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Speaker 1: A discussion up ahead here about the markets here, and

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Speaker 1: a discussion with Bill Gross, the co founder of PIMCO,

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Speaker 1: joining us right now from California. Bill, great to have

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Speaker 1: you here on the program. We've been talking a lot

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Speaker 1: this week. Absolutely, we've been talking a lot this week

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Speaker 1: about the fight against inflation, whether it has been slaid

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Speaker 1: or at least if it's on its way to being slaid.

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Speaker 1: You can make a case economically speaking that we're on

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Speaker 1: course for that, But is there an investment case to

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Speaker 1: be made right now around that?

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Speaker 2: Well, I think there is a case for three percent

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Speaker 2: inflation going forward plus or minus, and I think if

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Speaker 2: we got to that point, then the FED would begin

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Speaker 2: to consider stopping and maybe even lowering rates over the

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Speaker 2: next year or so.

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Speaker 3: But I do think that the tenuere at four.

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Speaker 2: Fifteen now, you know, it is probably overvalued and has

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Speaker 2: been overvalued for a long time in terms of a

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Speaker 2: lower yield and too high a price.

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Speaker 3: You know, if FED funds actually came.

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Speaker 2: Down to two and a half half or three percent,

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Speaker 2: you know, the ten yure term premium that is spread

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Speaker 2: between ten years and FED funds typically has been about

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Speaker 2: one hundred and thirty five basis points over a long

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Speaker 2: period of time. So you know, if you had one

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Speaker 2: hundred and thirty five basis points to two and a

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Speaker 2: half or even three percent on FED funds, you get

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Speaker 2: to a point where we are now. And that suggests

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Speaker 2: that all of the bulls on treasuries and on the

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Speaker 2: tenure and maybe even on the long bun I think

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Speaker 2: their arguments are a little misplaced. I think it's been

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Speaker 2: overvalued for a long time, and we're going back to

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Speaker 2: proper valuation on longer term notes and bonds.

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Speaker 1: But I mean, you understand better than anybody that relationship

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Speaker 1: between what's going on with inflation and the FED and

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Speaker 1: how that sort of factors into some of these bullish calls.

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Speaker 3: And those bull calls have really.

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Speaker 1: Started to increase, not just because of the two reports

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Speaker 1: that we got this week. Bill, if they do have

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Speaker 1: it wrong, here kind of give us a sense here

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Speaker 1: of why specifically.

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Speaker 3: Well, I I I think that they got it wrong. Uh.

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Speaker 2: First of all, because rates were so low because of

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Speaker 2: quantitative easing and the fact that, uh, you know, in

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Speaker 2: some cases the five year real yield was uh a

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Speaker 2: minus uh two hundred basis points, which sounds incredible, but

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Speaker 2: it was a year and a half ago, and uh

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Speaker 2: it's now a plus two hundred basis points, So I

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Speaker 2: f one hundred basis points switch in terms of real rates.

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Speaker 2: So I I think investors simply got overwhelmed with the

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Speaker 2: fact that the FED would stay low and stay low

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Speaker 2: for a long time, and that inflation wouldn't uh uh

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Speaker 2: pop its head out of the out of the rabbit

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Speaker 2: hole it has. And and so now we're moving back

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Speaker 2: into uh uh an old age world. I suppose in

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Speaker 2: which uh b you known the interest rates really are

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Speaker 2: are are a sign of a healthy economy. And uh

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Speaker 2: the way we have it now the negative yield curve,

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Speaker 2: and we've had that for twelve to eighteen months. I

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Speaker 2: suppose you know, a thriving economy, a thriving finance based

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Speaker 2: economy can't do well. Doesn't mean it goes down in

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Speaker 2: the dust, but it can't do well. If you know,

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Speaker 2: low risk investments yield more than high risk investments. And

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Speaker 2: as you march out from the you know, the thirty

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Speaker 2: day bill to you know, the thirty year bond, you

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Speaker 2: can see that you are better off field wise in

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Speaker 2: terms of the thirty year bill or thirty day bill.

