WEBVTT - Alpha Generation Is Getting Much Harder, Gross Says 0:00:09.720 --> 0:00:12.880 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene with 0:00:13.560 --> 0:00:16.560 David Gura. Daily we bring you insight from the best 0:00:16.560 --> 0:00:22.279 of economics, finance, investment, and international relations. Find Bloomberg Surveillance 0:00:22.320 --> 0:00:27.000 on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course 0:00:27.320 --> 0:00:34.880 on the Bloomberg Right Now, Dr Post and Adam pose 0:00:34.960 --> 0:00:36.840 it with us with the Peterson Institute, I'm gonna ask 0:00:36.840 --> 0:00:39.879 one question and let truly one of our Washington experts 0:00:40.520 --> 0:00:43.839 dive in here. Adam, the Peterson Institute will be writing 0:00:43.920 --> 0:00:48.519 about tax reform. What tact will you take? Well, I 0:00:48.560 --> 0:00:51.040 have to do the disclaimer. Our individual scholars take that, 0:00:51.200 --> 0:00:54.480 each their own tack, but they're pretty much gonna all agree, 0:00:54.760 --> 0:00:57.560 which is a This is much more about cuts than 0:00:57.640 --> 0:01:01.640 reform of the tax system. Be the in line with 0:01:01.680 --> 0:01:04.360 what you were saying on TV before, Tom, that the 0:01:04.440 --> 0:01:08.920 claims of wage improvements and job improvements in the short 0:01:09.040 --> 0:01:12.760 term vastly exaggerated. See there are a couple of good 0:01:12.760 --> 0:01:17.880 things in there, like they moved somewhat towards territoriality, the 0:01:17.880 --> 0:01:23.119 cutbacks and the mortgage interest deduction, um, the expensive investment. 0:01:23.280 --> 0:01:26.080 But d as my colleague Jason Furman, among others, has 0:01:26.160 --> 0:01:28.360 pointed out the question is what are those pay for 0:01:28.480 --> 0:01:31.600 us paying for? And if they're just paying for heavily 0:01:31.640 --> 0:01:34.400 tilted towards the rich on the personal tax side and 0:01:34.640 --> 0:01:38.679 uh not terribly useful tax cuts on the corporate side, 0:01:38.720 --> 0:01:40.679 it's not going to go very well for those of 0:01:40.760 --> 0:01:44.320 us who live in high tax states like New York 0:01:44.360 --> 0:01:51.320 and New Jersey the state and local tax uh deductions Washington, 0:01:52.200 --> 0:01:55.320 you I noticed you did not mention that. Is that 0:01:55.600 --> 0:01:57.840 one of the things that is bad or is that 0:01:57.960 --> 0:02:03.360 actually more Again I I'm I'm not going to make 0:02:03.400 --> 0:02:05.960 that the biggest bad thing, because that is more about 0:02:06.000 --> 0:02:08.640 redistribution than about the economy as a whole, and it 0:02:08.760 --> 0:02:12.760 is hitting the people who take deductions rather than the 0:02:12.800 --> 0:02:17.000 standard deduction. That said, it's clearly a political move of 0:02:17.080 --> 0:02:20.640 trying to starve the beast of state governments that hurts 0:02:20.680 --> 0:02:25.800 people mostly in blue states, and that in particular is 0:02:25.800 --> 0:02:28.320 going to make it harder for state governments to sustain 0:02:28.360 --> 0:02:31.240 their tax rates and thus the size of their governments. 0:02:31.280 --> 0:02:34.240 So I don't feel it as good. Um, But again, 0:02:34.280 --> 0:02:37.360 this is ull getting away. The big picture thing is 0:02:37.440 --> 0:02:40.280 that these these pay fors are not going to be 0:02:40.360 --> 0:02:44.480 anywhere near enough for an economy basically full employment. And 0:02:44.560 --> 0:02:47.520 what they're claiming is one point five trillion in deficit 0:02:47.560 --> 0:02:50.320 increase at that state of affairs, which is already bad. 0:02:50.960 --> 0:02:53.840 UM is probably going to be closer to two trillion plus. 0:02:54.360 --> 0:02:58.800 So given the deficit implications of this proposal, you know 0:02:58.919 --> 0:03:01.680 you've watched watching for a long time, how do you 0:03:01.720 --> 0:03:05.600 write the chances of actual tax bill of any kind 0:03:05.720 --> 0:03:09.080 getting through this Congress. I've been an outlier for some 0:03:09.160 --> 0:03:12.720 months now because I've said a year ago September in 0:03:12.760 --> 0:03:18.400 