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Kudlow’s Money Politics

Larry Kudlow’s daily web log of matters political and financial.

An Interview with Pimco’s Bill Gross



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Last night I had the pleasure of speaking with Pimco’s Bill Gross, one of America’s most famed investors, on CNBC’s Kudlow Report. Mr. Gross has generated big buzz over his admission that betting against U.S. debt was a mistake.

KUDLOW: And most important, at the top, PIMCO’s Bill Gross, one of America’s most famous and successful investors. He’s generating big buzz today with his superimportant and much talked about interview in The Wall Street Journal and elsewhere. Mr. Gross says he has, quote, “lost sleep,” end quote, over a bad bet on Treasury rates. He acknowledged that selling all his funds, Treasury holdings last February was a, quote, “mistake.” And he went on to say, and I quote, “We try to be very intellectually honest and honest with the public,” end quote.

All right, for my part, I just want to say to my old friend Bill Gross that I have nothing but admiration for his taking ownership and admitting a mistake. We all make them. And by the way, he’s setting a very good example for the rest of us. That’s just my take.

Anyway, it is always a real pleasure, especially tonight, to welcome back to the show a special Kudlow exclusive, Bill Gross. He’s founder and co-chief investment officer of PIMCO.

All right, Bill. You admit to a big Treasury bond miss. Rates this year went way down, not up. Can you tell us, please, why the interviews right now and what message are you sending?

GROSS: Well, I, you know, I think at PIMCO we always try and be open with the press and the public. I mean, isn’t that what voters want from their politicians? Mohamed El-Erian, our CEO, write several op-eds a week. I tweet daily and publish a monthly investment outlook, which came out this morning, by the way. So we try to give an honest answer to an honest question.

#more#And by the way, in terms of the interview with the Journal and with the FT, what I said was that–something that I think all bond and–bond managers would say if they were honest. They would say, `Wish I’d own more Treasuries.’ To say otherwise would be to say something like you’d wished you bet on the Miami Heat instead of the Dallas Mavericks. I mean, it’s obvious who won, right?

KUDLOW: Obviously wrong. All right, well, anyway, you’re very outspoken and I respect you for it.

Listen, you were here–I looked back–June 8th we spoke. So what’s that? Three months ago. At that point, Bill, you repeated the call to get out of bonds. Now the bonds rally more or less from 3 percent to 2 percent, today they’re at 2.20. What went wrong? How do you assess what went wrong with your bond call?

GROSS: Well, first of all, I didn’t say get out of bonds. I said get out of Treasuries and move…

KUDLOW: Treasuries.

GROSS: …and move into Canadian bonds and to Australian bonds and other alternatives. What went wrong in terms of the Treasury call from 3 percent down to close to 2 percent? Well, the economy slowed down dramatically. We had a freeze-up, so to speak, in terms of Washington with the politicians and policy options. It was recognized that fiscal stimulation, you know, certainly wasn’t going to be something undertaken for the next six to 12 months, if at all. It was recognized that the Fed was running out of policy options and so the economy was slowing down and was–seemed to be slowing almost permanently in terms of a 0 to 2 percent growth category.

KUDLOW: Have you basically lost confidence in the economy? You mention, I think, in the FT article, Bill, you call it, quote, “a new normal minus.” Have you lost all confidence in our capacity to grow the economy?

GROSS: Well, no. You know, but the problem I have with the free market capitalism, Larry, which is your philosophy, is not with the concept. In fact, you know, PIMCO is an epitome of its historical thrust. We’re very successful and because of free market capitalism. But the problem I have is with its apparent exhaustion in the face of three equally dynamic economic influences. Let me mention them briefly.

First of all globalization has weakened American and developed economies by syphoning off investment and, more importantly, jobs to emerging nations at 1/10th the wage cost. Take China, for example, Free market capitalism, in other words, is working for China, it’s working for Brazil, but it’s not working for America or Euroland.

Secondly and just briefly, free market capitalism depends on a balanced market between labor and capital. And clearly we’re reaching a point where impoverished Main Street cannot afford to buy the goods that capitalism so magnificently produces. So I think there’s an exhaustion here in terms of free market capitalism that has worked so well for 20 to 30 to 40, 50 years, but now is reaching structural impediments that prevent, you know, strong growth that we’re used to.

KUDLOW: I want to come back to that towards the back end, Bill, but I just want to narrow down for a moment. I want to drill down. According to the reports, you are buying Treasuries. You’re accumulating Treasuries. You have a net positive exposure for the first time. Let me ask you, what if the bond–the Treasury market has discounted a recession that doesn’t happen? Are you chasing the market? Is there a risk that the rate hikes that you foresaw this year might still come to pass if the economy surprises on the upside?

