Surveillance: Bond Investing With Bill Gross

believe reports have it has improved. But we're thrilled that Bill Gross would join us today. And here is why the New Normal is one of the great calls of the decade. There's Steve Major at HSBC, Gary Shilling with his call on deflation and disinflation, and then there was Gross in ll area in the New Normal. Bill, if you look back over ten years to the advent of the New normal, now you've got a pandemic overlay. Do

we escape your new normal at any point? Oh? I think we began to escape it um and and and perhaps we will continue to do so. You know, the new normal was was based on a slower economy, lower influence in incorporated globalization to some extent, demographics. I think that demographic influence continues. Globalization has actually turned into deglobalization, which is not deflationary but inflationary. So that's been a change outside the pandemic. And of course the pandemic is

not um has not helped globalization. It's actually accelerated deglobalization, so too to some extent, Yes, the virus is changing things rather bill any number of things to talk about, But I've got to go to your memo today where you talk about a six trillion dollar deficit. We've heard this from other sources. The great economist Claudiasm has made clear we need much much more deficit coverage. What does

your world do? What does the bond world do if we get out to three, four, five, and six trillion dollar deficits? Well, the bond world at the moment, uh, you know, it is a melding of of the Fed and the Treasury. Uh you know. To my way of thinking, this this sounds rather derogatory, but the you know, the

Fed is and the Treasury is wagging it. And to a certain extent, if if the Treasury wants money, if they want four or five six trillion, and the FED will provide it through uh MMT and through uh through purchases, which they've done. Now do I endorse that? Know? Is that a constructive thing down the road? Probably not? Does it inflationary? Probably yes, we'll have to see, but it hasn't been in Japan. But I think that we've melded

fiscal and monetary, and I think rather permanently. Now. Um, Yeah, deficits can increase, but gosh, Tom, we're at pent of GDP already and it goes to at some point, as others point out, if the if the FEDS stays out of it or or their influence, then inflation is gonna come back. In any case, we've had inflation with financial assets and with commodities, and so let's just come back in another form. Bill. I remember the day where you recommended the Procter and Gamble dividend in the bond world

fell off its collective chair. Now we have permanence of gross financial repression. I'm gonna give you great credit for coming up with that concept. Do we have an asset bubble or bubbles plural? Because we have your financial repression? Oh?

I think so? Um, And we have an asset bubble because interest rates are near zero and negative and uh, many parts of the world and that at least to my way of thinking, you know, through even in discount models and so on, have inflated growth stocks and anything that you know have profits far in the future, better growing fast. So um. So yeah. But financial repression, if we want to speak to that, is something that's always been swept under the rug by, not only by Powell

but by Yelling and Bernankey, etcetera. It's something that can be fixed at a later point because you know, prior fed share persons have either focused on inflation or focused on you know, revigorating the economy and to the extent that the retirees and to the extent of pension funds and savers so to speak, or being hurt. Well, that can just wait. But at some point it can't. And I think we're beginning to see that. I mean, we

don't have to talk about prudential or insurance companies or banks. Uh, we can talk about mom pop on main Street in des Moine, Iowa, where um, they have no more savings and they're not able to earn money on whatever they have left, and uh, you know, the problem year by year, uh, just getting increasingly greater, and I think ultimately that becomes the the real chink in the armor of this entire

financial complex. Bill Jonathan Hare always enjoy your right thing, and you've never hit in your personality when you do right. I do think however, today, when people read this investment outlook, the investment calls within, it aren't the things that are going to jump out at them. It's the things you write about your family. And I ask you this question, Bill, with the deep amount of respect for your career, what's

behind that this morning as you put this out. Well, I've always wanted to let people know who I am, um, and to the extent that they know who you are, and there's a certain amount of honesty in talking about yourself and your life. Then, you know, to my way of thinking, it always translated into a an equal amount of honesty in terms of the investment world. And yeah, I think it's always been an autobiographical type of thing.

