WEBVTT - PIMCO Co-Founder Bill Gross Talks Fed Decision Expectations

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>It is a very big week of economic news, and

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<v Speaker 2>just a few of the highlights include that CPI report,

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<v Speaker 2>the latest FED decision on Wednesday. We're also going to

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<v Speaker 2>keep a eye on producer prices and job has claims

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<v Speaker 2>on Thursday. Let's get some insight on what it all

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<v Speaker 2>means for the bond market. Joining us is the bond

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<v Speaker 2>King himself, Bill Gross, co founder of Pimco. Bill, it's

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<v Speaker 2>our launch day. It's our first show on the news

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<v Speaker 2>set we relaunched. We super appreciate it joining us on

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<v Speaker 2>launch day. Bill, Thank you so much.

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<v Speaker 3>You're welcome. Good to be here.

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<v Speaker 2>All right, what's the trade into the Fed on Wednesday?

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<v Speaker 2>What do you think?

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<v Speaker 4>Well, I don't think there's much of a trade on treasuries,

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<v Speaker 4>you know, to my way of thinking, the tenure, which

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<v Speaker 4>is close to four and a half let's call it

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<v Speaker 4>four and a half percent, is dependent upon inflation, which

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<v Speaker 4>we'll see on Wednesday, and we'll know more because of that.

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<v Speaker 4>But if inflation is two percent, I think the ten

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<v Speaker 4>year belongs close to four percent. If it's three percent,

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<v Speaker 4>it belongs closer to five. And we're right in the middle.

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<v Speaker 4>So at the moment with four point five ten year

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<v Speaker 4>treasuries and break evens that are around to twenty. You know,

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<v Speaker 4>that's a force that's a four to seventy basically break

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<v Speaker 4>even for the nominal ten year treasury, and I think

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<v Speaker 4>we're about there. There's not much to be done until

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<v Speaker 4>we know more.

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<v Speaker 2>Well, what are the chances that we see, say the

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<v Speaker 2>median dot in twenty twenty four and twenty twenty five

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<v Speaker 2>actually move higher. I mean, do you think there's a

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<v Speaker 2>possibility And what would be the reaction to something like that.

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<v Speaker 3>Well, I think it would be negative.

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<v Speaker 4>You know, the Fed is basically signaled they're sort of done,

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<v Speaker 4>perhaps ninety five percent done in terms of raising rates.

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<v Speaker 4>It's not that they can't raise them. If to print

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<v Speaker 4>on CPI isn't bad for the next months. But you know,

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<v Speaker 4>I think the market basically anticipates the Fed to stay

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<v Speaker 4>and maybe in September, maybe in December, maybe one or

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<v Speaker 4>two cuts if you know, the current numbers continue as

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<v Speaker 4>we've seen them.

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<v Speaker 1>I'm curious, Bill, when we talk about all the moves

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<v Speaker 1>that we've been seeing in the bond market as of late,

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<v Speaker 1>particularly in treasuries, as people try to sort of gain

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<v Speaker 1>what the FED does next. Is there still a strong

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<v Speaker 1>correlation between what we're seeing there and what we're seeing

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<v Speaker 1>in the equity market or is that kind of splintered.

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<v Speaker 4>Yeah, I don't think it exists anymore. I mean, for

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<v Speaker 4>years I've followed the correlation between the two, between real

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<v Speaker 4>interest rates and stock prices, between the FED funds rate

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<v Speaker 4>and stock prices, and you know, as we've seen, you know,

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<v Speaker 4>the FED raised there are short term rates over the

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<v Speaker 4>past year and a half or two from close to

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<v Speaker 4>zero to now five and three eights, and the stock

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<v Speaker 4>market basically I has neglected all of that in terms

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<v Speaker 4>of the rise and not only nomenal but real interest rates.

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<v Speaker 4>So you know, the correlations broke down. It's more of

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<v Speaker 4>a momentum type of market. Actually, it's a very momentum

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<v Speaker 4>driven market with AI that you've just talked about.

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<v Speaker 3>And so.

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<v Speaker 4>I wouldn't be so keen I guess on correlating stock

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<v Speaker 4>prices to interest rates at the moment, at least.