the forecast UM that the big economic policy of the 0:03:18.400 --> 0:03:22.360 Trump administration, besides deregulation, which people overlook UM, is going 0:03:22.400 --> 0:03:24.280 to be corporate tax cuts, and everything else will be 0:03:24.320 --> 0:03:27.080 sort of secondary. And I was wrong about the timing 0:03:27.120 --> 0:03:29.919 because like everybody else, I couldn't believe they'd fast around 0:03:29.960 --> 0:03:34.240 for nine months before submitting a budget UM. But the 0:03:34.280 --> 0:03:36.200 bottom line is that's what we're gonna end up with. 0:03:36.280 --> 0:03:40.400 So I think it's plus chance it it gets approved, 0:03:40.960 --> 0:03:43.320 and whatever else needs to be shed will be shed, 0:03:43.360 --> 0:03:45.840 but the core of the tax changes for the corporate 0:03:45.880 --> 0:03:50.760 statutory rate will remaind You glance at this how much 0:03:51.280 --> 0:03:56.720 economic growth can Republicans model I understand in the heat 0:03:56.760 --> 0:03:59.520 of the the moment, the camera lights around, they frame 0:03:59.560 --> 0:04:02.400 a bigger number, But can you do you have a 0:04:02.480 --> 0:04:05.640 working number where you can gross up g d P 0:04:06.480 --> 0:04:10.760 off of the enthusiasm of tax cuts. Well, I tend 0:04:10.840 --> 0:04:13.840 to um. There are people, as you mentioned earlier about 0:04:13.840 --> 0:04:17.840 the Joint Joint Committee and Taxation, the CBO Congressional Budget 0:04:17.839 --> 0:04:21.679 Office within the government, and then the Tax Center Urban 0:04:21.720 --> 0:04:25.720 Brookings outside government, as well as the Tax Foundation that 0:04:25.880 --> 0:04:28.640 do this stuff very carefully. But as a macro economist, 0:04:28.680 --> 0:04:31.720 and it's it's consistent with their analyzes. You know, you're 0:04:31.720 --> 0:04:34.760 adding to the deficit three quarters or percentage GDP a year, 0:04:35.080 --> 0:04:38.120 probably closer to one percent, both on average, but then 0:04:38.120 --> 0:04:41.320 maybe a little front loaded um. And some of the 0:04:41.360 --> 0:04:45.040 investment stuff is particularly front loaded and it's impact. So 0:04:45.240 --> 0:04:47.960 I could see you having a multiplier on that, given 0:04:48.040 --> 0:04:51.679 that we're at full employment of you know, around point 0:04:51.760 --> 0:04:54.840 six UM, you do a little dynamic scoring, you can 0:04:54.920 --> 0:04:56.480 maybe push it up a little bit from there, I 0:04:56.520 --> 0:05:00.400 don't think much more. So that gets you close to 0:05:00.440 --> 0:05:03.560 three percent growth for the next couple of years, and 0:05:03.640 --> 0:05:06.880 it's not sustainable. It's adding to the debt um, it's 0:05:06.920 --> 0:05:09.400 not entirely efficient, and we'll see how much goes into 0:05:09.440 --> 0:05:13.680 actual investment rather than to dividends. But leaving all that aside, Yeah, 0:05:13.920 --> 0:05:16.599 I mean, it's better to be lucky than to be smart, 0:05:16.680 --> 0:05:20.160 tom As, I certainly know, and I think the president 0:05:20.360 --> 0:05:22.240 was in a sense lucky that he didn't get his 0:05:22.279 --> 0:05:25.360 budget till now, because now the boom is probably gonna 0:05:25.400 --> 0:05:29.080 be perfectly time for the two thousand election. Interesting, Adam posing, 0:05:29.160 --> 0:05:31.960 thank you so much, very valuable on Bloomberg Television and 0:05:32.040 --> 0:05:35.760 Bloomberg Radio today, Marty, what is what are you watching for? 0:05:36.480 --> 0:05:38.440 Within you know, Craig Gordon and the whole team in 0:05:38.480 --> 0:05:41.760 Washington working on this is what's the twister angle and 0:05:41.839 --> 0:05:45.599 tax reform that that you're watching for? Well, I'm I'm 0:05:45.600 --> 0:05:50.920 watching Paul Ryan. I mean the he is the tax wonky, 0:05:51.080 --> 0:05:54.520 is the guy who everybody respects in terms of his 0:05:54.560 --> 0:05:58.960 intellectual capacity on these issues and what he says if 0:05:59.000 --> 0:06:01.800 he can bring his house along, because there are a 0:06:01.839 --> 0:06:05.520 lot of divisions within his party as general, that's the 0:06:05.600 --> 0:06:09.280 key for me. Interesting, And we'll overlay that politics, if 0:06:09.320 --> 0:06:12.240 you will, with some of the analysis out of Washington particular. 