Bill Gross Interview: ZIRP Causes Too Much Debt, Too Many Zombies, Not Much Trickle-Down, Busted Pensions

In an Bloomberg Television interview Bill Gross of Janus Capital spoke with Bloomberg Television's Trish Regan about the outlook for Federal Reserve policy, the U.S. economy and his objectives at Janus Capital.

Key Quotes

  • "Not even thin gruel is being offered to our modern-day Oliver Twist investors. You have to pay to come to the dinner table and then sit there staring at an empty plate."
  • "The interest rate can't be raised substantially even over the next two to three years."
  • "The US has escaped the liquidity trap that euroland and Japan are in. But, not necessarily for all time."
  • "[Low interest rates] keeps zombie corporations alive because they can borrow at 3 and 4 percent, as opposed to the 8 or 9 percent. It destroys business models. It's destroying the pension industry and in the insurance industry."
  • "ultimately, [low interest rates] destroy the capitalistic model at the margin. Instead of investing in the real economy, [corporations] can now simply borrow at close to 0 percent and buy their own stocks, which yield 2 or 3 percent on a dividend basis and provide a return of 6 or 7 percent on an earnings to price ratio basis."

Transcript

TRISH REGAN: Well, fresh off the presses, famed bond investor Bill Gross' monthly investment outlook, where he says the reality of today is that -- and I quote, "Not even thin gruel is being offered to our modern-day Oliver Twist investors. You have to pay to come to the dinner table and then sit there staring at an empty plate."

In other words, you're paying Germany, for example, to hold your money right now. Well, what does this mean for the health of the investing world? What does it mean for the Fed? What does it mean for pension plans? What does it mean for you?

BILL GROSS: Thank you, Trish.

REGAN: If you can work Dickens into an investment letter, along with a few references to the Westminster Dog Show, my hat goes off to you.

GROSS: Here's another one. You know, back in the Depression, in the 1930s, humorous Will Rogers said that he wasn't so much concerned about the return on his money, but the return of his money. And in today's financial markets, we're, as you mentioned, $2 trillion of euroland paper trades at negative yields, some as much as minus 75 basis points, I think Will Rogers would have to be concerned about both.

A negative yield assures the investor that not only is the return on his money or her money unsatisfactory, but the return of her money will be left (INAUDIBLE) paid.

REGAN: You know, it's pretty crazy. And you've got investors, Bill, out there that are getting somewhat desperate, right, for yield, because, as you rightly point out, there's just none out there.

So theoretically, let me ask you, could that change? Should it change?

Do we anticipate that Yellen will raise rates in June?

GROSS: Well, I think that's part of the problem, although it's one that can't be easily diagnosed in terms of historical models. And to the extent that the interest rates at -- at zero bound in the United States, you know, promote higher stock prices, higher bond prices, you know, some of that trickles down to the real economy and, you know, promotes growth.

But to be fair, not much has.

You know, what has been promoted has been, you know, potential bubbles in stock markets and in bond markets. And I think the Fed is willing, at this point, to at least acknowledge that by raising interest rates 25 basis points in June.

I also think -- and this is important, Trish, that the interest rate can't be raised substantially even over the next two to three years. I mean the market is anticipating the -- a 2 percent Fed funds rate in 2018, late 2018. And I -- I think the reason that they continue is that the U.S. economy and the global economy to which the U.S. dollar and the U.S. interest rate basically serves, is -- is too levered, too highly levered. There's too much debt and ultimately 2 percent is probably the top in terms of this Fed cycle.

REGAN: Let me ask you, though, how, Bill, does Yellen and company get off of the zero interest rate policy at a time when the U.S. dollar is showing so much strength?

You talk about, you know, the currency war, effectively, that we're seeing right now, but nobody wants to call it that.

But how can the Fed move when the dollar has already rallied as much as it has against other currencies?

GROSS: Well, I think that's a really good point and -- and I agree with it. Obviously, I put that it my investment outlook.

You know what, a stronger dollar does promote, you know, some negatives. It promotes not only lower exports and -- and lower growth in terms of manufacturing, but it promotes a -- an infusion of deflation as opposed to inflation, which is exactly opposite the -- what the Fed wants to do.

Today's number, Trish, the Personal Consumption Index, you know, on a year-over-year basis, was at 1.1 percent and going lower. And their target is 2 percent.

So ultimately, that's, again, one of the reasons why, you know, if they get off the dime in June or if they get off the dime in September, that they basically have to go very slowly, because ultimately, a stronger dollar promotes lower growth in the United States as opposed to higher growth.

REGAN: You mentioned this lack of inflation, 1.1 percent versus what they would like to see, 2 percent.

Do we need to be worried about deflation?

Clearly, it's a concern overseas.

Is that a reality that we could be facing?

GROSS: Well, I don't think so in the United States. I mean for the most part, our -- our inflation indexes, outside of oil and outside of food prices, you know, basically reflect health care expenses and wages in the United States, which are going up by 2 percent themselves.

So the United States, it appears, has escaped this, you know, this trap, this liquidity trap that euroland and Japan are in. But, you know, not necessarily for all time.

And so do we have to be worried about it now?

No. But I think if the Fed truly wants to get to a 2 percent inflation rate, which, by the way, is the reason why they need to get there, is that in an ensuing recession or a slowdown, they need some room to lower rates.

