Taming the Beast: Wall Street's Imperfect Answers to Making Money

Summary

• Pimco’s Bill Gross revolutionized bonds with his insight that different classes of them behave differently. So, to great success, he has dodged in and out of the different types. Since he started in the 1970s, a whole new host of bond instruments came onto the scene.
• Still, inflation is the great enemy of bonds and has hurt them badly. Once, aside from wartime, inflation was negligible. Then, in the 1970s, this changed. Inflation today persists, albeit in muted form, and periodically threatens to run wild again.
• Poor credit quality is bonds’ second greatest enemy. Given the failings of ratings agencies, credit weaknesses aren’t always apparent. The postwar explosion of credit has made discerning quality a tougher job. The world saw that, to its dismay, in the 2008 crisis.
• Bonds are not easy, or cheap, to buy, especially for an individual investor. But new tools now exist to evaluate and purchase them.
• The vast issuance of Treasury bonds to combat the great recession has made Gross uneasy—for fear that an oversupply would harm their prices eventually.
• The increasing complexity of bonds has made them both better opportunities and more dangerous. Junk bonds, for instance, are a promising, if nettlesome instrument. Popularized by Michael Milken, they fueled the 1980s corporate raiders, then went south in the early 1990s. Gross later misjudged them, and got burned. But he learned to adjust.