oh, what's your

Starting point is 00:55:03 book about and, you know, blah, blah, blah, just chatting with these folks. And they were like, oh, is that the guy who's leaving dead fish in his ex-wife's house? And I was like, oh, is that how he's known now? Like, is that Bill Gross, the guy who, like, oh, like, oh, you got to walk us through this. Sorry. I assume you know, you two have followed Bill Gross for seven years, um, or more. Yeah, so in November 2016, Sue Gross filed for divorce. This is his wife of 30 years or so. And this was like very shocking. I did not see this coming at all. I think Bill did not really see it coming. And it was very unfortunately extremely acrimonious. It became this kind of very upsetting to watch one-upmanship and like game of pettiness. And like he hired Empire Intelligence to follow her and

Starting point is 00:55:45 her family and like keep track of her, which I think she did not appreciate. It manifested as a real estate war. It was just the real culmination was when she won the house, their, you know, long time shared residence in the divorce. And I think Bill loved his house, you know, love the neighborhood. He'd lived there for a long time. He likes his routines. And when he's leaving the house, he got these like bottles of vomit spray, like sprays that will smell like these things and like literal dead fish. And he sprays the sprays all around and he leaves the fish and the air vents and like leaves balls of human hair in drawer. Like it just all this stuff that you're like, oh, this is intense. And the New York Post absolutely wheeled on this story. And so this

Starting point is 00:56:24 ends up being this enormous part of his, I don't know, persona public brand like legacy. And so I was sitting at this dinner party, you know, 2017 or 18, and my friend's friend is like, oh, is that the guy with the dead fish and is what X, Y's hot? And I'm like, I got to keep editing the book. I can't ignore this at this point. You know, I try to avoid people's personal lives for obvious reasons. It's just like, that's not what the book was supposed to be about. It is not actually like a full biography. So I was going to avoid it, but then I just couldn't. I just, it ended up being too large. Well, understandably so. And I imagine that doesn't show up in his autobiography. So it's, it's interesting to have the side by side as you put it, just the accounts and

Starting point is 00:57:03 the readers can make up their own minds, right? Yeah. So, Mary, congratulations on this book. It's such a triumph. I really enjoyed it. And I've really enjoyed talking with you today. Before I let you go, where can the audience learn more about you and your podcast and your book and any other resources you want to share? Yeah. I'm on Planet Money, which is a twice weekly economics podcast from NPR and I'm on Twitter at MDC and I have a very periodic substack. That's off the run. Substack.com. Yeah.

Starting point is 00:57:36 I think that's, I'm on LinkedIn. Fantastic. Well, thank you so much again, Mary. I've really enjoyed it. And thank you. This has been really fun. Thank you. All right, everybody.

Starting point is 00:57:47 I hope you enjoyed this one. That's all we have for you this week. If you're loving the show, please don't forget to follow us on your favorite podcast app and maybe even leave us a review. You can also find me on Twitter at Trey Lockerbie, and be sure to check out all of the resources and other shows we have for you on TIP. And with that, we'll see you again next time. Thank you for listening to TIP.

Starting point is 00:58:08 Make sure to subscribe to Millennial Investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvesterspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP451: The Story of Bill Gross aka The Bond King W/ Mary Childs

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