While he’s waiting for action from the White House on the US housing crisis, Pimco boss Bill Gross has turned his attention to another ‘Dubya’ – the wizards of financial complexity, or rather the alarming game of Where’s Waldo they have unleashed across the world’s markets. As his September letter to clients explains:
During times of market turmoil it helps to simplify and get basic — explain things to a public and even yourself in terms of what can be easily understood. Goodness knows it’s not a piece of cake for anyone over 40 these days to understand the maze of financial structures that now appear to be unwinding. They were created by youthful financial engineers trained to exploit cheap money and leverage who showed no fear and who have, until the last few weeks, never known the sting of the market’s lash. They are wizards of complexity. I, however, having just turned 63, am a professor of simplicity.
Gross’ “simple” approach tells him that while analysts can guesstimate how many Waldos – bad loans and defaulting subprime paper — might emerge over the next few years, no one really knows where they are hidden.
When no one really knows where and how many Waldos there are, the trust breaks down, and money is figuratively stuffed in Wall Street and London mattresses as opposed to extended into the increasingly desperate hands of hedge funds and similarly levered financial conduits. These structures in turn are experiencing runs from depositors and lenders exposed to asset price declines of unexpected proportions. In such an environment, markets become incredibly volatile as more and more financial institutions reach their risk limits at the same time. Waldo morphs and becomes a man with a thousand faces. All assets with the exception of U.S. Treasuries look suspiciously like every other. They’re all Waldos now.