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Speaker 1: Bill Gross, co founder of PIMCO, for an exclusive conversation. Bill,

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Speaker 1: great to have you here on the program, And I

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Speaker 1: do want to start off here with the yield curve itself,

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Speaker 1: what it's telling us, and more importantly, as Alex was

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Speaker 1: kind of alluding to, how do you position around this

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Speaker 1: if you're not quite sure not just whether the yel

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Speaker 1: curve is steeping, but what will actually drive that steepening.

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Speaker 2: Well, let me.

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Speaker 3: Start romain by saying that a negative yield curve, and

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Speaker 3: I use the two to ten year spread, which is

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Speaker 3: about a negative twenty three or twenty four. It's ven

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Speaker 3: as hiah as fifty to seventy five basis points. So

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Speaker 3: it's less negative now. But when you think about it

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Speaker 3: common sensically, when you think about it, capitalism and a

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Speaker 3: finance based economy which is what we have, can't really

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Speaker 3: do well. When you can get a higher return for

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Speaker 3: less risk. That's not the basis of a capitalistic economy.

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Speaker 2: You need to get a higher return for more rooms.

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Speaker 2: And it's just the reverse now.

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Speaker 3: And so you know, I think ultimately the yield current

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Speaker 3: has to go positive in order to produce a relatively

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Speaker 3: stable economy and a stable inflation rate around three percent?

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Speaker 1: Do you have faith right now in the economy and

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Speaker 1: more importantly the folks who are shepherding that economy.

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Speaker 3: Well, no, you know, let's let me put it out there.

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Speaker 3: You know, the FED is not done well in the

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Speaker 3: past three or four years and in terms of or

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Speaker 3: five years, in terms of trying to find that magic

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Speaker 3: FED funds rate that will neither increase inflation or produce deflation.

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Speaker 2: And so you know, are.

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Speaker 3: They wise enough now to know exactly what the FED

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Speaker 3: funds rate should be at any point in time or

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Speaker 3: even you know, six to twelve months down the road.

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Speaker 3: You know, I'd be very cautious, and I'd view economic

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Speaker 3: statistics like they do, but from an investor's standpoint that

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Speaker 3: you know, speak to fundamentals that the FED isn't necessarily following.

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Speaker 1: Well, let me ask you, what would you do different

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Speaker 1: if if for some reason you were magically in the

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Speaker 1: shoes of J. Powell, what would you do different at

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Speaker 1: this point?

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Speaker 3: Well, I would stop quantitative tightening. I think that's just

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Speaker 3: not a correct philosophy and policy at this point in

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Speaker 3: time to you know, continue to tighten quantitatively. They should

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Speaker 3: leave the you know, the the reserve balance around seven

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Speaker 3: trillion dollars and just see what happens going forward. I

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Speaker 3: also think that yes, the Fed should lower interest rates

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Speaker 3: over the next six to twelve months. Real interest rates

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Speaker 3: are simply too high. The ten year real interest rate

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Speaker 3: is one point eight percent, which historically is very restrictive.

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Speaker 3: And you know, I think not only the Fed, but

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Speaker 3: I would like to see the real interest rate on

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Speaker 3: a tenure come down to one and a half or

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Speaker 3: one percent. And so the way to do that is

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Speaker 3: to lower interest rates from where we have it now

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Speaker 3: at five and quarter percent for Fed funds and to

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Speaker 3: you know, basically balance out real interest rates and lower

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Speaker 3: them so that the economy won't go into a significant recession.

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Speaker 4: So, Bill, if you think we're going to get cuts

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Speaker 4: in the next day six to twelve months, are we

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Speaker 4: cutting because of normalization to get that real yield kind

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Speaker 4: of at a more normal level, or are we cutting

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Speaker 4: because the economy looks really bad.

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Speaker 3: Well, we're certainly not talking about cutting the FED funds

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Speaker 3: rate based upon an economy that looks bad. Although there

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Speaker 3: are indicators such as the you know, leading indicator number

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Speaker 3: that came out today and other decators that suggest like

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Speaker 3: we talked about in terms of the negative yal curve.

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Speaker 3: That suggests that you know, at some point we're going

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Speaker 3: to see a zero line, you know, real gene and

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Speaker 3: PN maybe something lower. I think, you know, to basically

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Speaker 3: keep an economy going in this finance based economy that

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Speaker 3: we've had for a long time now, five, ten, fifteen,

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Speaker 3: twenty years, you need interest rates lower than nominal GDP.

