Charlie Rose Talks to Pimco's Bill Gross
What have you learned in the past year, and has your confidence been shaken?
What has the past few months and 2011 and 2008 reinforced over and over again? It simply suggested that there’s lots of leverage out there, and that when you have a change in expectations, like we had with Fed tapering or the change in China’s growth rate, this leverage can unwind rather quickly. In the past five years the unwinding has always been met by check writing by the central bank. What we’ve learned over the past three months is that this mother’s milk of protection may not always be available, and it’s up to the market to absorb its own leverage.
Where are you seeing the best values?
They’re in intermediate treasuries. The treasury market—especially the 5- to 10-year period—was the sector affected so much by the talk of tapering. And now, with those yields higher by 100 basis points, there’s a decent chance to normalize. An investor wants to focus on higher quality. With the expectation that we’re looking at two successive quarters of 1 percent GDP growth, this is not a market for taking chances. And so, 5- to 10-year treasuries and perhaps 30-year agency mortgages at 3.5 to 4 percent.
Why isn’t GDP growth going higher?
Pimco explains it from a structural standpoint. There are structural headwinds from very little wage growth for most of the employed U.S. workers. It has to do with technology, which leads to what they call a race against the machine and losses of jobs. It refers to deleveraging, and not only U.S. households and businesses but even sovereign entities are reducing debt. In all of those cases—which the Fed doesn’t appreciate, in my opinion—there are significant headwinds against what used to be the standard 3 to 4 percent growth rate. This is our new normal in spades. We’re going to have to see 3 to 4 percent growth for a good 12 months before the Fed eases off the accelerator. And that’s a pretty hard job.
Are you surprised by the low inflation?
We are. And I think the Fed is surprised. But there are several explanations, at least in the short term. First of all, globalization has been important. And there’s no doubt that China’s slowing growth rate has had an influence in terms of commodity prices. There’s no doubt, from the standpoint of growth—what economists explain as an output gap—that when you have a significantly high unemployment rate, wages simply don’t go up very much, because there’s not a demand for labor. Obviously, in terms of housing prices and in terms of stock prices, we’ve got good inflation going. In terms of the CPI, it’s lower than expected and probably lower than it’s going to be over the next 6 to 12 months.
Is it fair to say you’ve had trouble building an equities business?
Well, we didn’t want to build one for a long time, and that was our mistake. Over the past few years, you know, we’ve grown reasonable. It’s fair to say that we have high hopes and that at some point we can build an equity base almost as strong as our fixed-income base. Now that’s a long way off because—obviously—$2 trillion is a high hurdle.
Has the market already factored in that Ben Bernanke will leave the Fed soon?
I think your interview [with President Obama] was an important signal that Chairman Bernanke would probably prefer to be a Princeton professor, as opposed to Fed chairman, in 2014. The question becomes, Who replaces him? And there’s a betting line—a number of candidates that the markets assess in terms of their similarity to Bernanke as a confirmed easy-money chairman. I think it matters, and we’ll know in the next month or two who might be the chairman’s replacement.
If the 30-year bond bull market is over, as you’ve said, will there be a shift away from bond funds?
Bonds as an asset class will always be needed, and not just by insurance companies and pension funds but by aging boomers. To think that the past two months in terms of bond fund performance—it’s down only 3 percent in terms of the overall indices—spells the death of an asset class is doing it a terrible injustice.