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Speaker 2: And so that's just a perverted yield current and it

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Speaker 2: won't do well for the economy going forward.

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Speaker 4: Well, you make the point that higher rates are a

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Speaker 4: sign of a healthy economy. And I want to talk

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Speaker 4: a little bit more about real yields.

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Speaker 3: Because I was just going through the screens.

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Speaker 4: If you look at thirty year real yields, they're knocking

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Speaker 4: on the door of two percent. We haven't been there

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Speaker 4: for well over a decade. What message do you take

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Speaker 4: away from that, this fantastic run up that we've seen

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Speaker 4: specifically in real yields.

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Speaker 2: Well, it's a message that the economy and inflation in

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Speaker 2: particular should be slowing down and has to slow down

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Speaker 2: if inflation is to be contained. Is a two percent

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Speaker 2: real yield for I don't think it's not high for thirties,

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Speaker 2: but for fives and close to that for tens.

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Speaker 3: Is that too high? Yeah? It probably is on a longer.

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Speaker 2: Term basis, But you know, it's been deemed necessary I

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Speaker 2: guess to keep inflation at this point at three to

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Speaker 2: three and a half percent, and will probably be necessary

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Speaker 2: going forward. Real yields, as Paul Volker showtis you know,

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Speaker 2: are the are this are the solution to slower economic growth,

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Speaker 2: lower inflation.

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Speaker 3: And I think both.

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Speaker 2: I think, you know, the current chairman, Powell is trying

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Speaker 2: to replicate what Paul Vulker did.

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Speaker 3: To slay the inflation dragon.

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Speaker 2: Not in the same way and not to the same

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Speaker 2: magnitude that Vulgar had to do, but he's trying to

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Speaker 2: be the Vulgar number two going forward, you know, twelve

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Speaker 2: to twenty four months in the future.

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Speaker 4: Bill, I promise you, I'm looking at the thirty year

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Speaker 4: real yield right now at one point nine to five percent.

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Speaker 4: All I beat you the chart later, but it is

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Speaker 4: really high. It's been shocking. I want to go back

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Speaker 4: to nominal yields though, and talk about fair value because

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Speaker 4: I follow your Twitter pretty closely, and of course you

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Speaker 4: tweeted last week that your overall bearish on ten year yields.

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Speaker 4: We've talked about how you look at the ten year

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Speaker 4: right now it's at about let's see four point sixteen percent.

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Speaker 4: Where is fair value? At what level would you get

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Speaker 4: comfortable stepping into duration here?

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Speaker 2: Well, I think at higher levels around the four and

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Speaker 2: a half is a good technical stopping point. You know

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Speaker 2: what we've seen this week, Katie, in terms of supply,

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Speaker 2: We've seen one hundred billion in supply. You mentioned that

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Speaker 2: three ten and thirty year bonds. The first two auctions

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Speaker 2: went well, the thirty year did not. But we can expect,

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Speaker 2: I think, going forward, based upon the fiscal situation and

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Speaker 2: a trillion and a half dollar deficit, to see a

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Speaker 2: supply in terms of longer dated treasuries of maybe a

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Speaker 2: trillion more than we saw on the previous twelve months.

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Speaker 2: So it's supply. In addition to the fact, in my

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Speaker 2: view that the ten year you know, began the year

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Speaker 2: a much too low a level. I would point out

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Speaker 2: too that other markets, the boone market in Germany and

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Speaker 2: the guilt market in the UK, they're all at basically

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Speaker 2: cyclical highs and signs at the moment of breaking into

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Speaker 2: higher territories.

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Speaker 3: So this is.

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Speaker 2: A global phenomenon. We know something about Japan. We don't

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Speaker 2: know exactly what their intentions are, but it seems all

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Speaker 2: major central banks are moving in the same direction, and

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Speaker 2: all major bond markets are moving that way too. So

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Speaker 2: I think the tenure treasury of four and a half

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Speaker 2: percent might be some might be some value, but Bill

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Speaker 2: was certainly not at this level.