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Speaker 3: That's what drives you know, basically today's economy as opposed

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Speaker 3: to what we saw fifty to one hundred years ago.

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Speaker 3: And so with nominal GDP at five and six percent

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Speaker 3: and perhaps out of four, but we need the tenuere

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Speaker 3: to be lower than nominal GDP in order to continue

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Speaker 3: a you know, a steady progression in terms of economic growth.

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Speaker 4: So, Bill, in that environment, does it make sense that

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Speaker 4: equity there at a record right now? Does it make

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Speaker 4: sense that equities are at a record right now based

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Speaker 4: on what you're talking about?

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Speaker 2: Well, no, I don't think it does.

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Speaker 3: I mean, you know, I've got some historical charts and

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Speaker 3: others have provided those for me, Bloomberg being one of them,

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Speaker 3: that basically suggest that PE ratios of nineteen to twenty times,

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Speaker 3: which is what we're at the moment, and perhaps a

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Speaker 3: little bit lower based on forward expectations that you know,

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Speaker 3: PE of nineteen times is much too high relative to

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Speaker 3: a one point eight percent real interest rate. You know,

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Speaker 3: real interest rates were down at a negative minus two percent,

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Speaker 3: you know, just as recently as two to three years ago,

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Speaker 3: and so they've risen significantly, but PE ratios haven't really dropped.

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Speaker 3: And so I think, ultimately, and this is a long term,

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Speaker 3: you know, type of statement and a long term thesis,

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Speaker 3: ultimately PE ratios have to get more in balance with

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Speaker 3: real interest rates, which are you know, relatively high.

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Speaker 1: Now that, certainly, Bill seems to be a question for

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Speaker 1: those folks who are looking for an entry point into

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Speaker 1: this market, for those folks who are already invested in,

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Speaker 1: particularly those folks who piled into a lot of those

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Speaker 1: big cap tech socks, the Magnificent seven. And even if

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Speaker 1: you've brought that out basically kind of the top fourteen here,

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Speaker 1: is that also a signal that maybe they should be

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Speaker 1: looking for the exit.

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Speaker 3: Well maybe not the exit remained, but you know, certainly

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Speaker 3: in terms of additional funds going into those magnificent seven

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Speaker 3: or fourteen, as you.

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Speaker 2: Mentioned, you know, it's probably the time to cool it.

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Speaker 3: Off a little bit and to you know, to put

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Speaker 3: your money elsewhere. You know, that's always a difficult statement

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Speaker 3: in terms of timing, because if I'd said this a

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Speaker 3: month ago, you know, I would have been more of

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Speaker 3: a fool than I might be a month from now.

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Speaker 3: But I think there are values in the market. I'm

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Speaker 3: not suggesting get out of the market. I'm suggesting that,

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Speaker 3: you know, perhaps you should be a little more conservative,

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Speaker 3: but you need to be invested. You know, a five

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Speaker 3: percent Treasury bill, yes, that's attractive, and I have some.

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Speaker 3: But basically, you know, there are certain stocks with higher yields,

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Speaker 3: relatively safe dividends that are more attractive to me than

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Speaker 3: the magnificent seven.

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Speaker 1: Like like what bill? Are these places where you yourself

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Speaker 1: have put your own money?

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Speaker 2: Oh? Yeah, you know.

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Speaker 3: For instance, you know, I've talked about the master limited

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Speaker 3: partnerships for pipelines that yield eight to nine percent with

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Speaker 3: a tax deferred type of status.

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Speaker 2: And you know, just this morning, remained.

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Speaker 3: News Star, which is one of those MLP pipelines, was purchased,

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Speaker 3: not purchased yet, but there was an offer from Sonoco

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Speaker 3: to buy a new Start at a ten to fifteen

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Speaker 3: percent premium, And so with yields at eight to nine percent,

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Speaker 3: and with this type of value and attraction from other

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Speaker 3: companies that are in the takeover type of business. I

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Speaker 3: think that's one clear example of what you should be

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Speaker 3: buying relative to the Magnificent.

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Speaker 4: Seven and will definitely get more to M and X.