0:06:12.320 --> 0:06:17.760 Shout out to Urban Brookings and their Tax Policy Center worldwide. 0:06:17.760 --> 0:06:33.640 This job's day, This is Bloomberg Helly now welcome. I'm 0:06:33.680 --> 0:06:38.520 Bloomberg Television Worldwide and here on Bloomberg Radio. William Gross 0:06:38.560 --> 0:06:40.320 he was very kind to be with us on FED 0:06:40.400 --> 0:06:44.280 Day and reducts that with Janice Henderson. Right now, Bill, 0:06:44.360 --> 0:06:46.520 you know, I really want to talk about the broader fabric. 0:06:46.560 --> 0:06:49.599 We see the U six number coming to seven point nine. 0:06:50.400 --> 0:06:54.279 Are we at a point where the financial crisis and 0:06:54.360 --> 0:07:01.920 the labor crisis of that disaster is behind us? Well, 0:07:01.960 --> 0:07:04.600 I think so. Um, you know, to the extent that 0:07:04.640 --> 0:07:08.000 we've got a little room to to to lower if 0:07:08.320 --> 0:07:11.240 a crisis appears over the horizon, to the extent that 0:07:11.360 --> 0:07:14.120 quantitative eason might come back. You know, I think we've 0:07:14.160 --> 0:07:17.040 got some ammunition. And in fact we do tom have 0:07:17.160 --> 0:07:21.840 a decently as economists would call it, robust economy with 0:07:22.560 --> 0:07:25.320 growth at three plus at least for the last two quarters, 0:07:25.360 --> 0:07:29.400 despite these rather disappointing employment numbers. So I think we're 0:07:29.400 --> 0:07:32.920 past the crisis certainly in most of the world, most 0:07:32.920 --> 0:07:35.680 of the developed world, but we have a potential crisis 0:07:35.720 --> 0:07:38.720 I think in Asia and China going forward. You were 0:07:38.760 --> 0:07:41.880 more than generous to be with us here on FED Day. 0:07:42.040 --> 0:07:44.320 I did ask you about your own Powell. I'll be 0:07:44.440 --> 0:07:47.960 nice built you. Uh, maybe it's because of San Francisco 0:07:48.000 --> 0:07:50.680 forty Niners are doing so poorly this year. But you 0:07:50.760 --> 0:07:53.160 weren't polite about it. You didn't mince words. We thank 0:07:53.200 --> 0:07:56.120 you for that. About the next chairman of the FED, 0:07:56.200 --> 0:08:01.560 you heard him speak yesterday, how can economists assist assist 0:08:01.720 --> 0:08:06.880 Jerome Powell to a better Fed? Well, I think a 0:08:06.920 --> 0:08:10.240 certain kind of economists can assist Jerome Pile and that 0:08:10.240 --> 0:08:13.720 that depends, of course, on the appointments going forward. Uh. 0:08:13.760 --> 0:08:17.480 You know, Trump's got three and certainly four. I think 0:08:17.520 --> 0:08:21.840 as Janet Yellen probably will resign as as uh FED 0:08:22.120 --> 0:08:26.320 chairman and chairwomen do in tradition, and so he's got 0:08:26.320 --> 0:08:28.800 four appointments going forward. He can pack the court, so 0:08:28.880 --> 0:08:32.880 to speak, just my FDR. And it depends on his 0:08:32.920 --> 0:08:35.520 appointments going forward, whether they're doves or hawks. And I 0:08:35.600 --> 0:08:38.760 presume that there will be doves. And so what can 0:08:38.840 --> 0:08:41.520 we learn from that when they're appointed? Uh, you know, 0:08:41.720 --> 0:08:44.400 potentially you can learn in my view at least, that 0:08:44.800 --> 0:08:48.600 there are subjective factors longer term structural factors such as 0:08:49.000 --> 0:08:54.120 demographics at place, such as technology advancement and displacement of 0:08:54.200 --> 0:08:57.960 labor at play, and ongoing globalization, so we can learn 0:08:58.040 --> 0:09:01.319 from those things as opposed to the old fashion models 0:09:01.480 --> 0:09:04.120 such as the tailor rule and others and the Phillips 0:09:04.120 --> 0:09:06.200 curve that you know have been failing us for the 0:09:06.240 --> 0:09:09.160 past ten, fifteen, twenty years. I hope he appoints someone 0:09:09.559 --> 0:09:13.040 with a more subjective as opposed to a model driven view. 0:09:13.240 --> 0:09:15.840 Here's the key question, Bill Gross, and we thank you 0:09:15.880 --> 