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Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene,

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Speaker 1: Jay Ley. We bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com and of course on the Bloomberg. And

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Speaker 1: now we welcome all of you on Bloomberg Television and

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Speaker 1: radio worldwide. Uh. Tom Keene in conversation with a gentleman

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Speaker 1: retiring today, but you know he will never slip away

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Speaker 1: from the financial analysis of his c f A Institute.

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Speaker 1: Bill Gross joins us with Janice Anderson. I guess Bill,

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Speaker 1: congratulations on retirement. I want to get to the track

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Speaker 1: record the challenges you've had at Janice Henderson. But how

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Speaker 1: did you get here? How is this decision made in

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Speaker 1: the last number of days? Did you make this unilaterally?

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Speaker 1: Did you make this with Janie Henderson management? Well, no,

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Speaker 1: I did it unilaterally and in combination with my family

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Speaker 1: and my partner, Amy Schwards. So I'm having so much

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Speaker 1: fun with um. You know, it's been almost a half

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Speaker 1: a century of watching Screenstonge and waking up in the

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Speaker 1: middle of the night to check Asia and Europe and

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Speaker 1: and Tom Brady equivalent years. That's that's a long time. Um.

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Speaker 1: I've got a few Super Bowl rings along the way

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Speaker 1: to look at, and it's time to enjoy myself and

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Speaker 1: enjoy my family within this is the catalyst of outflows

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Speaker 1: of funds. Was it harder to manage the Janison constrained

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Speaker 1: fund given the repeated and chronic outflows that you've seen

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Speaker 1: over the last number of quarters in even years, Well

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Speaker 1: not really. I mean half half of the fund is

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Speaker 1: mine and and I haven't taken any money out of

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Speaker 1: the fund. Others have as you've mentioned. You know, I

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Speaker 1: look back on it um and the performance on the

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Speaker 1: unconstrained fund in the past four years with janniss uh

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Speaker 1: has been unsatisfactory, no doubt, but still positively um positive

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Speaker 1: and normal and nominal terms. UM. What I'd like to

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Speaker 1: mention those I've managed some total return accounts what I'm

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Speaker 1: famous for for Jannis, and then they've outperformed like the

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Speaker 1: old days that Pimco hundred basis points over and actually

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Speaker 1: outperformed Pimco. So maybe I should have stuck a total

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Speaker 1: return and a little more constrained. This is this is

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Speaker 1: a really important point, folks, and that Mr Gross has

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Speaker 1: a number of ideas going here, including you know, fighting

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Speaker 1: the fixed income battles that fixed them income wars of

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Speaker 1: mutual funds. But I was talking with our John Gilson

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Speaker 1: and Los Angeles, uh, Bill, and within the unconstrained model,

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Speaker 1: the perspective model of this phrase unconstrained, what did you

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Speaker 1: learn about the pros and cons the difficult these of

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Speaker 1: this phrase unconstrained, Well, unconstrained has come to me and

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Speaker 1: basically go anywhere. Um, you know, the total return concept

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Speaker 1: that I developed was was really developed on the concept

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Speaker 1: of measured risk taking. That's what I learned in the

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Speaker 1: days of blackjack. You didn't put a lot on the table.

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Speaker 1: And so you know, for the past three or four years,

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Speaker 1: the negative trade for unconstrained has always been Germany versus

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Speaker 1: the United States in terms of a spread tenure. German

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Speaker 1: buns started out in my portfolio at a hundred and

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Speaker 1: ninety basis points over and they're now two fifty plus over.

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Speaker 1: And so that's been a you know, it's been the

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Speaker 1: big decider and probably one in which I shouldn't put

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Speaker 1: too many chips on the table. Well, this is critical, Bill,

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Speaker 1: and this goes to the hedge funds, and so many

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Speaker 1: underperformances of hedge funds, depending on whatever you want to

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Speaker 1: look at with the statistics. Was the underperformance that you

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Speaker 1: faced in the last year with unconstrained was it because

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Speaker 1: you were not diversified? Is it? Is it the phrase

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Speaker 1: on constraint gets you into a focus where the bets

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Speaker 1: are too big to go back to ed Thorpe, Yeah,

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Speaker 1: I think it did for me, and perhaps for other