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Speaker 4: I know it remains super excited about M and A

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Speaker 4: are so hold that thought. But I just want to

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Speaker 4: get your quick take on certain other areas of the

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Speaker 4: equity market. What about banks, for example? What about reads?

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Speaker 4: What about areas where you can get some good yield

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Speaker 4: and maybe some more risk is priced in their trading

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Speaker 4: really cheaply. What do you do with those areas.

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Speaker 3: Well? I like them, you know, as you know, I've

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Speaker 3: sort of become famous or infamous in the past five

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Speaker 3: or six months talking about bank stocks and how they were,

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Speaker 3: you know, relatively historically cheap with a book to priced

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Speaker 3: the book type of ratio at about a point five,

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Speaker 3: which is about as low as they've ever gone.

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Speaker 2: Now it's much higher. They've done well.

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Speaker 3: But there are certain bank stocks that I own that

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Speaker 3: yield about six percent. One of them is uh CFG,

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Speaker 3: another is ku Y, Another one Truest TFC, which is

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Speaker 3: down today. But these are attractive type of situations with

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Speaker 3: six percent yields and still some upside, although you know

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Speaker 3: at this point they're they're probably gonna level off too.

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Speaker 4: Bill, I guess a good question is I understand why

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Speaker 4: you like those those names and why you like the

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Speaker 4: dividend yields, but none of that is big tech and

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Speaker 4: the AI trend in semi's how do you play the

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Speaker 4: trend without buying into the big guys that are already expensive?

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Speaker 4: Is there is there a happy medium for Bill gross.

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Speaker 3: Well, I I don't own any of the Magnificent seven,

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Speaker 3: although I think Microsoft is UH certainly a great long

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Speaker 3: term value and can be bought, you know, at this

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Speaker 3: point with UH expectations of a of an attractive return

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Speaker 3: going forward. There there's a stock in Europe in euraland

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Speaker 3: there's basically the Microsoft of UH Eurland. UH symbol is EPAM,

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Speaker 3: and it UH tredes in a much cheaper value that

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Speaker 3: it's got some interest in Poland and so on, which

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Speaker 3: are chief politically risky. But I I think that's an

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Speaker 3: attractive situation, and you know, so you can pick and choose,

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Speaker 3: but UH, for the most part, UH Magnificent seven are

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Speaker 3: not on my buy list.

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Speaker 1: Alright, well, let's talk about some of the other things

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Speaker 1: that are on your buy list, at least what we

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Speaker 1: know publicly. Uh, you have been involved in some merger

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Speaker 1: arbitrage plays, including capre Holdings and at least a couple

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Speaker 1: of others here. Why do you find just overall merger

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Speaker 1: arbitrage attractive and environment where quite frankly, there doesn't seem

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Speaker 1: to be that many mergers anymore.

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Speaker 2: Well, we just had one this morning with the New Star.

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Speaker 3: But yes, I think in terms of Capri, you know,

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Speaker 3: it's just approved basically by China a few weeks ago.

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Speaker 2: In terms of the.

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Speaker 3: Potential going forward, and that tends to be a relatively

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Speaker 3: consistent indicator of what we might do here in the

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Speaker 3: United States. You know, Caprice trading around forty it's got

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Speaker 3: to buy out around forty seven, and so that's seven

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Speaker 3: points on a base of forty. So that's about sixteen

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Speaker 3: seventeen percent return, you know, over the next six months

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Speaker 3: if it goes through. So there's certainly some risk there.

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Speaker 3: Spl K is another one that's it's called Splunk, Yeah,

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Speaker 3: and splunk Splunk is an attractive situation with a small

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Speaker 3: total return, maybe four or five points going forward, but

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Speaker 3: it you know, consistently moves higher each and every day.

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Speaker 2: And so you know, these aren't.

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Speaker 3: Navidia type of stocks, but they're you know, situations where

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Speaker 3: you can certainly outperform treasury bills with a you know,

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Speaker 3: pretty good margin of safety.

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Speaker 1: I am I am curious when we talk about the

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Speaker 1: idea of sort of whether these deals go through. There's

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Speaker 1: been so much talk about some of the deals that

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Speaker 1: either failed because of regulatory pressure or maybe just because

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Speaker 1: the buyers or the sellers got cold feet out of it.

