Some cogent points from Bill Gross.
A Look Ahead: Where is Capitalism Going?
PIMCO Founder and CIO Bill Gross addressed the graduating MBA class at Duke University's Fuqua School of Business on May 8, 2004. Below is his commencement speech.
Thank you, Dean Breeden for that generous and perhaps too kind introduction. Faculty, distinguished guests, family, and finally…members of the MBA Class of 2004. To this last group I say congratulations - your struggle to the doorstep of our capitalistic jungle has been rewarded. I envy your enthusiasm, your vigor, your youth, and even some of your irrational exuberance that applies not just to markets, but to life as well. They are all essential ingredients in a successful trek through any jungle.
I envy too your presence here today at your very own graduation ceremony. Yours truly had the rather odd distinction of missing both of my college celebrations. At UCLA’s Anderson, where I earned my MBA, I had collected so many on-campus parking tickets that I felt the police would use the ceremony as a sting operation to balance the Anderson budget for fiscal ’71. The gala at Duke’s football field in 1966 failed to mention my name because I had hopped a freight train in downtown Durham shortly after my last final, with the intention of heading West to Las Vegas and making my fortune at the blackjack table as one of the game's first card counters. I must report that I got an A+ in blackjack, but very few of the same on my ultimate four-year transcript from Duke. Ah, wasted opportunities.
I am somewhat chary about giving advice, as is the standard protocol in a speech such as this. The assumption is that I know something you don’t. Perhaps. Age does have some benefits if only in knowing what not to do if given a second chance. Still, I’m well aware that each of you to the woman and man have more brain cells than I do and that you have already had at least several years of experience in the jungle already. It is I, therefore, that am at a disadvantage, and if not now, then in a decade’s time, when I will be listening to you, not vice versa. Still, for this Saturday morning, it is my 15 minutes at the Cameron Stage Podium.
Being here is reminiscent of the time just three months ago when my wife Sue and hopefully future Blue Devil Son Nick, who are again with me today, ventured back for the Duke/Carolina game. At half time we were introduced to Donald Trump of real estate renown and Apprentice fame and it struck me later on that many of you are in a similar environment now as Bill and Amy and Kwame were during the filming of the show. Not that you haven’t found your future jobs, and that you have to kiss a big shot's butt like they did in order to win the competition. As we all know, Fuqua graduates are beyond butt kissing! What I mean is that you’re still in the process of learning how your skills and personality mesh with the reality of the business world. Experience of course is the best teacher, but permit me during my 15 minutes to give you a few suggestions.
Now I think we all know what makes for a good Apprentice and we don’t need a reality show to point it out. Intelligence, a drive to succeed, communication skills, managerial moxie, and of course ethical standards (and the willpower to stand your ground when upholding them) are all key elements for a successful career in the business world. And you don’t even have to be as good looking as Bill or Amy, thank God. Look at me for instance, and I did pretty well. And look at the Trump Meister’s hair - if that can pass muster, then any "Do" will do.
But beyond these qualities I would mention two others as perhaps most critical in your future pursuits. First of all to use a playground expression, you must have the "Love." Not a love of hoops or the gridiron, but a fixation, an obsession, an exultation in what you do each and every day. You must find not only your niche, but also the niche through which you can symbiotically nurture your business enterprise and yourself at the same instant. This is not an easy task and I am not naïve enough to believe that all of you or even most of you can do it. There was, after all, only one Apprentice. The true winners from this group here today, however, will be those that can marry their education and people skills with their passion. It is a dynamite combination. If you haven’t already, find something eventually that makes you want to get up every morning and go in - not for the check and what it can buy, but for the LOVE. You should be working in a TGIM environment - Thank God It’s Monday. That alone will make you a life’s success in the businessworld.