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<v Speaker 1>When you look at valuations around here, and I know

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<v Speaker 1>you can sort of look at this market either you

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<v Speaker 1>could go the traditional bottom up valuation method or just

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<v Speaker 1>I guess, look at the technicals or ride the momentum.

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<v Speaker 1>But when you look at valuations and all the arguments

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<v Speaker 1>right now that this market might be overvalue, things might

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<v Speaker 1>be overpriced, here do you find I guess, credence to that?

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<v Speaker 3>Oh, I think so. I mean it depends upon.

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<v Speaker 4>Multiple, which multiple you use, whether it's the ten year

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<v Speaker 4>cape as they call it, or whether it's the the

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<v Speaker 4>immediate expectation in the next twelve months. In any case,

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<v Speaker 4>it's historically high or close to historically high at twenty

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<v Speaker 4>one twenty two times for a pe. And so to

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<v Speaker 4>my way of thinking, if the economy slows, and I

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<v Speaker 4>think it's slowing, we don't need a recession. But if

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<v Speaker 4>the economy slows and earning US growth fails to meet expectations,

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<v Speaker 4>I think there's a problem in terms of valuation at

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<v Speaker 4>the moment for many stocks.

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<v Speaker 3>Many stocks.

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<v Speaker 1>Well, that does that mean like right now, based on

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<v Speaker 1>at least what we know publicly, would you be comfortable

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<v Speaker 1>taking a broad market position right now in US equities?

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<v Speaker 4>No, But I'd be comfortable in taking a specific you know,

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<v Speaker 4>bet and investment in certain areas which are still very attractive.

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<v Speaker 4>I know that's the standard explanation that that investors basically say,

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<v Speaker 4>but I think there's some areas in the market that

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<v Speaker 4>are very attractive based upon a slowing economy and based

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<v Speaker 4>upon high valuations, and many stocks and the nastac well,

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<v Speaker 4>let's talk about a few I've owned for a long

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<v Speaker 4>time and I have recommended for a long time. Master

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<v Speaker 4>Limited Partnerships for pipelines. These are stocks. These are partnerships,

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<v Speaker 4>and because of that, they can't be bought by municipal

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<v Speaker 4>basically by the market, by mutual funds, and so it's

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<v Speaker 4>a narrow universe. These are stocks like energy transfer ets

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<v Speaker 4>a symbol like MPLX Marathon Pipeline, which is the symbol there.

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<v Speaker 4>You know. They yield between eight and eight and a

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<v Speaker 4>half percent. And there's one that I love, I actually

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<v Speaker 4>love Wees Western Pipeline yields about nine and a half percent.

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<v Speaker 4>These yields are basically utility, their taker paid type of contracts.

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<v Speaker 4>They defer because their partnerships, they defer taxes on their dividends,

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<v Speaker 4>and so it's a it's a huge you know, and

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<v Speaker 4>it's a huge attraction to me in terms of yield

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<v Speaker 4>and potential price appreciation. And they're all close to the

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<v Speaker 4>top of their twelve month highs along the.

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<v Speaker 2>Same lines you mentioned utilities. Utilities continue to sort of

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<v Speaker 2>outperform in a large part of that other power players

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<v Speaker 2>like Fistra or Constellation Energy, and that's definitely related to

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<v Speaker 2>the AI play. Do you buy into that kind of hype?

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<v Speaker 3>Yeah, I think so.

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<v Speaker 4>I own some Ane was just the next Energy, and

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<v Speaker 4>I think there's a correlation there between interest rates and between.

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<v Speaker 3>You know, the price of the stock.

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<v Speaker 4>So I think in certain areas, I think utilities as

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<v Speaker 4>a whole have sort of been overblown in terms of

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<v Speaker 4>the move relative to AI, aretill artificial intelligence and the

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<v Speaker 4>fact that they use more energy. But you know, there

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<v Speaker 4>are certain stocks there. Anye is one of them that

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<v Speaker 4>I like.