I didn't want to write a book about my life, but to a certain extent, these outlooks, um, you know, outline my life as as I've moved along in the current one where I talk about my son's tattoos. Um, you know, I think it's pretty interesting. That's a topical, uh piece of information, not only for my family, but for society. And uh, you know, uh to the extent the readers like it. Find if they don't like it, then some don't, then that's fine too. Well. Bill, you

know that many people are interested in your life. And once again, with a deep amount of respect for the family members that might read this and be terribly upset, you do refer to your son as a disappointment. And I'm trying to understand from you look happy right now as we talk, hugely successful, and when people read this, they might just be thinking, Bill, sounds really bitter and unhappy.

What would you respond to them if they asked you that? Well, I you know, I talked about tattoo as I said, he was a disappointment in terms of tattoos, and that, um, you know, that doesn't mean he necessarily a disappointment as a son. Didn't have enough room and space for that. But you know, I talked about my early two kids as well, relatively tattooed free and uh, something funny to talk about, especially the tattoo on the inside of my Son's lip. Who you know at least is here is

the sun didn't get a forty niners tattoo. That's the real issue, and you're gonna go get a tots tattoo. I do want to say, just going back to the investment thesis bill and the idea that you're making an analogy of the tattoo on the global economy that can't be removed for a very long time. And you talk about how you expect the bulk of stimulus have already occurred and that it's time to get more defensive. What does it mean to get defensive with yields so low

right now? Well, a number of things, and yes that I think the tattoo, uh, you know it's applicable to the global economy. Tattoo is a discoloring of the skin. And and certainly the global economy has been discolored by UH, by the virus, and things have changed in many ways as you've spoken to you know, certainly in the past half hour. What does it mean, uh, in terms of

investments and defensive yield types of investments. I'm always amazed, and I don't discount the phenomen gonna gross stocks and and the fangs and the Big five as I call them,

UM and others. Because you know, as real interest rates have declined in the US to amazing in the five years to a minus a hundred and thirty basis points, much more than other countries, then you know this diving a discount models would account for that and make gross stocks too much better than certainly other investments in the US and and and and globally. Um. But in terms of dividends, I'm always amazed that others don't recognize it.

If you can borrow money at U zero and one percent, and investors can probably borrow it at two percent on margin, then a relatively stable seven to eight percent investment, call it the tobacco stock. Are you know where I gravitated to some natural gas pipeline stocks with relatively firm dividends This perform US and and if you compound that uh six or seven percent a year relative to your bar and right, well that's uh, it's almost as good as a gross stock. Not as good as an Amazon, but

pretty good a stable investor bill. Just real quick, here are you saying that leverage is good in this kind of environment given how low rates are? Oh? For sure, you know, you've got a lever and to the extent that leverage comes back and snaps you, it does that one Central Banks raised rates and of course, uh, you know, I don't think and O there's and most don't think that rates will be raised for a long long time. So, yes,

you've got to be able to borrow money. You can do that with closed and funds that lever you can do that with you know, margin at your own account. Uh. Whenever you lever, however, you want to do it safely because as we know, ultimately leverage is destructive and the fore runner of a bear market as opposed to a bull market. Bill always appreciate transparency and you're always generous with the time. Thanks for you wanting to us today. Bill gross that honest and an outlook that he released

earlier this morning. Let's use every second we have with Dana eyes here and with wet Bush securities. I'm sure most of our audience on radio and television no of his enthusiasm for technology. Dan, we want to talk to you about China, America and technology, and yes, talk tick and all that, but Dana, I've just reaffirmed for is your bullishness on these belieguered texts. Right now, is this the mother of all by the dip opportunities in Apple,

in Amazon and the others. Yeah, Look, I do it as a golden buying opportunity because in my opinion, we're still in the sixth inning of a rerating in tech and this is just a healthy pull back. I still view twenty percent higher for text stocks and sign names over the next six nine months. And when you say that to clients in a zoom meeting whatever it is these days, higher, what did they say back? Right now? M most of the questions are which are the names?

