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Speaker 1: Bill Gross joining us right now, the co founder of PIMCO,

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Speaker 1: and now today here with this latest investment outlook, a

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Speaker 1: look at some of those yields, to look at the

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Speaker 1: risk of holding onto stocks and the differential. I guess

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Speaker 1: in the premium that, as we just said, Bill, doesn't

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Speaker 1: seem to exist anymore. If that risk premium isn't there, Bill,

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Speaker 1: I am curious as to exactly what equity investors would

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Speaker 1: have to hang their hat on to justify entering into

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Speaker 1: this market.

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Speaker 2: Well, I think Romaine, they would have a hat to

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Speaker 2: hang on, you know, perhaps AI and the potential increase

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Speaker 2: across the economy in terms of productivity. As of now,

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Speaker 2: we don't really know what that is. As well, they

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Speaker 2: would hang their hat on a stronger economy that may

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Speaker 2: continue to persist as opposed to a recession that many

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Speaker 2: are expecting. That's what they would hang their hat on.

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Speaker 2: I would go the other way and take the head.

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Speaker 3: Off, take the hat off.

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Speaker 1: I mean, we know in the past from speaking to

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Speaker 1: you as well as some of your other public statements,

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Speaker 1: that you took that hat off a while ago. Here,

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Speaker 1: I mean, what hat are you wearing right now?

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Speaker 2: Well, let me explain it this way. I think PE

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Speaker 2: ratios are coming down. Katie explained it in terms of

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Speaker 2: an equity risk premium being close to you know, basically

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Speaker 2: the bond market and meaning that there's little risk in

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Speaker 2: terms of stocks relative to treasury bills or short term

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Speaker 2: treasure notes. I would put it this way. Give me

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Speaker 2: thirty seconds for an example that a PE ratio at

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Speaker 2: twenty turn it upside down as an EP ratio at five.

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Speaker 2: So an earnings ratio at five a PE ratio of

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Speaker 2: twenty was a year and a half ago, and since then,

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Speaker 2: real yield says Katie pointed out, I've gone up by

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Speaker 2: you know, a good three hundred and fifty basis points.

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Speaker 2: If and I'm not saying this is going to happen,

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Speaker 2: but if the earnings yield ratio, the EP ratio went

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Speaker 2: up from five to eight and a half percent, then

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Speaker 2: PE ratios would be down around twelve or thirteen. Now

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Speaker 2: it's a little old school, it's Gordon discount dividend discount

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Speaker 2: model type of thing, but it does indicate the direction

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Speaker 2: in terms of PE ratios that they might move if

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Speaker 2: we see a situation really yields still at two point

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Speaker 2: four zero percent.

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Speaker 4: And let's break down what we've seen in terms of

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Speaker 4: nominal yields. As you mentioned, real yields very high, and

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Speaker 4: they've been in the driver's seat really if you think

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Speaker 4: about this rise in the ten year yield, talk to

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Speaker 4: us though about break evans. Do you think that inflation

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Speaker 4: expectations should be higher here given what we're seeing in

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Speaker 4: the energy market.

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Speaker 5: Yeah, I think it should.

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Speaker 2: And you know, the break even rate for the ten yure,

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Speaker 2: amazingly is rather stable between two and two point three

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Speaker 2: percent today. I think around two point three four percent,

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Speaker 2: and so that's the expectation for inflation. I would say

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Speaker 2: it's more like three. Getting down to two is going

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Speaker 2: to be very difficult going forward.

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Speaker 5: And so.

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Speaker 2: You know that to me means that nominal treasuries take

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Speaker 2: the tenure again at four point seventy five or four

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Speaker 2: point eight, that nominal treasuries are basically based upon an

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Speaker 2: expectation for a three percent PAD funds rate over a

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Speaker 2: long term basis. There is an equity risk premium that

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Speaker 2: you talked about. There is a term premium for bonds

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Speaker 2: as well, of about one to one on a quarter percent,

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Speaker 2: because that's the risk of owning a tenure versus a

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Speaker 2: treasury bill. And so if FED funds settle around three

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Speaker 2: to three and a half percent, you know, a five

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Speaker 2: percent tenure treasury is decent value.