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Speaker 1: I am curious as to whether it's easier or harder

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Speaker 1: to sort of assess these sort of the potential for

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Speaker 1: these mergers to actually make it through, given the regulatory environment,

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Speaker 1: given the cost of capital to finance, and quite frankly,

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Speaker 1: given investor appetite which at time seems to be a

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Speaker 1: little bit tepid for these types of tie ups.

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Speaker 3: Yeah, I think it's harder remain you know, there's no

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Speaker 3: doubt conditions that you just mentioned you'll make it more difficult.

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Speaker 3: But you know, we're talking about relative value here compared

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Speaker 3: to the Magnificent seven and some of the others that

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Speaker 3: stocks at nineteen pees, and so it just seems to

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Speaker 3: me that you know, a relatively conservative investor can make

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Speaker 3: a ten to fifteen percent annualized type of return without

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Speaker 3: as much risk as being in you know, high tech stocks.

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Speaker 4: Hey, Bill, looking ahead, it's an election yeer Hampshire primary

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Speaker 4: is today? Do you have a President Trump two point

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Speaker 4: zero playbook yet?

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Speaker 2: Are you talking about dwic digital?

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Speaker 4: No, I'm talking about if President Trump becomes a president again.

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Speaker 2: Oh what do you do?

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Speaker 4: Where do you go?

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Speaker 3: Well, that's certainly a risk because so we have political risk, domestically,

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Speaker 3: geopolitical risk in terms of you know, a numerous situations

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Speaker 3: around the world.

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Speaker 2: So what do you do? Typically you remain very cautious.

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Speaker 4: So what does cautious mean? Does that mean you want

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Speaker 4: to go by the tenure? Is it buy the dollar?

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Speaker 4: Is it get out of certain positions? What does cautious

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Speaker 4: mean for Bill Gross in that environment?

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Speaker 3: Well, I think it means, you know, going for an

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Speaker 3: attractive yield, an attractive diving in that's you know, consistent

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Speaker 3: going forward. I don't really want to mention this because

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Speaker 3: these these stocks are not on the favorite list of

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Speaker 3: any investor. But you know, tobacco stocks like all Tria

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Speaker 3: yield nine and a half to ten percent, and you know,

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Speaker 3: the dividend has been raised every year despite the problems

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Speaker 3: with you know, the tobacco industry. There are stocks like

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Speaker 3: Verizon and AT and T that yield six and a

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Speaker 3: half to seven percent. So you can go to areas

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Speaker 3: where there's perhaps still some growth like with Verizon and

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Speaker 3: AT and T and a high yield at the same time.

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Speaker 3: It just seems like a better bet for an investor

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Speaker 3: that wants to conservatively earn perhaps double digits going forward.

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Speaker 1: All right, Bill, I'm going to save you from the

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Speaker 1: political questions up from Alex well handled there. I am

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Speaker 1: curious about opportunities outside of the United States. There's been

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Speaker 1: a lot of discussion about how basically one of the

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Speaker 1: best performing markets out there isn't the US, it's Japan.

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Speaker 1: There's been a lot of discussion here about how there

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Speaker 1: is a lot more money that's coming out of China

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Speaker 1: and looking for a place to go in sort of

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Speaker 1: I guess the developing world, if not to Japan itself

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Speaker 1: as well. Here do you look at a turning point

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Speaker 1: in any of those markets that might provide, at least

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Speaker 1: on a relative basis, a little bit more return than

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Speaker 1: what you can get here in the US.

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Speaker 3: Yeah, I think so I'm looking and a little bit

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Speaker 3: because you know, as you point out remain you know,

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Speaker 3: non US stocks have not done well relative to the

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Speaker 3: rest of the universe. Japan is doing you know better

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Speaker 3: this year and and and last year. But you know,

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Speaker 3: there's a there's a an e t F by the

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Speaker 3: symbol of v e U that contains all our most

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Speaker 3: stocks that are non US related, and so you know,

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Speaker 3: it's a it's a long term timing situation in which, uh,

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Speaker 3: you know, the expectations for this, you know, have to

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Speaker 3: turn around. But I think there's value, more value in

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Speaker 3: European stocks than than in the United States, based upon

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Speaker 3: price and rings ratios and other considerations. Stocks like Volkswagen

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Speaker 3: for instance, or BMW. Gosh, the p E ratios there

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Speaker 3: are two to three to four times relative to GM

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Speaker 3: and Ford and certainly Tesla, and so yeah, there are

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Speaker 3: considerations in outside the United States.