0:09:18.640 for joining us on radio and television this morning with 0:09:18.720 --> 0:09:21.880 Janie Henderson. If we have low rate Janet, if we 0:09:21.920 --> 0:09:25.600 have low rate j and we have yield curves flattening, 0:09:25.679 --> 0:09:30.120 ten thirties flattening, twos tens flattening, what is that signal 0:09:30.160 --> 0:09:33.680 to Bill Gross? If you see flatter yield curves in 0:09:33.760 --> 0:09:39.120 the zeitgeist of a low rate central bank, well, I 0:09:39.160 --> 0:09:41.520 flatter curve is not positive. And let's look at it 0:09:41.559 --> 0:09:44.480 this way, since uh, you know, two thousand and eleven, 0:09:44.520 --> 0:09:46.599 and that takes us way back. But you know, the 0:09:47.360 --> 0:09:49.840 two ten curve was four and fifty basis points and 0:09:49.880 --> 0:09:53.760 now it's a hundred or less, and so it's flattened considerably. 0:09:53.840 --> 0:09:56.800 Since then, has ad made a difference. Not really, but 0:09:57.000 --> 0:10:00.520 in my view, at some point it will. Typically, you know, 0:10:00.559 --> 0:10:03.560 economists and stratagists say it's got to go flat before 0:10:03.559 --> 0:10:06.600 a recession appears. I would say, in a highly leveled 0:10:06.640 --> 0:10:10.000 economy with a lot of debt and that typifies the US, 0:10:10.320 --> 0:10:12.680 that we don't have to go flat, that perhaps another 0:10:12.760 --> 0:10:17.040 twenty basis points of tightening would be enough in order 0:10:17.080 --> 0:10:19.520 to induce certainly a slowdown in the economy. And I 0:10:19.520 --> 0:10:22.160 think central banks and the FED itself has to be 0:10:22.240 --> 0:10:26.920 careful in terms of using historical standards to judge monetary policy. 0:10:26.960 --> 0:10:29.080 I don't think they can raise interest rates too much 0:10:29.120 --> 0:10:33.120 further before there's the potential to slow economic growth. This 0:10:33.200 --> 0:10:36.200 is absolutely critical. Folks that Mr Gross's senor Jason, I 0:10:36.200 --> 0:10:37.800 want you to come over here. We're doing this on 0:10:37.840 --> 0:10:40.800 the fly and look, Jason, wheel around here, and I 0:10:40.800 --> 0:10:43.320 want to show what Bill Gross is talking about. Right now, 0:10:43.559 --> 0:10:46.720 here's the yield curve and down here are recessions. We're 0:10:46.760 --> 0:10:50.160 coming in like this, and Bill Gross, where do we 0:10:50.280 --> 0:10:54.520 get on the yield curve where it becomes a recession indicator? 0:10:54.559 --> 0:10:57.839 Where at seventy two basis points, how many basis points 0:10:57.880 --> 0:11:01.040 are we away where we flip from optimism to a 0:11:01.080 --> 0:11:06.320 real concern about economic slowdown? Yeah, I think around four 0:11:06.440 --> 0:11:08.800 year fifty year see your chart, But I know what 0:11:08.880 --> 0:11:12.319 you're talking about, uh and uh you know that indicates 0:11:12.520 --> 0:11:16.000 you know, perhaps another uh fifty basis points in terms 0:11:16.040 --> 0:11:19.720 of FED funds and maybe ten basis points higher intends 0:11:20.400 --> 0:11:23.560 to produce that type of number. You know. The critical 0:11:23.960 --> 0:11:26.280 element and all of this is really the cost of 0:11:26.320 --> 0:11:30.280 credit and what cost of credit? And we're talking about mortgages, 0:11:30.320 --> 0:11:33.720 we're talking about corporate loans, we're talking about uh, you know, 0:11:33.920 --> 0:11:37.160 government bonds. To a certain extent, the cost of credit 0:11:37.240 --> 0:11:41.000 relative to UM you know, the nominal growth in GDP, 0:11:41.520 --> 0:11:44.640 we have better nominal growth. We have four plus nominal 0:11:44.640 --> 0:11:49.160 growth now. And the cost of credit, uh, you know 0:11:49.600 --> 0:11:53.240 has been supportive of that's certainly quantitative easing has been 0:11:53.280 --> 0:11:56.040 supportive of that to the extent that we don't have 0:11:56.120 --> 0:11:59.080 QUI to the extent that interest rates go up by 0:11:59.200 --> 0:12:02.079 four year fifty points in your curve flattens by thirty 0:12:02.200 --> 0:12:04.360 or forty, then all of a sudden, the cost of 0:12:04.440 --> 0:12:08.599 credit and the absence