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Speaker 1: unconstrained funds too, if only by the nature of the

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Speaker 1: term um. You know, the old ed Thorpe terms. The

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Speaker 1: Gambler's ruined concept basically said you could only bet UH

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Speaker 1: two of your capital and and and certainly I had

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Speaker 1: positions and unconstrained there were significantly more than that, especially

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Speaker 1: the German US Treasury trade, and that UH probably was

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Speaker 1: too much, but it was an unconstrained portfolio. Investors were

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Speaker 1: expecting hedge fund types of returns of five to ten percent,

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Speaker 1: you know, for for a while there it was only

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Speaker 1: one to two percent, and that was unsatisfactor. It was

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Speaker 1: unsatisfactor Reinbill, this goes to your perspective now, and we

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Speaker 1: should point out that Mr Gross has written all sorts

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Speaker 1: of academic work for the c f A Institute over

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Speaker 1: the years on finance, on the integrity of financial theory.

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Speaker 1: You've lived it, Bill, Is the hedge fund model broken

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Speaker 1: because it's a non diversified model, Well, I I think

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Speaker 1: it was broken for a long time, Tom. You know,

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Speaker 1: obviously the hedge fund concepts suggested long and short, but

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Speaker 1: it was really one in which managers took a lot

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Speaker 1: of risks. So when you speak to diversification, you know,

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Speaker 1: perhaps most of those hedge funds were non diversified in

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Speaker 1: terms of the risk that they were taking. They were

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Speaker 1: taking levered risk and still are and so to the

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Speaker 1: extent that markets moving and risk off type of mode,

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Speaker 1: and they have in December and um other periods of time,

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Speaker 1: then the hedge fund concept is really an exposure of

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Speaker 1: risk as opposed to anything else, and it and it

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Speaker 1: needs to be more diversified for sure. If you're just

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Speaker 1: joining us, William Gross with us, of course, with Janice

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Speaker 1: Henderson announces his retirement today a very young seventy four

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Speaker 1: unto seventy five years old. Of course, this after for

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Speaker 1: in five decades of work. We continue now with Bill

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Speaker 1: Gross welcoming all of you on Bloomberg Television. And Bloomberg

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Speaker 1: Radio worldwide. Bill Gross, if we look at the investment

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Speaker 1: in the recent investment return in that you mentioned the

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Speaker 1: German trade, the spread trade with Germany? Did the central

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Speaker 1: bankers get in your way? Are you willing to blame

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Speaker 1: any sense of underperformance on Federal Reserve officials, ECB officials, etcetera, etcetera.

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Speaker 1: These people didn't go by the book, and Bill Gross

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Speaker 1: got run over because they did something new and original.

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Speaker 1: We all not necessarily mean they didn't go by the book,

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Speaker 1: and it's up to the portfolio manager to analyze what

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Speaker 1: that new book is in terms of reading um. You know,

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Speaker 1: for five six of in eight years, the quantitative easiness

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Speaker 1: provided an opportunity for bond investors to take advantage of

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Speaker 1: capital gains um. The question became in terms of Germany

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Speaker 1: versus the United States. You know, what would the effect

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Speaker 1: of US tightening by the Federal Reserve and the ultimate uh,

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Speaker 1: you know, exclusion of quantitative easing in the beginning of

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Speaker 1: quantitative training? What would that do relatives? What was happening

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Speaker 1: with the e c B and it uh. The spread

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Speaker 1: continued to widen and continues to widen eve until the

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Speaker 1: day and that's a that's a very long term situation.

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Speaker 1: But Bill, this is critical and critical going forward as

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Speaker 1: you invest your own money, and everybody else wants to

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Speaker 1: know what you feel about central banks that got away

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Speaker 1: from Phillips curve theology over to balance sheet adjustment through

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Speaker 1: Q quantitative easy and then onto some set of quantitative

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Speaker 1: tightenings to come. Which of those two was the real harm?

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Speaker 1: Was that the balance sheet dynamics or was at the

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Speaker 1: death of the Philip curve dynamic. Well, I think it's

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Speaker 1: basically both. In terms of the balance sheet. I find

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Speaker 1: it very interesting, certainly in the US with the Fed.

