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December 01, 2004 at 02:00 AM
With the exception of Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow, no one swings a bigger club in the bond market than Bill Gross, managing director and chief pundit at Pacific Investment Management Company, or PIMCO. With good reason: Newport Beach, California-based PIMCO boasts $415 billion in assets, $77.4 billion of which resides in the various share classes of PIMCO Total Return, the largest bond fund in the U.S.
In a year marked by economic recovery, rising interest rates, war, and a heated presidential campaign, Gross has proved to be a skilled navigator: Total Return’s institutional shares logged a 4.76% total return through October, according to Standard & Poor’s, some 50 basis points better than the Lehman Brothers U.S. aggregate bond index. We profiled PIMCO and Gross in May (“The Bond King’s New World”). This month, we got Gross, who turned 60 on December 1, to sit still at his keyboard for a few minutes while we chatted with him via e-mail.
The presidential contest is over and we have a clear popular and electoral vote winner this time in George W. Bush. Can you give us your feeling for the big picture for the economy and markets now that the GOP has kept control of the White House and tightened its grip on both houses of Congress? What I said before the elections and what I continue to believe is that it didn’t really matter who won the White House because neither candidate has many options, especially when they’re staring at $400 billion-plus in budget deficits. What those deficits mean for bonds is that yields have to rise because the government cannot afford to pop the ballooning deficit because it is the necessary evil that is keeping the economy growing.
President Bush says his plans for Social Security include allowing some workers to invest part of their payroll taxes in private accounts. But the day is looming closer when what goes into the Social Security Trust Fund will fall short of what’s going out. As a bond market investor, are you concerned? Do you have a prescription or see a likely outcome? The prescription is not privatization–that will increase the underfunding by $1 trillion. Ultimately, Americans must work longer hours and retire later. That is the solution.
In 2003, you were highly critical of America’s entry into the war in Iraq. What is your current take? My position hasn’t changed much. Don’t forget I, too, fought in an unpopular war, Vietnam, so I continue to support our troops in Iraq. But I still question the mission.
Do you see any sign of foreign unease with American involvement in the war translating into a reluctance to hold U.S. dollar-denominated assets? There may be individuals who have decided to do this, but I have not seen any data that supports entire countries acting as such. However, what the war is doing is growing the U.S. deficits, and these deficits are being supported by the “kindness of strangers,” the Chinese, the Japanese, et cetera. As long as the strangers go along and are willing to finance the budget deficit at these low interest rates, we can look forward to a relatively placid period. But when–not “if,” but “when”–they decide to not go along with the program, that’s when the real danger exists for higher yields and substantially lower prices in Treasuries as they exit the barn for more profitable pastures.