of credit growth UM as typified 0:12:08.600 --> 0:12:11.640 by KWI become factors, and so I think I think 0:12:11.720 --> 0:12:15.160 the Fed has careful. I know, I know they think 0:12:15.160 --> 0:12:17.079 they have to be careful. I mean, we're gonna do this. 0:12:17.120 --> 0:12:19.160 I'm gonna make a chart up here for Bloomberg Radio, 0:12:19.280 --> 0:12:21.760 also for John Farroh. I'm gonna make up a chart 0:12:21.800 --> 0:12:24.360 here to show that tip point of forty to fifty 0:12:24.559 --> 0:12:28.079 basis points bill gross on tax reform. You've got to 0:12:28.160 --> 0:12:30.560 live with it. Can you live with a one point 0:12:30.640 --> 0:12:34.520 five trillion deficit add on? Or do you believe is 0:12:34.559 --> 0:12:37.840 ad im posing believes adam posing that we could go 0:12:37.880 --> 0:12:43.760 out to a to two trillion dollar add on? Well, 0:12:44.000 --> 0:12:46.400 you know, here's here's a funny one, and it's, uh, 0:12:46.559 --> 0:12:49.040 you know, I'm starting to rethink this time because we've 0:12:49.080 --> 0:12:53.640 seen um, you know, not necessarily deficits expanding, but central 0:12:53.679 --> 0:12:56.840 banks buying trillions and trillions of dollars worth of debt 0:12:56.920 --> 0:13:02.080 and then recycling the interest rate back to the central government. 0:13:02.080 --> 0:13:05.679 And so, you know, do deficits matter? I think ultimately 0:13:05.720 --> 0:13:08.480 do they do. We talked a few days ago about 0:13:08.880 --> 0:13:11.839 you know the present value of all of our liabilities, 0:13:11.880 --> 0:13:15.000 including social security and Medicare and Medicaid. It's you know, 0:13:15.160 --> 0:13:19.040 perhaps instead of eighteen trillion, it's perhaps seventy eight trillion. 0:13:19.080 --> 0:13:22.480 Of course debt matters, but in the short term, I 0:13:22.520 --> 0:13:25.400 don't think it matters that much. And uh, you know, 0:13:25.440 --> 0:13:29.839 we're moving to a fiscally stimulative type of environment as 0:13:29.840 --> 0:13:33.280 opposed to a monetary stimulative type of environment, and perhaps 0:13:33.320 --> 0:13:36.040 that's what we need. But ultimately some a believer in 0:13:36.559 --> 0:13:40.600 low debt as opposed to high debt. And it's incredible 0:13:40.640 --> 0:13:44.079 to me you know this too, that the Republican orthodoxy 0:13:44.080 --> 0:13:49.720 has simply changed from fiscal doves to fiscal hawks, and 0:13:49.800 --> 0:13:55.439 to deficit deniers to deficit supporters. The entire party is 0:13:55.480 --> 0:13:59.120 flip flopped, with Marty Schenker uh running all of our 0:13:59.160 --> 0:14:02.480 economics that govern and now chief content officer for all 0:14:02.520 --> 0:14:05.320 of Bloomberg News. Marty, what is your observation off the 0:14:05.400 --> 0:14:07.679 jobs report? Before we get back to Bill Gross, Well, 0:14:07.720 --> 0:14:10.240 I'm a little surprised that we hadn't heard from Donald 0:14:10.280 --> 0:14:14.559 Trump tweeting on the uh numbers of the jobs report, 0:14:14.640 --> 0:14:17.760 which he has not hesitated to take some credit for. 0:14:18.200 --> 0:14:20.520 But I think he is on his way to Asia. 0:14:20.560 --> 0:14:26.440 I think he's boarding a playing almost Hannolulu. Yeah, Bill 0:14:26.480 --> 0:14:28.840 Gross with us with Janie Henderson has been very kind 0:14:28.840 --> 0:14:30.520 to be with us, and I want to get back 0:14:30.560 --> 0:14:34.520 to tax reform and its ramifications on the nation. But Bill, 0:14:34.560 --> 0:14:36.640 there's a Bill Gross if people don't know. And I'm 0:14:36.640 --> 0:14:39.960 not talking about your resurgence of the San Francisco forty 0:14:40.040 --> 0:14:43.480 Niners and bringing Mr Garoppolo over from the New England 0:14:43.480 --> 0:14:45.680 Patriots and the fact you can beat the cardinals and 0:14:45.720 --> 0:14:49.080 the giants here in the coming days. I'm talking about 0:14:49.080 --> 0:14:51.360 your article for the c FA Institute of a few 0:14:51.440 --> 0:14:56.240 years ago, consistent alpha generation through structure. This is twelve 0:14:56.320 --> 0:14:58.480 years ago, and it's a Bill Gross. I think that 0:14:58.480 --> 0:15:02.040 