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<v Speaker 1>What about banks right now? Bill, There's been a lot

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<v Speaker 1>of talk here about financials and this idea that quite

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<v Speaker 1>a few of them might actually sort of have been

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<v Speaker 1>kind of valued, maybe not appropriately, the idea that there's

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<v Speaker 1>a little bit more juice left in some of those names.

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<v Speaker 1>Do you find any real value there, particularly outside of

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<v Speaker 1>just the big money center banks.

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<v Speaker 3>Yeah.

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<v Speaker 4>I've bought some regionals today and I do think, you know,

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<v Speaker 4>they're down ten or fifteen percent from their peaks, and

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<v Speaker 4>so that's one positive going forward. Many of them yield

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<v Speaker 4>five to five and a half percent. I bought this morning.

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<v Speaker 4>You know, Key Bank k E Y yields close to

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<v Speaker 4>six percent. And you know, it seems to me that

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<v Speaker 4>the commercial real estate problems has been reserved against for

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<v Speaker 4>the most part, and so k E Y or Truest

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<v Speaker 4>TFC or Citizens CFG, you know, to my whay, I

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<v Speaker 4>think in are very attractive investments for the media to

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<v Speaker 4>long term.

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<v Speaker 1>I am curious on the point though, of commercial real estate.

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<v Speaker 1>There's been so much handwringing right now about the next

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<v Speaker 1>shoe to drop, the idea that we haven't really worked

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<v Speaker 1>ourselves through the cire crisis or whatever we want to

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<v Speaker 1>call it. Here, you're not worried that we're going to

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<v Speaker 1>see any sort of major defaults, at least not major

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<v Speaker 1>enough that would really rattle the market.

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<v Speaker 4>Well, I think it's dependent upon the economy. If we

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<v Speaker 4>get a decent recession, then obviously you know, commercial real

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<v Speaker 4>estate loans are less attractive than they are at the moment,

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<v Speaker 4>So watch the economy. As I pointed out before, I

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<v Speaker 4>think in many cases they've these regionals have had a

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<v Speaker 4>year or two years to reserve. Again, it's the potential

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<v Speaker 4>for you know, additional losses. It's just you know, they

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<v Speaker 4>traded pees of around nine. They traded price to book

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<v Speaker 4>values of point seven or point eight relative to something

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<v Speaker 4>like JPM, and so you know, I like them for

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<v Speaker 4>the long term, Hey Bill.

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<v Speaker 2>One of the big news items that really move markets

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<v Speaker 2>for the Ust twenty four hours is what we saw

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<v Speaker 2>over with the parliamentary elections and Matcron calling for legislative

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<v Speaker 2>elections at the end of June early July. The market

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<v Speaker 2>moved quite sturdily here. The euro hit a one month low,

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<v Speaker 2>you got to pop in yields, the BTP boom spread

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<v Speaker 2>really blew out, you got a weakness and the equity

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<v Speaker 2>market over in France in particular. What did you make

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<v Speaker 2>of the market reaction to what we saw.

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<v Speaker 3>Well, I think it's to be expected.

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<v Speaker 4>I think in terms of an attraction German tenure boons

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<v Speaker 4>and French oats the tenure there there are spreads of

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<v Speaker 4>narrowed significantly in the past month or two relative to

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<v Speaker 4>treasuries and today as well by eight or ten basis points.

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<v Speaker 4>So there's there's coming to a point where European bonds

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<v Speaker 4>are more attractive than treasury bonds in my.

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<v Speaker 2>Opinion, where what European bonds would you be looking at.

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<v Speaker 4>Bill Well, I mentioned tenure buns, ten year oates, the

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<v Speaker 4>Italian bonds as well. Has has you know, gained more

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<v Speaker 4>attraction in the past several weeks, and certainly after last

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<v Speaker 4>night's snap election in France And.

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<v Speaker 1>It gets It's interesting too, Bill, because we talk about

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<v Speaker 1>what happened overnight with the with the EU elections and

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<v Speaker 1>the snap election in France coming up, we also had

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<v Speaker 1>three elections, uh of course in India and Mexico and

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<v Speaker 1>a couple other places South Africa that also rattled investors.