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Speaker 1: Um you know, the FED expanded its balance sheet during

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Speaker 1: quantitative easing from proximately one trillion to proximately four trillion

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Speaker 1: UM in a world in which credit in the United

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Speaker 1: States was around sixty trillion dollars. You know, to my

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Speaker 1: way of thinking, back in two thousands seven and two

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Speaker 1: thousand and eight, the FED was in a highly levered

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Speaker 1: situation relative to total credit. It was one trillion versus

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Speaker 1: sixty trillion or sixty to one UM. They expanded that

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Speaker 1: and basically equitized their portfolio to four trillion, and that

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Speaker 1: was a much leverage situation. Now quantitative tightening, reducing that

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Speaker 1: to some extent, although probably going to stop in the

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Speaker 1: next few quarters or so. UM. You know it perhaps

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Speaker 1: is at a point where the lever inherent in the

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Speaker 1: Fed's balance sheet and the leverage inherent in the US

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Speaker 1: creditum economy is um It's better probably put it that way,

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Speaker 1: although not necessarily satisfactory. So many times I've found Bill

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Speaker 1: Gross I don't want to mention names here, but a

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Speaker 1: lot of acclaim managers in whatever way are shown the door,

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Speaker 1: and then X number of months afterwards, whatever their play was,

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Speaker 1: works out like a charm. Do you sense any kind

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Speaker 1: of jump condition coming where yields come up or those

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Speaker 1: spreads normalized? I mean, is it going to be smooth

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Speaker 1: functions over one year, two year, three years, or do

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Speaker 1: we get a jump audition and abruptness to some outcome

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Speaker 1: this year two thousand nineteen. Well, we need to speak

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Speaker 1: to different central banks as supposed in different in the US.

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Speaker 1: In the US, the FED is that two and a

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Speaker 1: half percent in terms of FED funds. If you assume

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Speaker 1: inflations at want to, then you've got a half a percent,

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Speaker 1: and to is a real interest rates, which to my

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Speaker 1: way of thinking, it's about as high as you can

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Speaker 1: go in a levered type of economy, and the rest

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Speaker 1: of the world, you know, let's just take the e

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Speaker 1: c B and take Japan as well, um, with their

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Speaker 1: zero percent interest rates or even negative interest rates in

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Speaker 1: Germany all the way out to seven or eight years um.

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Speaker 1: You know, there's a very different situation and things haven't

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Speaker 1: really changed, and I wonder versus the US, you know

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Speaker 1: what that means for their economy. And as I've mentioned

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Speaker 1: for many times on your program, Tom, the the disadvantage,

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Speaker 1: in addition to potential inflation down the road, the disadvantage

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Speaker 1: of negative interest rates and low interest rates in the

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Speaker 1: rest of the world is that savers are disadvantaged, and

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Speaker 1: insurance companies and banks are disadvantaged, and so the savings

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Speaker 1: function is at risk. This is really important for US.

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Speaker 1: And doing one more question on this and then switch

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Speaker 1: themes in this generous conversation with Bill Gross this morning

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Speaker 1: again on Bloomberg Television and Bloomberg Radio. Worldwide, we have

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Speaker 1: negative interest rates. This was a huge theme of Davos

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Speaker 1: in the in the hallways, Bill grows a chronic nature

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Speaker 1: to negative interest rates in Europe. It redounds on the

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Speaker 1: US is well, is that something that goes to a

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Speaker 1: breaking point or do you have an optimism that e

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Speaker 1: c B in Europe as a political entity can extricate

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Speaker 1: itself from these negative interest rates that don't help savers. Well,

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Speaker 1: I think it will take time to observe, and haven't

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Speaker 1: we had that for the last three or four or

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Speaker 1: five years. And what we've found, certainly in in the

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Speaker 1: easy in Europe with the e c B, is that

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Speaker 1: these raids are just enough to keep growth above the

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Speaker 1: line and just enough, uh, you know, to keep inflation

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Speaker 1: at one to two percent, you know Japean For me,

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Speaker 1: Tom is the Petri dish because they've been doing this

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Speaker 1: for ten or fifteen years um. And you know, in

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Speaker 1: e commerce would have predicted that if the government was

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Speaker 1: buying all of the debt issued by its treasury, or