Who in software do you own? Where the text teams? Because John, what I would tell you is it's it's to the one ratio investors were going to do the work on who the winners are rad and hit the panic button and sound that's in twenty plus years covering tech in terms of just from a scale white knuckles from my perscus. I think that your band cast this question the last week or so down. So let me ask him of you the distinction between the tech revolution

and a bubble. A bubble which I you know I was. I was an analyst through nine and two thousands. It was all about secular themes that might happen in the stocks were massively over and play with no profitable business models. Now, the secular themes you here to say, in my opinion, the most transformational tech teams that I've seen in twenty plus years terms of Cloud, five G, cybersecurity and others. And these numbers now are starting reflected. That's the difference.

The secular themes are here and they're on the horizon. It's not on the common a hoop. And I think that's the difference, and that's why this continues to be a powerdigm change in terms of valuations or tech doctor. And I don't view these last week or two is the end or some sort of sign about bubble. And there are a lot of people who would agree with you. They would say that the tops page on top tic, as Tom might put it, would do really well and

could drive revenue. But what multiples makes sense? I mean, how high can we go at this point? Yeah? I think that that's where I think a lot of these names chapter you. It is some of the parts as well as ultimately what numbers look like in a normalized state when we look out over next twelve d eight months, and a lot of these growth stories they've been accelerated by one to two years, sometimes two to three years,

so that these are still a digestion process. And somebody's work from home names a zoom a document sign and the scale or some the core cybersecurity. And when you look at large top path, I mean the stronger getting stronger, and I think we go into earnings in terms of three Q that's gonna be another Pattle's higher in my opinion, And Dan, I want to rip the script right now. This is really important. Cisco and Oracle are you know, to amateurs like me, are tech companies, but they're really not.

Their hardware companies up nine nine percent per year for the last decade, which is MOULDI compared to the group you following. How bad do you perceive Lawrence Ellison wants to be like the other guys? Well, I mean that's the TikTok deal. It's on the outside looking in and for for Allison Oracle that was once there. I mean, this is an opportunity for them from a TikTok perspective, to topsy partner and get in the game and getting

that conversation. But but I continue to view this as a massive head scratcher in terms of Oracle looking at the deal and obviously a partnership which is totally different than outright said, which continues to be the issue Dan a head scratcher, and yet Oracle shares uh in pre are con trading up more than nine percent. Isn't this the kind of activity that would point at some of the frost that you're rejecting basically the idea. People don't

understand it. They don't even understand how real it is. They don't even understand what kind of deal this is. And yet Bio Oracle, well, no, I think that that's why I don't have to distinguish between is your car frad and fundamental drivers. And I think this is an example of it's it's a head scratch and some theorical partnership and alter in what that even means and if it ultimately gets approved by the White House. And this is nachas all noise because it's not a salid investiture.

But that's why it's an investor. I think you gotta see, you've got to go through the noise and look at the fundamental drivers like you loo can name like Apple to five you supercycle. I think it's a once in a decade cycle. That's why you own that mean others might have throught. We saw that with Slack over the last week or two, so I think you have to look at the individual stories. It's not just a rising tide to with tall boats. Then you mentioned Apple. We

don't do this often, but let's do it now. Can you just talk to me about the middle of March when you dropped your price target but you maintained that outperform rating. I just want to give you a victory lap for that down because when we were in those depths of March, people just decided that was it. This bullmarket was over, and Dan, you just stuck with it with the big tech names. What was the lesson from

that moment, No, I appreciate. Look, the lesson from that moment is it was all about the installed base and seeing the forest of the trees and understanding that this was a panic sell off and if you just sort of stuck to those fundamental drivers, the stock was going to reread further up and and and that's why I view when you look at Apple, and obviously we've talked about many times over the last five six years many times that they were dead from a growth perspective, but

you had to come back. Look, and that's why the heaters will heat. But it just creates the opportunity. In my opinion, I think still think one basks up on the down fantastic to catch up with you as a white down if stet of wet Bush joining. So Francis Donald with manual life asset management doing wonderful work across the entire equation of economics. Francis Donald, are the airlines and outlier or can you actually see US economic growth

slowing into the end of the year. Oh, certainly the momentum constall are you a first deriva ever second revative type of guide? Tom, Really, this is an incredibly interesting recovery because you can take a sector and make a story out of it, or you can also pick strect

sectors that are doing very well. Anything in the manufacturing space we're gonna end up with and I hate to use the letter shape recovery, it seems pretty simplific, but we're going to end up with a K shape recovery here, which is that segments of the economy like airlines are going to do really poorly and you're also going to have areas like in inductrial manufacturers going to do well.