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<v Speaker 1>And of course, as you know, we still have a

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<v Speaker 1>big election here in the US that could have a

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<v Speaker 1>dramatic impact on investor psychees. Are those, at least here

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<v Speaker 1>in the US as we move forward to November? Do

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<v Speaker 1>you think that is going to be a tradable event?

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<v Speaker 1>Do you think that the policy difference is and the

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<v Speaker 1>reaction to whoever wins in November will be market moving?

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<v Speaker 4>Yeah?

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<v Speaker 3>I think so.

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<v Speaker 4>And in these cases that you mentioned, these prior elections

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<v Speaker 4>in the last few weeks, you know, they've all moved right,

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<v Speaker 4>and there's a certain consequence to that, But there's also

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<v Speaker 4>an element of uncertainty, and so what we've seen, you know,

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<v Speaker 4>last night, and what we've seen in the last few

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<v Speaker 4>weeks is a reaction to uncertainty in terms of not

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<v Speaker 4>only the party that's dominating, but uncertainty in terms of

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<v Speaker 4>what their policies will be. And I think as we

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<v Speaker 4>moved to November and something becomes more clear in terms

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<v Speaker 4>of who might or who might not win, the uncertain

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<v Speaker 4>plus the potential policy implications, I think you could impact

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<v Speaker 4>treasuries significantly.

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<v Speaker 1>Yeah, it's gonna be interesting to see your next investment

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<v Speaker 1>outlook post election to see what you have to say there.

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<v Speaker 1>And it's interesting too how you've compiled all of your

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<v Speaker 1>past investment outlooks into a new book. One thing that

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<v Speaker 1>I didn't really see in there, and that maybe you'll

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<v Speaker 1>have to do in an updated book is maybe have

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<v Speaker 1>a little bit more discussion about AI and what that

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<v Speaker 1>means for the market as a whole. When you look

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<v Speaker 1>at all the AI hype around here, the run up

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<v Speaker 1>in Nvidia, do you find any sort of opportunity there

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<v Speaker 1>that's to your liking? Do you think it's sustainable?

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<v Speaker 4>Well, not a pro there, but I would say that AI,

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<v Speaker 4>to my way of thinking, has the potential to increase

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<v Speaker 4>productivity in general across the US economy. The question is

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<v Speaker 4>by how much, or if at all, to the extent

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<v Speaker 4>that it even increases productivity by half of percent, I

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<v Speaker 4>think it's significant in terms of economic growth. So you

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<v Speaker 4>know that's the bet. You know, specific stocks, I like Microsoft.

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<v Speaker 4>I've never been involved with Nvidia or or Amazon or

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<v Speaker 4>even Apple today for instance, but Microsoft is my favorite.

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<v Speaker 4>Other than that, you know, it's a wait and watch

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<v Speaker 4>type of situation in terms of the impact on economic growth.

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<v Speaker 2>So, Bill, not only is it the launch of our

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<v Speaker 2>new show, but also you will be selling Peace by Piece,

0:13:35.160 --> 0:13:38.400
<v Speaker 2>a US stamp collection, on Friday and Saturday at Robert A.

0:13:38.520 --> 0:13:41.480
<v Speaker 2>Siegel auction House. Now you've sold your stamps before. You

0:13:41.520 --> 0:13:45.040
<v Speaker 2>are clearly a very well known collector. Some of the estimates, though,

0:13:45.080 --> 0:13:46.960
<v Speaker 2>think this could bring in a record of something like

0:13:47.000 --> 0:13:50.200
<v Speaker 2>twenty million dollars. Bill, what told you that this was

0:13:50.240 --> 0:13:52.640
<v Speaker 2>the right time to sell in this kind of environment

0:13:53.000 --> 0:13:53.680
<v Speaker 2>these stamps?