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Speaker 1: But Bill, when we look at sort of I guess

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Speaker 1: what real rates are telling us, and you put that,

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Speaker 1: I guess against the backdrop of the increased in treasury supply,

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Speaker 1: what most people expect to increase further, and of course

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Speaker 1: the potential for additional fiscal money coming through the pipeline.

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Speaker 1: Does that distort the message that we're getting.

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Speaker 2: I think to some extent, like I suggested the real yields.

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Speaker 2: That's sorry, Katie on the thirty year. I guess you're

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Speaker 2: more right than I am in terms of being close

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Speaker 2: to two percent. So they're all close to two percent historically,

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Speaker 2: you know, those levels have been enough, have been enough

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Speaker 2: to bring down inflation. They were higher than that during

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Speaker 2: the Vulgar period, although it was harder to measure because

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Speaker 2: they didn't have tips. But you know, two percent real

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Speaker 2: is a substantially restrictive rate. And I think once you

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Speaker 2: know this five hundred billion or one trillion push by

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Speaker 2: consumers resulting from the three or four trillion dollars fiscal

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Speaker 2: program of twelve to eighteen months ago, I think once

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Speaker 2: that's used up, that we're going to start to see

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Speaker 2: the effect of a two percent reel rate on consumers

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Speaker 2: and consumption going forward. Therefore lower reel GDP and therefore

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Speaker 2: inflation in my view around three percent.

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Speaker 3: Bill.

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Speaker 4: I know that you've gotten out of a lot of

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Speaker 4: your regional bank holding. You tweeted last month you made

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Speaker 4: quote mucho bucks. You tweeted something earlier that I thought

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Speaker 4: was really interesting. You were connecting it to what we're

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Speaker 4: seeing in the treasury market, saying that you find it

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Speaker 4: odd that the high thirty year treasure yields that took

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Speaker 4: down SVB and most other regionals due to the access

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Speaker 4: duration are just as high or higher.

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Speaker 3: Now.

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Speaker 4: Did the past few months allow regionals to reduce duration?

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Speaker 4: What do you mean by that? Were you being basically

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Speaker 4: making the point that we could see more trouble ahead

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Speaker 4: for some of these smaller banks.

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Speaker 3: Well, it's hard to know, Katie.

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Speaker 2: We do know that Silicon Valley Bank was taken down

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Speaker 2: because of long term treasures. They took risk, but they

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Speaker 2: took it on the duration side as opposed to the

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Speaker 2: credit side. And during the time of many panic two

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Speaker 2: months ago, you know firms like Schwab and so on

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Speaker 2: which were identified with having held a longer term portfolio,

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Speaker 2: but they were duh taken down rather abruptly as well.

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Speaker 2: I I find it odd now that thirty year treasures

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Speaker 2: are at a higher yield than they were when this

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Speaker 2: many panic occurred. That uh, you know, the the duration

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Speaker 2: effect isn't having an effect on the original banks. It

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Speaker 2: doesn't mean that you know during this period of time

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Speaker 2: that many of them have taken measures to reduce duration.

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Speaker 2: I don't know that the statistics are not current enough,

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Speaker 2: but you know it, it's certainly odd that they've come

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Speaker 2: back up uh ten twenty thirty percent, and the long

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Speaker 2: bond and the long U treasure yield is higher than

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Speaker 2: what it was before, and so their h there assets

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Speaker 2: to the extent that they own longer duration assets, treasuries

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Speaker 2: perhaps you know, have gone down in price, and uh,

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Speaker 2: their their book value has probably been affected. But I'm

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Speaker 2: not sure in terms of the totality whether or not

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Speaker 2: the regionals have reduced duration. But if they haven't, then

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Speaker 2: there could be problems.

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Speaker 3: Bill.

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Speaker 4: Is it odd enough that you would bet against some

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Speaker 4: of these regional bank socks or simply not touch them.