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Speaker 5: It's not great value.

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Speaker 4: What is great though, when you think about five percent

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Speaker 4: on a ten year treasury, we haven't seen that for

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Speaker 4: fifteen years plus. That's not great. What is great?

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Speaker 2: Well, it's great, there's no doubt about that. But five

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Speaker 2: percent again, would would be a normal bond term premium

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Speaker 2: of about one or a quarter percent under three percent

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Speaker 2: inflationary expectations.

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Speaker 5: So that's okay.

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Speaker 2: And I know corporate spreads have winded out a little

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Speaker 2: bit and that makes them attractive. But what I think

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Speaker 2: has happened, Katie, in the past several weeks, and the

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Speaker 2: market is beginning to recognize treasury supply, you know, based

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Speaker 2: upon a two trillion dollar deficit. They're beginning to recognize,

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Speaker 2: you know, basically the selling of bonds by the Fed in.

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Speaker 5: Terms of the QT.

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Speaker 2: They're beginning to recognize higher for longer as well. And

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Speaker 2: so those two factors have been important in terms of

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Speaker 2: the current rise.

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Speaker 5: What I seen in the last week.

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Speaker 2: Is it the bond vigilantes to the extent that they

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Speaker 2: are now individuals owning you know, billions and billions, hundreds

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Speaker 2: of billions of bond ETFs. They've been spooked over the

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Speaker 2: last week or so by declines of two, three, four,

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Speaker 2: five percent in their ETFs, and so I think they're

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Speaker 2: joining the crowd.

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Speaker 5: In terms of selling.

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Speaker 2: And you know, we're seeing a little bit of an

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Speaker 2: over soul market here headed to five percent, certainly over sold.

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Speaker 1: But I do worry bills about some of these external events.

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Speaker 1: Of course, yesterday there was a lot of hoopla around

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Speaker 1: basically the Speaker of the House losing his position here

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Speaker 1: and whether this was symptomatic of just the dysfunction in Washington.

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Speaker 3: You mentioned the federal debt.

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Speaker 1: We know, debt servicing costs have gone off from sub

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Speaker 1: two percent here for the government too, I think now

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Speaker 1: somewhere in the four to five percent range here on average.

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Speaker 1: How much of that ends up becoming a factor in

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Speaker 1: investment decisions or can you ignore it?

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Speaker 5: Well? I I don't think you can ignore it.

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Speaker 2: You know, we're gonna see the uh the point again

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Speaker 2: thirty days from now, in which they have to to

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Speaker 2: vote and we'll have a new speaker, I assume, uh,

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Speaker 2: but uh to me, it indicates uh, you know, disruption

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Speaker 2: in terms of the process additional disruption based upon what

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Speaker 2: we've seen because ten Republicans, ten conservative Republicans basically are

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Speaker 2: running the show in the House, and so that will

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Speaker 2: increase volatility in terms of all markets and UH certainly

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Speaker 2: as a negative.

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Speaker 1: Well and it I mean then yes, I mean we

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Speaker 1: can blame those ten Republicans, but there really hasn't been

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Speaker 1: UH a major player at least when it comes to UH,

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Speaker 1: I guess UH fiscal UH conservatism for quite some time,

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Speaker 1: at least, not one that has listened to And I'm

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Speaker 1: talking on both sides of the aisle here, So this

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Speaker 1: isn't just a party issue here. It just seems that

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Speaker 1: whatever appetite that we had UH to address the fiscal situation.

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Speaker 3: At least for now, it just seems they have completely dissipated.

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Speaker 5: Well.

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Speaker 2: Yeah, the fiscal situation is very much of a negative.

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Speaker 2: I mentioned two trillion dollars in terms of a deficit

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Speaker 2: at least for this particular fiscal year. And the incredible

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Speaker 2: thing you've pointed out in the past that the higher

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Speaker 2: level of interest that the Treasury must pay is going

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Speaker 2: to add increasingly to this deficit going forward. And so

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Speaker 2: we don't have much to hope for in terms of

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Speaker 2: deficit spending.

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Speaker 5: If anything, you know, you would think that.