0:13:56.000 --> 0:13:59.080
<v Speaker 4>Well, I'm eighty years old, and you know it's time

0:13:59.120 --> 0:14:03.040
<v Speaker 4>to turn over to turn this over to some other

0:14:03.120 --> 0:14:06.600
<v Speaker 4>future collectors. And I also think you know a slight

0:14:06.720 --> 0:14:10.600
<v Speaker 4>negative here is that stamp collecting has always been a

0:14:10.640 --> 0:14:15.160
<v Speaker 4>function of kids and they're collecting who later on become

0:14:15.240 --> 0:14:20.160
<v Speaker 4>adults and you know, wealthy adults. But in this case,

0:14:20.520 --> 0:14:23.280
<v Speaker 4>I don't think the kids are collecting stamps anymore. They're

0:14:23.360 --> 0:14:27.600
<v Speaker 4>more involved with their cell phones and their games. But

0:14:28.720 --> 0:14:30.080
<v Speaker 4>that'd be one of the reasons too.

0:14:30.240 --> 0:14:30.520
<v Speaker 3>Well.

0:14:31.000 --> 0:14:32.760
<v Speaker 1>Well, I could tell you, Bill, there are still a

0:14:32.800 --> 0:14:34.840
<v Speaker 1>few nerdy kids out there that's still into it. I

0:14:34.920 --> 0:14:36.960
<v Speaker 1>know a couple in my family that still do it.

0:14:36.960 --> 0:14:38.840
<v Speaker 1>I don't think they're in the market for the stamps

0:14:38.840 --> 0:14:41.400
<v Speaker 1>that you're selling. They're pretty pricey here. But I was

0:14:41.440 --> 0:14:42.640
<v Speaker 1>just lucky to the collect I mean, this is just

0:14:42.680 --> 0:14:45.600
<v Speaker 1>an impressive collection. Obviously, probably the star of that, of course,

0:14:45.680 --> 0:14:48.000
<v Speaker 1>is one of the inverted Jenny's. But I am curious

0:14:48.000 --> 0:14:50.960
<v Speaker 1>that when you look at just the collection that you

0:14:51.040 --> 0:14:53.480
<v Speaker 1>had and how you put them together here, was that

0:14:53.560 --> 0:14:55.240
<v Speaker 1>really from the heart. Did you sort of look at

0:14:55.240 --> 0:14:56.680
<v Speaker 1>this and just say, oh, this will be a good

0:14:56.720 --> 0:14:58.560
<v Speaker 1>deal later, or did you say, look, I just want

0:14:58.560 --> 0:14:59.800
<v Speaker 1>to own this, and I want a piece of this.

0:15:00.000 --> 0:15:01.160
<v Speaker 1>I want to be able to hold it and look

0:15:01.200 --> 0:15:01.680
<v Speaker 1>at it.

0:15:03.680 --> 0:15:03.880
<v Speaker 3>Now.

0:15:03.960 --> 0:15:08.880
<v Speaker 4>My mother back in the forties, in the early fifties,

0:15:08.920 --> 0:15:12.840
<v Speaker 4>collected stamps in order to send me to college. I

0:15:12.880 --> 0:15:17.760
<v Speaker 4>took those stamps to San Francisco in nineteen sixty one

0:15:18.720 --> 0:15:22.000
<v Speaker 4>and tried to sell them. They'd offer me nothing relative

0:15:22.040 --> 0:15:24.560
<v Speaker 4>to the three percent on the face of the stamp.

0:15:24.680 --> 0:15:28.200
<v Speaker 3>So basically, when I had some money twenty.

0:15:28.000 --> 0:15:30.400
<v Speaker 4>Years ago, I said, she had the right idea, but

0:15:30.480 --> 0:15:32.600
<v Speaker 4>she bought the wrong stamps. And so if I can

0:15:32.680 --> 0:15:39.000
<v Speaker 4>apply bond market economic you know, terminology and philosophy to

0:15:39.120 --> 0:15:43.560
<v Speaker 4>the stamp auction, much like paintings have a provedance and

0:15:43.640 --> 0:15:47.000
<v Speaker 4>so on, then perhaps we can make some money as well.

0:15:47.320 --> 0:15:49.280
<v Speaker 1>All right, Bill, always great to talk to you, and

0:15:49.280 --> 0:15:51.960
<v Speaker 1>good luck on that auction later this week. Bill Gross,

0:15:51.960 --> 0:15:54.400
<v Speaker 1>the co founder of PIMCO, The bond King,