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Speaker 2: Well, I haven't bet against them. I just eliminated them

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Speaker 2: from my portfolio. I wrote an investment I Look about

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Speaker 2: two months ago that said I always wanted to own

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Speaker 2: a bank because it's a license to make money at

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Speaker 2: book value.

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Speaker 3: If it's created for you in a new fashion.

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Speaker 2: There was a chance two months ago where you could

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Speaker 2: buy a decent bank at fifty book value, and so

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Speaker 2: it was on sale by.

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Speaker 3: Half during that time.

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Speaker 2: So I think at this point, not having been an

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Speaker 2: expert on banks themselves, but being experienced I guess over

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Speaker 2: thirty or forty years in terms of financial panics, and

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Speaker 2: this was a mini panic that it just seemed like

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Speaker 2: an overreach in terms of a downside, and that there

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Speaker 2: was value not at one time's book value, but at

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Speaker 2: a zero point five percent book value, And so I

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Speaker 2: bought a lot of them. But now, as I mentioned,

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Speaker 2: with long bond yields moving higher as opposed to lower,

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Speaker 2: and with most of the regionals going up thirty or

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Speaker 2: forty percent, you know, it's.

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Speaker 3: Just time to look elsewhere. And that's what I'm doing.

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Speaker 1: Well, let's talk about that. I mean, where are you looking?

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Speaker 1: What's your appetite right now?

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Speaker 2: Well, it's mainly in our related investments. I have a

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Speaker 2: pretty good position in Activision, which is the Microsoft acquisition,

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Speaker 2: which may or may not, but it looks good in

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Speaker 2: the next two to three weeks at ninety five dollars.

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Speaker 2: In the stocks just below ninety two.

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Speaker 3: So I think that's a good value.

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Speaker 2: And the best value that I think out there remain

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Speaker 2: is you know, in the MLPs, the pipelines that are partnerships,

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Speaker 2: the first of all, their tax deferred, and second of all,

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Speaker 2: they yield eight to eight and a half percent and participates. Yes,

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Speaker 2: when oil prices go up, and you know if oil

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Speaker 2: prices went back down, they're correlated to some extent. But

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Speaker 2: these are investments that are very attractive, especially one Magellan,

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Speaker 2: which is a symbol MMP. It's selling at a six

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Speaker 2: percent discount to its acquirer, which is OK, and you

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Speaker 2: know that could take place in one to two months.

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Speaker 2: And so these are these have been my major moneymakers

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Speaker 2: in addition to the regional Is.

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Speaker 1: That primarily though looking for cash flow or is there

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Speaker 1: a growth story there as well?

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Speaker 3: Well? I think so.

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Speaker 2: You know, I'm seventy nine, and so portfolios reflective fact

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Speaker 2: that cash flow is important. It's not that I'm dissing

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Speaker 2: in Vidia, although I did a week or two weeks ago,

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Speaker 2: but you know, at eight to eight and a half

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Speaker 2: percent tax deferred, that's really an equivalent yield of about

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Speaker 2: eleven or twelve percent. When you put a pencil to it,

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Speaker 2: and so that to me is an excellent, excellent return.

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Speaker 2: You know, the stock market itself. You haven't asked this question,

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Speaker 2: but let me get into it. The equity risk premium,

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Speaker 2: as pointed out by the Economist just last night their

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Speaker 2: weekly addition, the equity risk premium, which is the difference

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Speaker 2: between between the equity. It's the PE ratio upside down.

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Speaker 2: So if the PE is twenty, it's a five percent

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Speaker 2: premium relative to the tenure. Right now it's less than

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Speaker 2: one percent, which is almost historically low. It means investors

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Speaker 2: are willing to take equity risk relative to a tenure treasury,

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Speaker 2: which in my view is overvalued itself.

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Speaker 3: And so.

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Speaker 2: You know, the market, the stock market, I think is

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Speaker 2: overvalued based upon those terms and other terms as well.