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Speaker 1: if the central bank was buying it, that that would

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Speaker 1: be quite inflationary, but it hasn't been. So the quandary

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Speaker 1: going forward is for other central banks, will this behavior

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Speaker 1: create inflation? And in my context, will this disadvantaged savers

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Speaker 1: to the point where the savings function and the investment

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Speaker 1: function is severely disrupted. We welcome all of you on

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Speaker 1: Bloomberg television in Bloomberg Radio worldwide, Bill Gross announcing his

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Speaker 1: retirement today from Janice Henderson. We're thrilled to bring him

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Speaker 1: to you on Bloomberg Surveillance. Bill Gross, I want you

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Speaker 1: to speak to the savers of America. You grew up Middletown, Ohio.

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Speaker 1: You went out to San Francisco to get as far

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Speaker 1: away from Tom Brady. Is its theoretically possible? And Bill Gross,

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Speaker 1: you're out in San Francisco. You did more duty in

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Speaker 1: Vietnam assisting the tet offensive, decorated for that, etcetera. And

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Speaker 1: there was a time there where savers could actually say,

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Speaker 1: if you go back to the seventies, it actually worked.

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Speaker 1: You go back to the eighties, it actually worked. I

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Speaker 1: want you to speak right now to our savers on

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Speaker 1: television and radio who haven't gotten a fair deal in

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Speaker 1: the Gilded Age. When did the savers finally get a

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Speaker 1: break and actually get a real return. Well, to be fair,

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Speaker 1: it's better now than it was a year or two

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Speaker 1: years ago. They have a chance to basically stay up

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Speaker 1: with inflation with their money market type of account. But um,

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Speaker 1: you know, for a long time it hasn't. And I

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Speaker 1: suspect going forward, if the FED stops here, you know,

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Speaker 1: there won't be the same advantage as you mentioned over

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Speaker 1: the past forty years, all the way back to when

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Speaker 1: I started in the early nineties seventies, And so what

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Speaker 1: does that mean we Ultimately it means to a saver

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Speaker 1: that you know, they fall behind. Pension funds fall behind,

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Speaker 1: individual savers fall behind in terms of retirement, education for

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Speaker 1: the kids, etcetera. And it's only been the stock market,

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Speaker 1: um that has been uh, you know, the savior in

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Speaker 1: terms of their necessity to build up an st egg

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Speaker 1: and many um individuals, as you know, uh, don't invest

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Speaker 1: in the stock market, and so um, yeah, you've got

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Speaker 1: to get the interest rate above the inflation rate in

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Speaker 1: order to give savers, pension funds, insurance companies okay, fighting

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Speaker 1: chance to to take care of their liabilities. So that's

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Speaker 1: a great summary. But do you anticipate that will occur

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Speaker 1: or is there a permanence to our guild Today? The

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Speaker 1: President is going to speak tomor nighted a state of

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Speaker 1: state of the Union with a wide perception across all

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Speaker 1: of politics. Did it's the very narrow haves and a

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Speaker 1: huge body of have nots that can't get a fair shake,

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Speaker 1: Whether fixed income or equity markets. Are we gonna shift

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Speaker 1: to some form of real return in fixed income and

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Speaker 1: indeed per cist with equity total returns? Yeah, I don't

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Speaker 1: think so, tom or or if it does, it will

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Speaker 1: take a long long time. I mean, what the FED

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Speaker 1: did in two thousand and five and six to raise

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Speaker 1: FED funds to five percent or three percent real or so,

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Speaker 1: it was to basically break the levered economy. Now, someone

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Speaker 1: suggests that we're less levered now in terms of banks

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Speaker 1: and capital, and we are, but the debt to GDP

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Speaker 1: is still at two and climbing, and around the world

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Speaker 1: it's even higher. And so, um, I think central banks

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Speaker 1: have to be cognizant of the fact that a certain

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Speaker 1: interest rate, you know, could break the global economy again.

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Speaker 1: And as that a realistic observation, yes, but it's also

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Speaker 1: a negative, as we've mentioned, for savings institutions to be

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Speaker 1: able to pay off their liabilities going forward. One of

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Speaker 1: these days, UM, you know, pension funds, large pension funds

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Speaker 1: will simply say, you know, three percent is not enough.