And so, you know, if the Fed eventually gets to 2 percent inflation, then that's probably the sweet spot for Janet Yellen and the Fed.

REGAN: You say eventually 2 percent.

I mean how long is it going to take for that to unfold?

Do you think these are going to be very slow moves, Bill?

GROSS: I do. You know, I basically think, you know, 50 basis points a year. Right now, the forward market, as I mentioned, is anticipating a 2 percent Fed funds rate in late 2018.So that's three and a half years.

Whether or not that's the -- the proper path, the proper -- the slope and in terms of a -- a forward yield curve, no one really knows.But it gets back to, you know, what I've talked about in April of last year, you know, the new neutral rate, the new policy rate, which ultimately, in my view, has to be much lower than historically because of high leverage and because of demographic influences that basically promote lower structural growth.

REGAN: You know, Bill, Janet Yellen has indicated that she's going to stay patient. But here we are, what, six years into (INAUDIBLE). We've had multiple rounds of QE. And all we've got is this anemic growth.

In your view, has the Fed been too patient?

I mean do you worry at all that its policies have actually had the unintended consequence of causing people and companies to delay purchases because they know money is going to be cheap for the foreseeable future?

GROSS: Yes, I -- I think they went too far, Trish, and that's, you know, a -- a subjective assessment of history, I guess. But a zero percent interest rate, yes, induces positives in terms of higher bond prices and stock prices, but also some negatives.

You know, it keeps zombie corporations alive because they can borrow at 3 and 4 percent, as opposed to the 8 or 9 percent. It destroys business models. It's destroying the pension industry and in the insurance industry because, you know, basically, their liabilities can't be -- they can't be provided for by very low interest rates.

And ultimately, I think it destroys, you know, the capitalistic model at the margin. You talk about stocks and cheap money, they're basically corporations, instead of investing in the real economy, can now simply borrow at, you know, close to 0 percent and buy their own stocks, which yield 2 or 3 percent on a dividend basis and, you know, provide a return of 6 or 7 percent on an earnings to price ratio basis.

So, you know, there are a lot of negatives in terms of 0 bound interest rates. And I think one of the reasons why the Fed will move is to -- to sort of gradually move away from those negatives.

REGAN: Yes, because it's given birth to all this financial engineering, but you wonder these days whether investors are really valuing assets for what they're worth.

Let me -- let me ask you, with that in mind, do you ever worry that the Fed is just, perhaps, too forthcoming in its information, as well?

I mean they seem to want to tell us everything and anything that they're going to do.

And I just wonder whether investors have become overly reliant on that telegraphing from the Fed.

I mean do you ever long for the days when you actually had to wait and check the markets to see what the Fed had done, back before it was as transparent as it is now?

GROSS: Well, I don't long for that day, because it was -- it was very uncertain and you waited on a Thursday afternoon to -- or morning to see whether or not the Fed was, you know, changing its interest rates on a weekly basis.

But I think the Fed is moving away a little bit from this -- from this certainty, from Draghi's whatever it takes, from, you know, basically alerting the market as to, you know, how high interest rates are going to go and what level they should be at.

So, yes, I think that's a reflection of Stanley Fischer. He basically wants to move away from the certainty model.

We'll see a little of that movement. But I'd like at least to know a little bit about what the Fed is thinking in terms of, you know, new neutral interest rates, where they think, you know, the neutral interest rate should be relative to the Taylor Rule, which they used prior to the recession, to the Great Recession in 2008 and '09.

REGAN: You know, Bill, let me ask you, this is the first time you and I have talked on air here since you made your move to Janus. You were a founder of PIMCO. Your name was synonymous with that firm.

What's it like being some place new after having spent your career -- your entire career -- elsewhere (INAUDIBLE)?

GROSS: Well, it's certainly different. You know, PIMCO had 2,500 people. Janus Newport, you know, basically has seven or eight, although Janus Denver a much larger location and a much larger corporation, you know, has thousands of people, too.

And it's a little bit different. There's more flexibility, basically, in what I'm doing, the -- the unconstrained funds that are run on a separate account basis and the mutual funds. There's a lot more flexibility. There's the ability to move as opposed to not move so much, as was the case in PIMCO.

So, you know, a little bit smaller, certainly, but a little bit more flexible and I enjoy that.

REGAN: You know, Bill, a lot of people would have said, look, I don't need to do this, I've got plenty of money, I've had plenty of success.

Why keep going?

Why get up and go to the office every day and do what you do at this point?

GROSS:Well, part of it, you know, my wife said she married me for better or worse, but not for lunch. And so...
(LAUGHTER) so lunchtime is spent in Newport Beach. But, also, you know, I wanted to show clients and to show the world, to the extent that they're interested, you know, that I can continue to produce a track record like I did at PIMCO.

You know, I won't have as much time. I won't have five to 10 to 15 years of leeway like I had at PIMCO in terms of proving that. But certainly for the next two, three or four years. You know, I'm a very competitive person and I like to post numbers that are better than the market and better than the competition. So it's a combination of both of those.

REGAN: Well, my congrats to you. Bill Gross, great to see you. Hope to see you again soon.

GROSS: Thank you, Trish.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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