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Speaker 2: The fiscal side would come in and start spending money

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Speaker 2: if we have a recession or significant slowdown. So deficits

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Speaker 2: as far as the eye can see, is what I

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Speaker 2: can see. And that puts obvious supply pressure going forward,

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Speaker 2: probably twice as much as what we've had over the

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Speaker 2: past year or two in terms of treasury supply.

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Speaker 3: So well, it makes me wondering to see what happens.

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Speaker 1: Yeahs be wonder Bill about the whole ideology of bond

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Speaker 1: vigil anties. Is that something that even really exists in

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Speaker 1: this current environment. Is there someone or some group of

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Speaker 1: people that have that much way still in the market.

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Speaker 5: No, there isn't.

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Speaker 2: Romaine, And I used the term loosely because back in

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Speaker 2: the day, you know, the vigil antes that Ed Jordini

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Speaker 2: talked about were in control.

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Speaker 5: To some extent.

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Speaker 2: These days, to speak about an ETF holding by an

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Speaker 2: individual as representing a BOD vigilante is a little loose,

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Speaker 2: a little bit of a stretcher.

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Speaker 5: I suggested.

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Speaker 2: But what I've seen in the past week or two

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Speaker 2: are significant sales of ETFs, the volume on agg or

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Speaker 2: the volume on B and D, which are one hundred

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Speaker 2: billion dollar ETFs, you know, has been significant. So what

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Speaker 2: I see are these smaller vigilantes joining the treasury joining

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Speaker 2: the Fed in terms of negative pressure for bond prices

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Speaker 2: and higher pressure for bond yields.

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Speaker 4: Well, just to ask sort of a simple scene setting question,

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Speaker 4: if it's not vigilantes, what do you think is driving

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Speaker 4: this move?

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Speaker 5: At the long end?

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Speaker 4: Do you think about eighty ninety one hundred basis points

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Speaker 4: move higher in tenure treasure yields over the past couple months,

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Speaker 4: what's driving that and what's going to bring it lower?

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Speaker 5: Yeah?

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Speaker 2: I think that's important, and we talk about a forecast

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Speaker 2: for a ten year treasury, but we should also talk

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Speaker 2: about the shape of the yield curve.

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Speaker 5: And as you mentioned, longer.

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Speaker 2: Yields are head higher, shorter yields not so much, and

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Speaker 2: we have a less negative yield curve, which I think

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Speaker 2: is important going forward in terms of markets. So what's

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Speaker 2: driving it? I think to some extent to say of

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Speaker 2: ETFs which own long duration as opposed to short duration,

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Speaker 2: is important. I think the mix of treasury sales is

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Speaker 2: important going forward. Next week we'll see a three to

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Speaker 2: ten and a thirty a year, a combined offering of

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Speaker 2: perhaps one hundred billion dollars. And so the long end

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Speaker 2: is being pressured based upon supply and based upon expectations

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Speaker 2: for a stronger economy than what was the expectation of

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Speaker 2: three to six months ago.

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Speaker 4: Bill, you tweeted yesterday, thirty year mortgage at seven point

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Speaker 4: seven percent. This shuts down the housing market. And to

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Speaker 4: that point, Bill, it feels like everyone is unhappy here.

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Speaker 4: You have sellers struggling to sell, and buyers don't necessarily

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Speaker 4: want to buy in this market either.

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Speaker 5: Well, I think that's true.

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Speaker 2: That speaks to the secondary market what I was suggesting,

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Speaker 2: as well as the new housing market construction, new housing

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Speaker 2: starts and so on.

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Speaker 5: And it's hard to see.

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Speaker 2: You know, despite the relative success I guess of home

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Speaker 2: builder stocks in the past several months, it's hard to

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Speaker 2: see how new homes can be sold with a seven

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Speaker 2: seven percent mortgage and maybe some points added.

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Speaker 5: On to that.

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Speaker 2: So, you know, typically housing Katie leads the economy by

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Speaker 2: six months or so, and and so what we've seen

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Speaker 2: is a relatively robust housing market. But at seven point

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Speaker 2: seven percent, you know, that doubles and in some cases

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Speaker 2: triples the payments, the home payments that a homeowner would

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Speaker 2: have expected, you know, perhaps a year and a half ago.