If, in addition, you want to climb the ladder towards the top, let me recommend one additional thing. You must be a risk-taker. How much and how often depends on you and your business environment and associates, but faint heart never wins a fair maiden or a handsome prince for that matter. You must take some chances. My success at PIMCO in large part has come from the fact that bond people are a cautious lot and rightly so. Preserve and protect is our motto much like the NYPD and NYFD. The opportunity that I recognized at PIMCO, however, was that the same industry-wide caution that prevailed in bond portfolio management was being carried over onto its business playing field. Bond people were unwilling to play the schizophrenic role of cautious investor and aggressive entrepreneur at the same time. I found that by innovating with the use of conservative investments, such as mortgage pass-throughs in 1975, financial futures in 1981, and global bonds in 1987, that PIMCO had a chance to leapfrog the competition. I and PIMCO took some chances. We took the chance of being thrown into the same perception pot as pork belly traders when we talked about bond futures. We took the chance that clients would think I had an accent as I explained the advantages of a German Bund instead of a Treasury Bond. But it worked - we stood out, we outperformed, we and our clients thrived.
In sum, to win at the ultimate business reality show, you can do no better than to love what you do and as you’re doing it to slough or molt your everyday business skin by taking measured risks and calculated chances. Strange words from a bond guy, huh?
Now a word or two about the future world in which you will hopefully be joyously molting. While acknowledging ahead of time that I am a glass half empty guy when it comes to any economic forecast, let me at least acknowledge that capitalism in the future will be a going enterprise. That said, I believe the question of the day to be not "Is capitalism a going enterprise?" but "Where is capitalism going?" And since the United States is the role model, indeed it’s at the center of the entire process, a brief analysis should begin and end with a discussion of the U.S. of A. My conclusion first. I am not optimistic. Over a span of several decades, America has morphed not just from an industrial economy, to a service based one as is well known, but then additionally to a finance-based economy dependent on the production of paper and the innovation of financial instruments for its well being. Over the past 20 years our total private and government debt as a percentage of GDP has skyrocketed to historic levels, even beyond those reached during the depressionary 1930s. While some would claim that the servicing of this debt remains under control, when and if interest rates do go up, the servicing costs of an accelerating debt economy eventually bite the hand of its master. The result will likely be slower economic growth and the potential for renewed bubble popping whether it be stocks, bonds, or housing prices.
Similarly, in an environment in which profits, business success, and jobs themselves have been driven in substantial part by a 20-year trend of lower interest rates, an observer must make the unmistakable conclusion that we have come to the end of the road. One percent short rates have nowhere to go but up, (that is for certain) and nearly as certain is a similar conclusion for interest rates further out along the yield curve. Joining this near slam dunk forecast with the observation of historically high leverage in our finance-based economy leads one to conclude that the bloom of capitalism’s rose will surely come off over the next few years. We will all pay in some form or fashion, whether it be via higher inflation, subdued returns on stocks and bonds, a depreciating dollar, or a loss of competitive influence relative to our capitalistic competitors.
This, of course, does not even reflect the enormous demographic liabilities represented by boomers who will demand social security and healthcare benefits at the expense of your generation. In just four years, the first of around 77 million baby boomers will start collecting social security benefits. In seven years they will start collecting Medicare. By estimates generated by a study commissioned by ex-Secretary of the Treasury Paul O’Neill, the present value shortfall of government social security, healthcare, and debt service obligations amounts to $45 trillion, or more than four years of this country’s annual output. Your generation is being handed a bill that can likely be paid only by higher inflation and dampened consumption over the next several decades. Since at 60, I am not technically a boomer, I owe you no apologies, but you certainly have my condolences.
So, if true, what to do? Become Chicken Little like and refuse to work in the open air? Of course not. I am arguing, though, for realism and for the possibility that standards of living may not grow at the same pace as they have for the past half century. My forecast and personal advice to you argues for an entrepreneurial spirit full of the Love, spiced with timely risk taking, but cautioning even those that succeed to set aside reserves for increasingly stormy weather. Be a bond person like me - take business chances but invest the fruits of your labor conservatively. And unlike me make sure your kids, just like yourselves, will be attending their own graduation ceremonies. After all, absent a scholarship, it’s likely that you’ll be footing the bill for that too, and you’ll deserve a payback.
Thank you for listening, the best of good fortune to all of you in the future. And I hope that you’ll be starring as chairperson of your own reality show sometime soon. Even if you don’t, remember as John Lennon wrote, that "we all shine on, like the moon and the stars and the sun." - two into one, no separation.