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Speaker 1: When you look at though, what kind of led us

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Speaker 1: to these valuations? Bill? I mean, there were a lot

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Speaker 1: of people that talked about this idea. I mean you

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Speaker 1: mentioned in Nvidia and AI, the idea that there was

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Speaker 1: some sort of new structural growth story, if you will,

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Speaker 1: that AI would make us more productive and in turn

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Speaker 1: that would lead to better profits, better profit margins. Here,

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Speaker 1: do you not see any validity to that thesis.

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Speaker 2: No I do, or I didn't mention that, and thanks

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Speaker 2: for pointing that out.

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Speaker 3: I'm not sure.

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Speaker 2: I'm not an expert AI, although I have one here

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Speaker 2: in my pocket phone, but it seems to me, yes,

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Speaker 2: that the consensus seems to be that AI will affect

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Speaker 2: profits in many areas, not just in chips, and so

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Speaker 2: if that's the case, then that the stock market has

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Speaker 2: a fundamental foundation going forward.

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Speaker 3: Uh, well, we'll have to see on that.

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Speaker 2: But you know, aside from that, you know, I simply

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Speaker 2: think that based on the low equity risk premium and

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Speaker 2: relatively high pe ratios that you know, the market's over valued.

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Speaker 2: Let me point this out, but real interest rates are

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Speaker 2: real interest rates are really important over a longer term

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Speaker 2: basis in terms of stock valuations. And as we've mentioned before,

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Speaker 2: the five year real interest rate has gone from a

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Speaker 2: minus two hundred to a plus two hundred. That means

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Speaker 2: that the five year tip has gone down by sixteen

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Speaker 2: percent and the ten year tip's gone down by twenty percent.

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Speaker 2: And you know, had things been copasetic and not changed,

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Speaker 2: had we not seen AI, had we not experienced a

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Speaker 2: momentum flesh here in the last six months, then you know,

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Speaker 2: these interest rates over a longer term basis would would

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Speaker 2: be bound to affect the stock market levels because they've

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Speaker 2: they themselves have gone down by twenty to twenty five percent.

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Speaker 4: Well, Bill, I'm glad you brought us there, because that's

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Speaker 4: something I've been wondering. I remember back in twenty twenty,

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Speaker 4: twenty twenty one, when interest rates were real interest rates

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Speaker 4: at those deeply negative levels. I wrote a lot of

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Speaker 4: stories to the effect of when this goes back to

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Speaker 4: positive territory in a meaningful way, that'll be bad news

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Speaker 4: for stocks. Obviously we haven't seen that. Do you think

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Speaker 4: that that dynamic is just delayed or has something fundamentally

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Speaker 4: changed in that relationship?

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Speaker 2: No, I I I think it's delayed, Kitty. And it's

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Speaker 2: hard to know because the UH real interest rates work

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Speaker 2: with a lag. It's not a day to day type

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Speaker 2: of basis. That could be a one to two to

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Speaker 2: three year type of lag basis. And and both of

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Speaker 2: you have bought out the fact that that AI and

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Speaker 2: momentum and UH. You know, a good earning season for

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Speaker 2: stocks UH in the last twelve to twenty four months

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Speaker 2: based upon fiscal policy that UH will not be repeated

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Speaker 2: in In my opinion relative to what we've seen in

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Speaker 2: the past at UH three to four trillion dollar UH deficits, and.

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Speaker 3: So I absince this.

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Speaker 2: I I think going forward, if an investor is a

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Speaker 2: long term investor, wanna be very careful in terms of

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Speaker 2: valuations here on stocks, despite AI and despite UH momentum

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Speaker 2: UH going forward it UH. It's clearly an unusual UH

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Speaker 2: spread and an unusual effect that hasn't taken place going forward.

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Speaker 4: All Right, Bill, gotta leave it there. Really appreciate your

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Speaker 4: time on this summer Friday. I hope you come back soon.

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Speaker 4: That is Bill Gross, of course, he is the co

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Speaker 4: founder of PIMCOH