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Speaker 1: I've I've basically guaranteed five or six percent from my

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Speaker 1: uh pension retirees and uh, you know, we're gonna need

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Speaker 1: some welp here from the government. Well, we got every

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Speaker 1: other city out there, you name, the city's everything, but

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Speaker 1: fancy Newport beaches underwater. We've got serious actuarial assumptions in

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Speaker 1: America that have gone wrong. How urgent is that? And

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Speaker 1: when do the owners of pension, owners of people not

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Speaker 1: making the actual assumption, when do they say enough fixus.

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Speaker 1: I don't see that pressure out there, Bill, I don't

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Speaker 1: see it either, because it's a long term problem. In

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Speaker 1: politicians and even the public, you know, are our wont

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Speaker 1: to observe a long term problem. They tend to look

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Speaker 1: for the day as opposed to tomorrow. But I think

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Speaker 1: ultimately it is it is a problem. How might it

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Speaker 1: be solved? It might be solved by this melding of

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Speaker 1: fiscal and monetary policy that we've seen in Japan and

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Speaker 1: actually in the United States and elsewhere. What does that mean?

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Speaker 1: It means ultimately that the United States could you know,

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Speaker 1: issue dead to solve these problems. But you know, have

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Speaker 1: the central bank buy it back itself? And is that

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Speaker 1: a negative? Is that a potential harm to the account certainly,

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Speaker 1: But what we've seen in Japan is that so far

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Speaker 1: it's working so ultimately to me a long term forecast.

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Speaker 1: I used to be really negative on this about the

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Speaker 1: fifty or sixty trillion dollars of liabilities with social Security

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Speaker 1: and healthcare and so on. But the Fed can basically

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Speaker 1: buy it back. And if it's non inflationary, which is

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Speaker 1: the critical key, If it's non inflationary, then perhaps they

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Speaker 1: can pull a rabbit out of the hat. I don't

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Speaker 1: think so, but I think they might try. I'm Bloomberg

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Speaker 1: Television and Bloomberg Radio. William Gross with us today. He

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Speaker 1: retires from Janice Henderson. We're thrilled that he could join

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Speaker 1: us for this extensive and special conversation. Bill Gross, I

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Speaker 1: want to go back to the theory the moment I

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Speaker 1: got Marko. It's his book on My Desk from ninety two,

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Speaker 1: which is a bunch of fancy theory that you've written

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Speaker 1: about at the cf A Institute. I think of Abby,

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Speaker 1: Joseph Cohen and others that have written about the architecture

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Speaker 1: that all of our listeners and viewers rely on. Does

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Speaker 1: that architecture still work? Is the efficient frontier still there?

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Speaker 1: Does the sharp ratio still work? And all the other

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Speaker 1: mumbo jumbo the alchemy of the trade. Well, I think

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Speaker 1: it does, but it's much less than it used to

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Speaker 1: be because the financial markets have become so sophisticated with

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Speaker 1: UH you know, and not only advanced theories, but with

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Speaker 1: speed trading and UH computer iration and al goes and

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Speaker 1: so on. But um, I think it still works. But

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Speaker 1: to expect information and sharp ratios to be higher than

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Speaker 1: one or one okay for what we have done, I

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Speaker 1: think it's a little unrealistic, certainly in an era of

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Speaker 1: low interest rate. This is the critical folks. You've got

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Speaker 1: to understand this out at Pacific Investment Management Company, and

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Speaker 1: I'm sure over at Jane Anderson, Mr grow Hit on

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Speaker 1: his desk before the Bloomberg terminal a Monroe trader, which

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Speaker 1: is how he got his information advantage. Bill, Are you

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Speaker 1: suggesting that the information advantage for all of active management

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Speaker 1: equity and indeed fixed income as well, has to give

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Speaker 1: way to the wonderful John Bogel's passive investment? Please a

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Speaker 1: comment on active versus passive and the legacy you know

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Speaker 1: from Mr Bogel. Well, I'm still believing believer in active management,

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Speaker 1: and and Jack and I would go back and forth

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Speaker 1: on this. I've always been willing to acknowledge that indexation's

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Speaker 1: primary benefit and Jack would have said this too, you know,