GROSS: Well, that’s possible. We read in the Fed minutes today of the last meeting that the–that the two-year 0 percent or 25 basis point Fed funds level is conditional, and we know that there are hawks, that there are doves, and that should the economy recover to a 2 to 3 to 4 percent rate, that, you know, perhaps inflation looms larger in terms of a threat. So anything is possible. What I would say at the moment, though, is since the economy is really moving closer to the zero level, since inflation probably will come down gradually, you know, the Fed is at 0 percent for the next two years and perhaps even longer than that, and that determines significantly the level of Treasury rates in five-year space, 10-year space and even 30-year space.

KUDLOW: But, you know, it’s interesting. We had Byron Wein on, a distinguished investment guru on his own part. He predicted the S&P would rally to 1400. OK? It’s just over 1200 today, as you know, If that sort of thing happened with better corporate profits, even consumer sentiment, which tanked today but people are still buying washing machines and cars, retail sales are holding up. If you had a big rally in stocks, the risk trade is back on. That’ll come out of Treasury bonds, and those could–that could drive those bond rates back to 3 percent. You’re buying bonds now. Are you worried that there’s a potential for whiplash?

GROSS: Well, I’m suggesting that the probability–that the high probability is for interest rates to stay low for a long time. I mean, Byron Wein basically is a a mean reversion cyclical type of–type of analyst. What we’re suggesting is that there are structural impediments to the US economy to develop market economies that will prevent growth in the 3 to 4 percent category.

Let me ask you, in terms of consumerism, in terms of the US consumer, if unemployment stays at 9 percent plus and if wage gains–if real wage gains are nonexistent, then were is the spending power coming from? It has to come from the consumer as opposed to businesses. Businesses are waiting on the consumer. The consumer is waiting on business. We have what we call a liquidity trap. So what we’re suggesting is not a reversion to the mean, not a cyclical upthrust, but basically a structural impediment that produces growth in the 0 to 2 percent category for a long time. Not just in the US, but in Euroland, as well.

KUDLOW: All right. So let me–have you had any trouble with your fund–I guess the Total Return Fund, because of the bond miss this year, rates went down instead of up? Have people withdrawn from the fund? What are your customers saying right now?

GROSS: We have a $245 billion customer base. You know, that customer base is growing. We just got a billion dollar contribution from a large corporation this week. There’s been no lack of confidence. You know, to suggest that a six to seven month timeframe for the PIMCO Total Return Fund, which has produced results for the last 20, 30 or 35 years, is, you know, a stretch of the imagination. We continue to produce fine results for our clients.

KUDLOW: Oh, that’s what everybody says. That’s–everybody I talked to today on this story said exactly what you said. Your record down through the years has been superb.

Let me ask you this, are you still buying some corporate bonds and are you still buying foreign bonds? You talked to me about that when you last visited.

GROSS: Well, corporate bonds of the highest quality, yes. And that would be A and AA-types of corporates, not high-yield bonds because they don’t do well, you know, if we near the recessionary level of 0 percent. In terms of foreign bonds, let me just cite the comparison: a five-year Treasury in the United States at 1 percent, actually little bit less; in Canada 1.7 percent; in Euroland 2.1 percent; in Mexico 5.4 percent; in Brazil 11 percent. And these are countries, by the way, Larry, which have what we call clean or dirty shirts. Mexico has half the debt of the United States. Brazil has half the debt of the United States and has treasury reserves as opposed to deficits. And so these are countries with higher yields and better balance sheets.

KUDLOW: All right, last one. I’m going to come back to where you were on the breakdown of free market capitalism, which is fair enough. I would acknowledge that America’s economy has been on the decline now for about 10 years. But I ask you, Bill, everybody is so profitable. Businesses are so profitable, so much cash. Banks have more liquidity than they know what to do with. Is it possible there’s a buyer’s strike, that there’s a capital strike, that the spending and taxing and regulatory threats out of Washington are really the problem, not the free market capitalist system?

GROSS: Well, I’d have to say that that doesn’t help. I mean, let’s come together on that point that regulation and too much of it–that taxation in terms of the necessary reforms that probably lie ahead, you know, don’t help either in terms of the current economic environment. What I would say in terms of corporate tax reform is, yes, let’s reform taxes, let’s reform corporate taxes and let’s reform individual taxes. But at the same token, let’s not lower them, because corporate taxes are 10 percent of total federal revenues. They’re at an all-time low, Larry. And to suggest that corporations are the poor baby in this particular story, I think, is an absurdity.

KUDLOW: All right. I’m going to leave that for the next discussion we have. We have much more to discuss on corporate tax reform. But, Bill Gross, thank you for your honesty. Thank you for your forthrightness.

GROSS: Thank you, Larry.

KUDLOW: And thanks for coming on tonight. I appreciate it.

GROSS: Yeah.



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