Gross is to be criticized not merely for making a trade that proved to be a huge loser, but because his model of how the world works is/was much less-good than others’(like Krugman’s), which he dismissed in favor of his own pet-theory.

Invest with Gross and you’re long “the conventional wisdom” — as if that were something worth paying for instead of reading about in the pages of Barrons Roundtable & elsewhere.

I don’t understand why bloggers & the MSM adore Bill Gross when I think he’s a bully who narrowly eluded serious reputational & criminal charges:

http://www.bloomberg.com/news/2010-12-30  /pimco-to-pay-92-million-to-settle-futu res-lawsuit.html

Gross’ dasein (his way of ‘being in the world’) will eventually undo him: he’ll be spectacularly wrong again and/or unable to beat the next criminal rap. His mentalité is not worth paying a premium for. Sell BG.

Gross was in effect making a bet against what a particular model predicted was going to happen. There are two things Gross could have done here: admitted he and his team didn’t understand the macro situation properly, or simply state that his predicted outcome _could_ have plausibly happened due to irrationality, madness, or whatever and he just lost the bet this time. Gross is rightly introspective but it doesn’t mean Krugman was “right”, only that the Hicks model — amongst others — worked rather well ex post and Gross should ask his advisory team about that.

Gross didn’t screw this up because he didn’t understand the economics or how bonds trade. He gets them just fine. (And jesse1, Krugman’s right that McCulley WAS a big loss, but Gross has got more than a few insanely sharp macro guys at his disposal…)

The “problem” was that, whether you think it foolish or not, Gross worried that the models and historical precedent would be superceded by unusual market psychology, and that…this time would be different. I’m not going to try and describe that in fine detail, but I think most of you probably know what I mean (?)

Too bad… Because as Finster stated, the bond market right now is irrational, and being driven by forces that are not concerned with investment returns.

To me this is akin to observing in 1998-1999 that the tech stocks were irrationally valued. If you had gone short on the Nasdaq in January 1999 at 2500, you could have made a heck of a lot of money by the end of 2002 — but you would have faced massive margin calls in early 2000 as the index topped 5000.

Comparing your investment returns to the market is not always wise. It is unrealistic to expect to participate in a frothy rally yet still escape the bursting of the bubble unscathed. Better to sit out both sides of that market.

It is only a mistake if Gross reverses himself now.

It’s a bond fund and will be measured relative to other bond funds. He can produce guidance with those optics but people don’t invest with Gross for his knowledge of small cap mining stocks.

The guy is paid to know the bond market and he is ruing his recent judgement. That shows incredible gall but I don’t yet see what he’s doing about it. Perhaps he’s off to Princeton for tea and crumpets?

…which is why sane investors should shun bonds at this point.

Does Gross have the option of moving into other asset classes? Dividend stocks have done pretty well recently.

I think Gross mistake falls into the ‘market can stay irrational longer than you can remain solvent’ category. When tradebalance oriented players like the PBoC and the Fed as extended arm of the US are in the market with unlimited funds, then price discovery will not work as expected. These players are not interested in a return on their investment and yet are the biggest buyers standing right next to you at any auction. Short term bidding up their quary or buying ahead of them may make sense. Long term you will end up with their intended return. Zero or negative. That is the stated mission for your competitors.

Further, Krugman has been usually right (i.e. on the basis of historical evidence, not theoretical opinion). It has been observed that one of the most effective ways to run a macro hedgefund this last few years has been simply to read Krugman’s column, and then do what it suggests. If Paul were running a macro hedge fund he would have delivered high and non- volatile profits these last few years, and he has a coherent theory why.

It appears that part of what motivated Gross’ bad bet was a lack of understanding of how interest rates work in a liquidity trap. Gross didn’t make a bad guess in an uncertain environment; his company relied on bad theory, despite the availability of a good one that has done quite well over the last two to three years.

However, in 2011 the Total Return Fund has done poorly even compared with corporate bonds. Year-to-date the Total Return Fund is up 3.1%. The iShares Barclays Intermediate Credit Bond ETF (CIU), which has a similar duration as the Total Return Fund, is up 5.2% for the year.

I agree nine months is not a convincing amount of data. I still wonder whether this is the beginning of the end for Bill Gross’s seemingly unassailable reputation, à la Bill Miller.

However, in 2011 the Total Return Fund has done poorly even compared with corporate bonds. Year-to-date the Total Return Fund is up 3.1%. The iShares Barclays Intermediate Credit Bond ETF (CIU), which has a similar duration as the Total Return Fund, is up 5.2% for the year.

I agree nine months is not a convincing amount of data. I still wonder whether this is the beginning of the end for Bill Gross’s seemingly unassailable reputation, à la Bill Miller.

Admitting his mistake and being willing to learn from it rather than doubling down is a strength of Gross’ that cannot be overstated. Tens of thousands of money manager and trader collapses fall into the “not willing to admit fault / learn from mistakes” category.