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Speaker 2: So I think an investor should look at this.

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Speaker 1: Is interesting, Bill, I mean, I always love talking to you.

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Speaker 1: I mean, for a guy who basically made his name

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Speaker 1: and his fortune in the fixed income space here, you

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Speaker 1: really seem to have a very interesting view about just

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Speaker 1: the pace of equities right now and the attractiveness there.

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Speaker 1: Is it more exciting now for you to, I guess,

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Speaker 1: do what you're doing. Obviously you have the independence to

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Speaker 1: do whatever the heck you want now. But is it

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Speaker 1: more exciting, I guess, to be more in that space

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Speaker 1: than in bonds and fixed income?

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Speaker 3: Well, yeah, I think it is, you know, the volatilities higher,

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Speaker 3: but you know, to be fair, I'm still in the

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Speaker 3: treasury market with puts and calls and options.

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Speaker 2: And you know.

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Speaker 3: Even if you don't have a bullish outlook on the

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Speaker 3: tenurre treasury, which I don't, you can still make a

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Speaker 3: decent return by you know, doing the spread trade of

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Speaker 3: put in a call spread trade that over a month's

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Speaker 3: period of time can provide a decent return. So yeah,

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Speaker 3: it's more exciting to be in stocks and romaine. One

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Speaker 3: of the considerations in the stock market is consistent with

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Speaker 3: what I did at PIMCO. You know, stocks are a

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Speaker 3: volatility type of consideration. At Pimpco, we sold volatility consistently

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Speaker 3: going going forward based upon mortgage pass throughs, et cetera,

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Speaker 3: et cetera. And so yeah, yeah, I like dabbling in

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Speaker 3: the equity market more than bonds. But bonds are still there.

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Speaker 4: I don't think I ever would have thought that Bill

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Speaker 4: Gross would say that, Bill before we let you go.

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Speaker 4: I would kick myself if I didn't ask you this.

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Speaker 4: We're having exploding fiscal deficits in the US. Whoever takes

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Speaker 4: the White House. That's going and continued to grow. At

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Speaker 4: some point, do you think the bond market can start

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Speaker 4: telling Washington, DC to trim more fat like the bond

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Speaker 4: market did in the UK with former Prime Minister Liz Truss.

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Speaker 3: Well, hopefully, yes, But I don't think the bond market

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Speaker 3: can tell Washington anything. I think it's Washington that dictates

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Speaker 3: the bond market. You know, Washington is concerned in an

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Speaker 3: election year with maintaining a deficit of one and a

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Speaker 3: half trillion or more in order to keep a nominal

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Speaker 3: GDP higher.

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Speaker 2: And so.

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Speaker 3: Yes, I think this election year is important. But I

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Speaker 3: don't think the bond market, even under a supply consideration

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Speaker 3: that suggests higher interest rates, is going to do much

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Speaker 3: good in terms of giving a lesson to Washington.

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Speaker 2: It's vice versa.

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Speaker 1: Do you think we're going to actually see that lesson?

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Speaker 1: I guess in your lifetime, in my lifetime, or is

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Speaker 1: this just something that our children or grandchildren are going

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Speaker 1: to be aren't going to inherit.

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Speaker 3: Well, you know, you know, demographics argue for higher deficits

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Speaker 3: going forward with social security, with Medicare and medicaid. You know,

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Speaker 3: it seems to me that we're in a situation where

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Speaker 3: long term deficits, as far as I can see, are

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Speaker 3: going to be consistently high, not just here but in

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Speaker 3: your land and elsewhere. It's simply a situation now where

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Speaker 3: there's too much debt and in order to you know,

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Speaker 3: keep that debt rolling and keep the economies rolling on

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Speaker 3: a nominal basis, it's necessary on the part of central

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Speaker 3: banks too, you know, to maintain a relatively easy monetary policy.

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Speaker 3: And the same thing with fiscal I think I think

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Speaker 3: one and a half trillion dollar deficits are here to stay.

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Speaker 1: All right, Bill, Really appreciate you taking time for it's

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Speaker 1: always insightful. Bull Gross of course, the co founder of

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Speaker 1: him Go, helping us kick off to the close here