a lot of our listeners don't know. We are seeing Bill, 0:15:02.440 --> 0:15:06.360 a lot of black box theories of hedge funds blow up, 0:15:06.400 --> 0:15:09.920 and we see it with challenging results. Maybe Ray Dalio 0:15:10.000 --> 0:15:13.000 of Bridgewater, who I just had the great privileges speaking 0:15:13.080 --> 0:15:18.080 to where it's really really hard now to make money 0:15:18.720 --> 0:15:23.760 quantitative black box formulaic whether it's risk parity or this 0:15:23.920 --> 0:15:27.680 that or the other thing. Is that from another bygone age, 0:15:28.000 --> 0:15:33.120 or can those guys create alpha down the road? Well, 0:15:33.240 --> 0:15:35.600 I I would agree with the premise of your question, 0:15:35.600 --> 0:15:38.520 Tom that that it is getting much harder to generate alpha, 0:15:38.640 --> 0:15:43.600 if only because returns certainly interest rates and potential equity 0:15:43.680 --> 0:15:47.720 returns are lower. I mean, you know, information ratios of 0:15:47.720 --> 0:15:51.200 the past were in part generated simply by bowl markets, 0:15:51.240 --> 0:15:54.960 and now um as interest rate spreads are very narrow 0:15:55.080 --> 0:15:58.400 and opportunities in my view, are limited. You know, alpha 0:15:58.440 --> 0:16:02.760 generation becomes much more difficult affirm like PIMCO. I was 0:16:02.800 --> 0:16:05.840 at PIMCO and we could generate hundred and fifty basis 0:16:05.880 --> 0:16:08.320 points per year in alpha. You know, it becomes a 0:16:08.560 --> 0:16:12.280 very challenged and I would say relative to that period 0:16:12.320 --> 0:16:16.880 of time that an excellent manager that can generate basis 0:16:17.080 --> 0:16:20.600 and so over the market is probably uh in a 0:16:20.640 --> 0:16:23.640 good stead. So yeah, it's very difficult, and I think 0:16:23.680 --> 0:16:27.640 the age of active management is it's not dead, but 0:16:27.760 --> 0:16:31.640 it's certainly overpriced, and uh, we're gonna have to see 0:16:31.640 --> 0:16:34.640 some changes going forward because they can't generate what they 0:16:34.720 --> 0:16:37.280 used to generate in classy of you at Janice Henderson 0:16:37.320 --> 0:16:41.160 mentioning your former employee as well as as we mentioned 0:16:41.240 --> 0:16:44.240 Ray Delio at Bridgewater. If that's the case, if active 0:16:44.920 --> 0:16:49.280 is a challenge, what needs to be the response, almost 0:16:49.600 --> 0:16:54.680 from a portfolio structure basis, did just assume less diversification, 0:16:55.240 --> 0:17:01.320 less theory and more let's take a chance. Well, no, 0:17:02.000 --> 0:17:05.720 you know, I wouldn't advise that. I think that's what's occurring. Uh. 0:17:06.000 --> 0:17:09.040 You know, individuals and pension funds and institutions are taking 0:17:09.040 --> 0:17:12.760 more risk in order to generate what they hope for, 0:17:13.040 --> 0:17:17.280 uh in terms of returns relative to their liabilities. Um, 0:17:17.320 --> 0:17:19.400 it can only go so far. We know, spreads can 0:17:19.440 --> 0:17:22.800 only go so tight before defaults tend to take over. 0:17:22.880 --> 0:17:25.760 In the bond market. We know, I suppose in the 0:17:25.800 --> 0:17:28.359 stock market that p s can only go so high 0:17:28.440 --> 0:17:31.520 before you know, it becomes limited in terms of its 0:17:31.600 --> 0:17:37.159 future expansion. And so yeah, i'd say, of you know, 0:17:37.200 --> 0:17:41.040 we have a limited future in terms of expected returns, 0:17:41.080 --> 0:17:46.679 and the response, as investors are are exhibiting is basically 0:17:46.720 --> 0:17:50.480 to move into a lower feed product to uh take 0:17:50.520 --> 0:17:53.760 away some of those returns from the managers as opposed 0:17:53.800 --> 0:17:58.240 to themselves. Bill Morty Schanker, Here is their risk associated 0:17:58.280 --> 0:18:03.680 with that search for alpha out in the marketplace? Well, 0:18:03.880 --> 0:18:06.640 there always is. Anytime you move, anytime you move out 0:18:06.640 --> 0:18:09.600 from a treasury build, there's risk. But I would say this, yes, 0:18:09.680 --> 0:18:12.440 when when interest rates are basically zero and they are 0:18:12.600 --> 