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February 04, 2014 at 09:48 AM
It’s been a tumultuous few months for PIMCO CIO Bill Gross.
The PIMCO Total Return Fund, which Gross manages, saw $30.4 billion in outflows in 2013, and Gross’ co-CIO, Mohamed El-Erian, recently announced his resignation.
Despite the stock market’s takeoff last year, the new normal that El-Erian predicted is still imminent, Gross told Erik Schatzker and Stephanie Ruhle Tuesday on Bloomberg TV, and investors should lower their expectations and prepare themselves for an era of slow global growth.
“I think the era of getting rich quickly is over,” he said, “and I think, almost, that the era of getting rich slowly is over, too.”
He also told Bloomberg TV why China is “the mystery meat of emerging market countries” and speculated on what’s next for El-Erian.
ERIK SCHATZKER: I think we’ve got to start in the most obvious of places. Why are risk assets correcting? What in your opinion is behind the sell-off?
BILL GROSS: Well risk assets, financial systems are unstable with excessive risk taking on one hand and low returns on the other, which in turn encourages more risk taking. It’s sort of like [George] Soros’ reflexivity. Once you get the levered system going, it hardly knows when and where to stop. And so that’s what we’re seeing. We have a highly levered global financial system with hedged positions that are moving back and forth based on emerging market countries and their growth rates or expected growth rates. And when those change, then positions change. And as levered positions change, you’ve got a lot of volatility and reflexivity, as Mr. Soros would have said.
STEPHANIE RUHLE: Why aren’t we seeing that kind of volatility in the credit markets? Yesterday Hyundai did an investment-grade deal and it blew out, while I look at equities in emerging markets and they’re suffering. Why is everyone still piling into credit?
GROSS: Well credit is higher up on the stability hierarchy I suppose, Stephanie. It – it usually is thought of as a flight to quality, not necessarily corporate bonds or high-yield bonds but Treasury bonds. And when investors want to park money in a supposedly safe haven, and we know that bonds aren’t necessarily safe all the time, they weren’t in 2013, but that’s where money goes. Money comes back to the center, so to speak, of the global financial network. And the center at the moment are one, two, three developed countries. That certainly includes the United States. And so we see treasuries being bought, treasury rates coming down under the assumption that the Federal Reserve will stay put for perhaps a long, long time.
SCHATZKER: Bill, what happens next? Would you call this just a bump in the road, or have markets made a detour and we’re going to go down this new road for a while? GROSS: Well I think we will for a while, Erik, meaning for a long, long time. We’ve talked about this with the new normal. The new normal really didn’t apply to the equity market last year, did it? Thirty percent was certainly not normal. But what we see going forward is a global marketplace and a global economy where growth is slow.
And to the extent that financial asset prices like stocks and other risk assets have anticipated that growth rate, that’s always a subjective judgement. And it was six to eight weeks ago. To the extent that that growth rate comes down, then risk assets become at risk and more volatility. So I think it’s all dependent upon a growth rate on the global economy. And certainly in the United States we saw some bad numbers over the past few days and we wonder whether or not that 3% growth rate in 2014 is for real.
So look at growth and look at inflation, by the way, for an indicator in terms of where the Fed goes. Because as we know, where the Fed goes, where quantitative easing goes and tapering and ultimately the policy rate, which is critical, where that goes is dependent upon not just growth but inflation. And so the inflation target numbers that we see close to 1% are clearly indicative of where bonds might rest and ultimately where stocks might go as well.
RUHLE: You’re taking us big picture. Let’s go literal. What are you doing? What did you do yesterday when the market was selling off?
GROSS: Well, I continued to buy and PIMCO continues to buy what we think are the safest positions, front-end treasuries, Stephanie, buy four- to five-year treasuries. Do they yield much? No, they don’t yield much. They yield something like 1.25 to 1.5%, but they’re relatively safe as long as the Fed stays put. And we think when Yellen testifies, for instance next week at the joint Congress meeting, that she’ll suggest that for the next two or three years the policy rate will stay at 25 basis points.
That means fours and fives basically return with the yield, and that’s an important consideration going forward. If you can hold principal at part and produce some type of return, obviously in this market, in the bond market and in the stock market, if your money doesn’t go down and it appreciates to some extent through interest or dividend payments, then you’ve got a deal relative to what you’ve had for the past month or so.
