PIMCO, JANUS and Parabolic Structures

It is extremely ironic that Bill Gross is going to Janus.  In the DOT.COM bubble Janus was the poster child of Technology Growth stocks on steroids.  The assets of the company went from $50 billion in 1996 to $250 billion in 1999.  A 5 bagger in asset growth in 3 years.  Pimco’s asset growth went from $700 billion in 2008 to about $2 trillion in 2012.  Almost a 3 bagger in  asset growth in 4 years.  Both of their asset growth graphs look like the following:

This is what is known as a parabolic structure.  It is where price and time accelerate and the trend eventually has a blow off top and then price and time begin to commence down the other side of the slope and retrace much of the gains from the beginning of the move.    Janus lost about 50% of their assets by the time 2002 rolled around.  PIMCO is going to lose about $1 trillion in AUM.  Despite Bill’s departure the demise of PIMCO was already baked into the cake from their parabolic growth phase.  All parabolic structures eventually collapse and retrace their gains.  Bill’s departure will only accelerate the outflows in time hence I predict that PIMCO loses $1 trillion AUM in 1.5 to 2 years.  Janus and now PIMCO were the victims of momentum chasing top ticking asset allocators.  This represented 2x growth in assets over the last year or two for both firms in the blow off top phase.  The money comes in so fast that both firms ended up making the markets in their respective asset classes.  Performance is boosted by the self fulfilling prophecy of buying your book every day.  And then one day the flows stop.  They exhaust themselves.  Then performance begins to falter and the hot money flows begin to reverse.  What was once a virtuous cycle becomes a vicious cycle.  It does not help that the street sticks their proboscis into the victim and sucks as much blood out as they can.  The momentum money is really the problem because it is dumb and impatient.  They can’t handle under performance.  They run and they run very fast.  The very success of both these firms is their eventual undoing.

The problem is only exacerbated by finger pointing and personnel changes which cause more outflows.  My advice to PIMCO would be to not blame anyone for performance due to the outflows and leave the team you have on the field for the next several years.

Why should equity investors give a damn about this:

1) Liquidity is a disaster in fixed income right now.  As PIMCO liquidates it may cause dislocations in credit markets which will have knock on effects in equities and preferred stocks.

2) We are likely peaking for the credit cycle which will make the PIMCO liquidation very sloppy and disruptive to both already stressed debt and equity markets.  If you own levered companies that rely on the credit markets now would be a good time to blow them out of your portfolio.

3) The S&P, DOW, Nasdaq have all gone parabolic due to QE1, 2 and 3 which is ending in four weeks.  All parabolic structures end badly.

Bottom Line:  The largest fixed income asset manager in the world is going to liquidate $1 trillion over the next 18 to 24 months right as the street has all but turned out the lights on their fixed income desks due to Dodd/Frank.  In addition credit markets have likely peaked.  If you don’t think equities will be affected you are sorely mistaken.

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