0:18:15.399 or negative in Germany and other places, and that's certainly 0:18:15.480 --> 0:18:18.639 very low. In the United States and elsewhere, Um, you know, 0:18:18.680 --> 0:18:22.240 the risk is increased. I mean a thirty years swap. 0:18:22.440 --> 0:18:25.240 Most of your listeners may not be uh you know, 0:18:25.280 --> 0:18:28.640 appraised of this, but a thirty years swamp basically only 0:18:28.680 --> 0:18:31.040 earns fifty basis points a year in terms of carry 0:18:31.040 --> 0:18:33.720 whether close to a thirty year duration, it's a it's 0:18:33.760 --> 0:18:38.040 an impossible situation unless basically interest rates stay the same. 0:18:38.200 --> 0:18:41.960 So all markets are overpriced. I use the term fake 0:18:42.119 --> 0:18:46.520 markets because uh you know, they're being generated by artificial 0:18:46.720 --> 0:18:50.159 stimulation from central banks, which at some point will disappear. 0:18:50.600 --> 0:18:53.560 It's not disappearing yet, but in two thousand and eighteen, 0:18:53.560 --> 0:18:58.280 for instance, central banks stimulation check writing, quantitative easing UM 0:18:58.560 --> 0:19:02.200 will go flat line as opposed to a trillion dollars 0:19:02.240 --> 0:19:04.720 a year positive. And so there will be a point 0:19:04.840 --> 0:19:10.000 where where risk enters the equation simply because monetary stimulation 0:19:10.160 --> 0:19:14.560 slows down or even goes negative. If you were had 0:19:14.560 --> 0:19:20.040 the ability to UH counsel Droomee Powell on policy prescriptions 0:19:20.040 --> 0:19:25.680 going forward, what would what would those recommendations be? Well, 0:19:25.720 --> 0:19:29.320 I would advise him to study UH some of his 0:19:29.440 --> 0:19:33.480 own Fed research from the San Francisco FED, for instance, 0:19:33.480 --> 0:19:36.239 where they've done historical studies for a long time in 0:19:36.359 --> 0:19:41.280 terms of the neutral interest rate, and to try and 0:19:41.480 --> 0:19:45.439 find and seek out and search as he moves higher. Uh, 0:19:45.560 --> 0:19:49.160 you know, twenty five basis points for quarter. What that 0:19:49.280 --> 0:19:52.159 neutral interest rate is that it used to be in 0:19:52.320 --> 0:19:56.640 nominal terms around four percent and now perhaps with inflation 0:19:56.680 --> 0:19:59.080 and one a half percent, is probably around two. But 0:19:59.160 --> 0:20:02.640 that's a probably nobody knows. I would say, Mr Powell, 0:20:03.040 --> 0:20:07.880 find that magical neutral interest rate which keeps inflation at 0:20:07.920 --> 0:20:11.000 two percent or lower and growth at two percent or higher, 0:20:11.280 --> 0:20:14.720 and uh, and tread carefully because it's uh, it's a 0:20:14.840 --> 0:20:17.280 it's a changing number, and it's a it's a new 0:20:17.320 --> 0:20:21.399 world in terms of credit, and keep reducing that balance sheet, 0:20:21.480 --> 0:20:26.439 I would imagine, right, Well, I think that's okay. I'm 0:20:26.480 --> 0:20:29.679 not a balance sheet fanatic in terms of reducing it. 0:20:29.720 --> 0:20:32.880 I sort of think, Marty, that the balance sheet itself 0:20:32.920 --> 0:20:36.080 at four trillion plus is really a reflection of the 0:20:36.200 --> 0:20:39.359 leverage in our economy. We've got about sixty eight trillion 0:20:39.359 --> 0:20:41.480 in terms of total credit and four and a half 0:20:41.560 --> 0:20:44.640 trillion in terms of the FED balance sheet, And look 0:20:44.640 --> 0:20:47.600 at that as a bank. Um, you know, with equity 0:20:47.640 --> 0:20:51.239 capital maybe a five or six percent. You know, if 0:20:51.280 --> 0:20:55.000 you reduce that by half, your you've got an equity 0:20:55.040 --> 0:20:57.640 capitalization of two or three percent. We know banks don't 0:20:57.680 --> 0:21:00.600 do well on that, so I'd say, I'd say leave 0:21:00.680 --> 0:21:03.880 the balance you alone. It's okay, But they're they're gonna 0:21:03.960 --> 0:21:08.440 go forward. Bill the President yesterday with Chairman Brady of 0:21:08.480 --> 0:21:11.320 the House Ways and Means Committee, trotted out their card, 0:21:11.359 --> 0:21:14.560 their tax reform card, which I'm sure Bill Gross will 0:21:14.560 --> 0:21:17.160 be doing his taxes on, uh this year, the little 0:21:17.160 --> 0:21:20.000 three by five card, making it simple and all that. 0:21:20.080 --> 0:21:23.920 What is your process, what is your prospect for tax reform? What? 0:21:23.920 --> 0:21:26.360 What do you how do you model it into your business? 