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Speaker 1: is that it's low fees and and investors in some

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Speaker 1: cases don't pay any fees now for index funds, whereas

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Speaker 1: active management can charge fifty hundred and fifty basis points

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Speaker 1: depending on um, you know, the risk asset itself and

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Speaker 1: so um. You know, can active managers produce those types

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Speaker 1: of retains to compensate for those fees? I think with

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Speaker 1: interest rates as low as they are, and remember Tom,

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Speaker 1: that low interest rates basically or the foundation for returns

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Speaker 1: for all other assets absent you know, euphoria, which we've

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Speaker 1: we've seen certainly in the past few years. Um, you know,

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Speaker 1: the the alpha the information ratio of the sharks ratios. Um,

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Speaker 1: they're going to be much less than they were. And

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Speaker 1: if they are, then active managers have got to lower

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Speaker 1: their own fees and recognition of their inability to return

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Speaker 1: a proper rate of return to their investors. On the

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Speaker 1: time that I've got left to you with Bloomberg Television

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Speaker 1: and Bloomberg Radio today, I want to touch upon your philanthropy.

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Speaker 1: Do you still own any stamps or if you sold

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Speaker 1: it off for medical research. I still got. I've got

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Speaker 1: six auctions going forward. I've got you know, the bulk

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Speaker 1: of my stamp collection is still to go, and it's

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Speaker 1: it's a little tier, I guess every auction that I have.

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Speaker 1: But you know, in the past ten years since I

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Speaker 1: started these functions, you know, probably forty five to fifty

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Speaker 1: million dollars to philanthropic institutions, including a a Smithsonian stamp

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Speaker 1: exhibit and post office in Washington, d C. Which is

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Speaker 1: lovely and so uh. You know, there's a lot more

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Speaker 1: to come. I still have a few left. I may

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Speaker 1: keep one or two, uh in the next few years.

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Speaker 1: One final question, if I can, Bill Gross, I would

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Speaker 1: note the uh, the discussion that Gronk may retire from

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Speaker 1: the New England Patriots. I guess Edelman will go forever.

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Speaker 1: But there's this guy Tom Brady, who you have clearly

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Speaker 1: shown a lack of affinity for over the years. You're

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Speaker 1: not going out on top after a difficult track record

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Speaker 1: at janis uh Anderson, Bill Gross, do you suggest that

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Speaker 1: Mr Brady take the high road and retire today and

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Speaker 1: go out strong? Now I've based upon last night's performance.

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Speaker 1: I mean Tom eats right, he uh, he works out right.

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Speaker 1: He has a belief that he can keep on going

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Speaker 1: for another few years. And as a quarterback, um, he

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Speaker 1: doesn't need to be fast, he needs to have a

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Speaker 1: strong arm. So um, you know, let the guy go

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Speaker 1: and uh evidently uh and perhaps going forward he'll be

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Speaker 1: defeated in a super Bowl and cash and his chips.

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Speaker 1: But he's got a lot of rings. And like I said,

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Speaker 1: I've got a lot of rings too. I'm very proud

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Speaker 1: of total return concept. I'm very proud of the you know,

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Speaker 1: the innovative assets that we were able to move into

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Speaker 1: like mortgages and financial futures and UH tips and so on,

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Speaker 1: which was really the basis for performance in PIMCO. And

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Speaker 1: so I've got a great career. I'm proud of it.

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Speaker 1: Uh the last few years. UM, you know, we'll we'll

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Speaker 1: wipe those off the magic slate and go forward having

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Speaker 1: fun and uh enjoy life. Bill gross thank you so

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Speaker 1: much for these comments this morning on UH philanthropy and

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Speaker 1: there of course on active passive and as well on

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Speaker 1: the state of the economics, finance and investment that we

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Speaker 1: all live. Mr Grosser's with Janice Henderson we greatly appreciate

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Speaker 1: as a tendency. Thanks for listening to the Bloomberg Surveillance podcast.

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Speaker 1: Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or

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Speaker 1: whichever podcast platform you prefer. I'm on Twitter at Tom

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Speaker 1: Keane before the podcast. You can always catch us worldwide.

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Speaker 1: I'm Bloomberg Radio