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Speaker 1: Yeah, absolutely all, Bill, And I am curious though too,

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Speaker 1: if we talk about the secondary market, and our apologies

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Speaker 1: to our viewers, if you hear the phones, there's a

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Speaker 1: national test going on here that's going across the newsroom

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Speaker 1: and beyond.

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Speaker 3: So no where is their bill. You weren't the only

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Speaker 3: one the phone on.

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Speaker 1: I am curious when we look at when we look

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Speaker 1: at spreads. I mean, you mentioned earlier about corporate spreads,

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Speaker 1: but I was taking a look at NBS spreads as well,

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Speaker 1: and they've really sort of widened out. I think probably

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Speaker 1: some of the cheapest levels that we've seen at least

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Speaker 1: since the big housing bubble will collapse a few years back.

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Speaker 3: Here.

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Speaker 1: I'm curious that what we can extrapolate about that here,

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Speaker 1: if you have that tightness in the housing market and

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Speaker 1: nobody's making money in NBS, here is what's the equal

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Speaker 1: sign and what comes after that?

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Speaker 5: Well, I think you're correct.

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Speaker 2: I mean the spread between a thirty year mortgage and

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Speaker 2: there's an index on your Bloomberg screen that will point

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Speaker 2: that out at seven seven percent or so, But that

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Speaker 2: spread relative to a ten year government is significantly wide.

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Speaker 2: To me what that portends going forward. If that spread

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Speaker 2: narrows set, it's very much of a benefit to mortgageits

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Speaker 2: such as analytes such as a GNC, they yield about

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Speaker 2: sixteen percent. Now, this particular sector thrives on a less

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Speaker 2: negative yield curve, and it thrives, you know, basically on

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Speaker 2: lower market volatility in terms of the treasury market, both

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Speaker 2: of which you know, hopefully we're going to see going forward.

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Speaker 2: So as a sixteen percent yield on a mortgage riit.

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Speaker 5: A safe field.

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Speaker 2: Not necessarily they've been cut before if these mortgage rates

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Speaker 2: you know, have been overlevered, but I think they learned

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Speaker 2: their listen. I think we can move into this sector,

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Speaker 2: you know, and capture the yields as well as perhaps

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Speaker 2: a ten percent price appreciation if the mortgage spread narrows.

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Speaker 4: And Bill, I did want to switch skiers here. In

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Speaker 4: a couple of minutes we have left with you and

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Speaker 4: ask about something that you had in your investment outlook.

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Speaker 4: You wrote this, some of the best that's right now

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Speaker 4: are our vitrages in merger and acquisition deals. You specifically

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Speaker 4: named Microsoft buying activision Blizzard I'm curious whether you view

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Speaker 4: that as idiosyncratic to that specific deal or our merger

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Speaker 4: arms in general more attractive right now.

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Speaker 2: Well, they've become more attractive in the last week or

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Speaker 2: two as liquidity in both markets, in the stock market

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Speaker 2: and the bond market has declined, and in some cases,

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Speaker 2: as I was explaining into my wife last night at dinner,

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Speaker 2: you know, margin is required to you know, to maintain

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Speaker 2: those positions. So you know, atv I Activision, to my

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Speaker 2: way of thinking, it's seven days away from approval by

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Speaker 2: the UK Radiolatory Commission. That means the price goes from

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Speaker 2: ninety four to ninety five as a point, that's one

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Speaker 2: point one percent.

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Speaker 5: Is that a big deal? It is over seven days?

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Speaker 2: And so you know, there are other examples such as

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Speaker 2: Capri which owns Jimmy Choos and other lines that are

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Speaker 2: being acquired by a private investor and that's selling at

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Speaker 2: a discount of ten, eleven, twelve percent.

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Speaker 5: So there are.

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Speaker 2: Situations, not a lot of them are situations in which

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Speaker 2: arbitrage can produce returns, you know, certainly much higher than

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Speaker 2: what we've seen in the equity market over the past

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Speaker 2: few months.

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Speaker 1: All Right, Bill gonna have to leave it there. Great

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Speaker 1: to catch up with you. Bill Gross there he's the

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Speaker 1: co founder of him go out there in California with

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Speaker 1: his latest investment outlook,