0:21:26.440 --> 0:21:30.080 And frankly, how should our listeners look at tax reform 0:21:30.160 --> 0:21:34.840 out three four in six months? Well, first of all time, 0:21:34.920 --> 0:21:37.840 in my view, it's not tax reform. It's tax cut 0:21:37.880 --> 0:21:42.119 scuts cuts, and the cuts are basically pointed at corporations 0:21:42.160 --> 0:21:44.320 as opposed to individuals. And we can talk about the 0:21:44.359 --> 0:21:47.600 details and so on, but um, it's a corporate tax cut. 0:21:47.680 --> 0:21:50.840 It's market friendly. I won't deny that it has been 0:21:50.880 --> 0:21:53.440 market friendly, but most of the benefits go to the 0:21:53.560 --> 0:21:58.760 corporations and individuals basically are flatline. Despite the claims, I 0:21:59.080 --> 0:22:02.000 would say, this is the interesting argument that I'm seeing. 0:22:02.040 --> 0:22:05.720 It's sort of like the Laffer curve uh being back, 0:22:06.680 --> 0:22:11.480 but this time regarding wages. Their claim the Republicans claimed that, uh, 0:22:11.560 --> 0:22:16.120 you know, if if you uh can can lower taxes, 0:22:16.160 --> 0:22:19.440 you can raise wages. The old trickle down. And it's 0:22:19.480 --> 0:22:24.720 supported by continuing studies by the Council of Economic Advisors, etcetera, etcetera. 0:22:25.320 --> 0:22:28.560 Private economists such as Larry Summers and others. Uh. You know, 0:22:28.600 --> 0:22:30.840 Summers said the other day that he would give an 0:22:30.840 --> 0:22:33.160 F to F to any student who submitted a paper 0:22:33.240 --> 0:22:37.360 supporting this logic. Um, so we have an ongoing debate. 0:22:37.720 --> 0:22:39.960 I say, one chart and I'll finish with this. And 0:22:40.359 --> 0:22:43.920 the answer, Uh, the the economist has a chart this 0:22:43.960 --> 0:22:48.760 week which shows UH lowering corporate taxes in many countries 0:22:48.800 --> 0:22:52.080 over many years. And basically it's a push in terms 0:22:52.119 --> 0:22:55.919 of the wage gains for the population. And so, you know, 0:22:56.280 --> 0:22:59.080 big arguments back and forth, but I suspect it's not 0:22:59.080 --> 0:23:01.200 gonna help much into was a wage growth. We certainly 0:23:01.200 --> 0:23:03.320 didn't see it today, did we. No, we did not 0:23:03.400 --> 0:23:06.440 Bill thank you so much for coming prepared. Mr Garoffalo 0:23:06.560 --> 0:23:08.560 is gonna make a difference for the forty Niners from 0:23:08.600 --> 0:23:12.800 New England out to San Francisco. Yeah, I think so. 0:23:12.880 --> 0:23:14.760 I think the Niners will win a game this year. 0:23:15.119 --> 0:23:17.359 They may still get the first draft choice of the 0:23:17.359 --> 0:23:20.080 Browns do the same. But I think next year it's 0:23:20.119 --> 0:23:22.960 up better season. How can it be worse? Very good Bill, girls, 0:23:23.000 --> 0:23:26.080 thank you for your attendance today and particularly joining us 0:23:26.080 --> 0:23:27.639 a few days ago in five Day as well. We 0:23:27.680 --> 0:23:43.160 greatly appreciate his perspective. He is with Janice Henderson over 0:23:43.200 --> 0:23:45.960 the next half hour. We hope you regroup with us 0:23:46.680 --> 0:23:51.680 on an extraordinary week of economics, finance investment. David gur Friends, 0:23:51.880 --> 0:23:54.919 Laqua and I never a chance were humbled by the 0:23:55.080 --> 0:23:57.199 quality of the guests. We get to speak with Vincent 0:23:57.200 --> 0:24:00.360 Reinhart yesterday. It was a real high point. I thought 0:24:00.359 --> 0:24:03.639 that Alan Blinder added value and fed day. We spoked 0:24:03.640 --> 0:24:07.399 to Mr Gross twice, any number of other guests, and 0:24:07.480 --> 0:24:11.359 it is wonderful to try to summarize the week with 0:24:11.520 --> 0:24:15.040 Yacom Fells with Morgan Stanley for years, where he literally 0:24:15.080 --> 0:24:19.200