So you can have any analysts on they'll take a sector they can make a story out of it, really careful about disaggregating what's the happening, and at least so there's a new alphabet out there now, it's a K shaped recovery. According to Msdonald, I know because of your support of Arsenal, it's going to be an A shaped recovery here in about twelve weeks. Absolutely are G shaped recovery for the gunners, I will say Francis, though, you know,

talking about the airlines is emblematic. One thing that has been constant has been airlines layoffs of employees, and they're planning to do another round of possibly tens hundreds of thousands of layoffs once they're aid from the government and the federal government wears out. And and to Tom's point, this is probably why they don't want to get a bailout. They don't want the strings attached. They don't have the

strings attached from the capital markets. How much is that being factored into some of the projections for the economy, The fact that some of these big employers still have layoffs to make that haven't necessarily been even announced. Yet. Once again, we're using one sector to really paint an excellent example for what's happened underlying the surface, and that is we really have to employment shocks in the US

and global economy. We had those eight percent of those who were initially laid off forward towards your job losses temporary, and now that number is falling quickly. We have, you know, eight hundred thousands of a million Americans a week who are filing for unemployment insurance. Those job losses are not going to be temporary. Those are more like two thousand one or two thousand eight style recessions. So even those who were told their job loss would be temporary may

become permanent. My suspicion is actually, even though we have fewer people are unemployed now, the composition of the labor market is actually much less healthy now in August September than it was in April. So we really have to move away from that headline figure pay attention to the quality underlying the surface. Well, Francis, let's build on that just a little bit more. The composition of this economy going forward, capital economics in the last twenty four hours.

That a nice little job on this. It's not about the recovery for the next six or twelve months. It's about the permanent changes of this economy and the sector makeup of it, and the shifts the permanent shifts were witnessing. Can you speak to the Francis. Yes, it's a huge challenge if you're an asset manager, because you know there's another five to COVID and we don't know when it is, and we don't even know what unlocks it. I would argue it's not even a vaccine, it's just you know,

reduction in the fatality rate. So what do you do. You have to trade tactical portfolios, but ultimately focus on the long term trend. Now there will be those who are going to focus on behavioral changes or composition of the economy changes. My view is a macroeconomist is to say what's fundamentally changed here, And what's fundamentally changed is that we're going to have base bottom interest rates for

at least five years and possibly longer. We're going to have extraordinarily large government deficits and debt to GDP, and we've entered this new paradigm, particularly in North America, where a government issues a bond and a central bank buys it. So we can call that all types of different things. But I'm a little bit like debt monetization to me. So these are the structural trends that have really affected

our financial system. And sure you can be excited about digilization of the economy or or the end of malls, but what really starts seeing are addressing. The way that I'm thinking about my portfolio is what do we do when government bonds are doing us a negative return and

we have to make are you predicting it? Are you predicting negative interest rates just because of the structural challenges, well, not predicting negative interest rates in the United States, So I suspect they're The probability is signed by the market is still probably too low. But we have of the

global government bond universe that's negative yielding. So if you're an asset manager and you have to allocate the global government bonds, this is an asset class that has lost a huge amount of appeal, So you have to rotate into another asset class. You have to generate your six to seven percent. It means We're going to see big flows into under own asset classes, more flows in international

and more flows into emerging market debt high yield. This is why these sectors are doing fundamentally well, because we have to put the money somewhere doesn't exist in the traditional global government bond asset class anymore. So, Francis, you're talking about how the labor market looks less healthy now, and you're talking about places to allocate your money based on low yielding the yield low yielding regime that we're in,

when real fundamentals matter anymore anymore or again? Um I I hope soon because I like my job as someone who does fundamental analysis. But I will say, you know, we talk about this disconnect between the economy and the stock market. I'm not so convinced the disconnected as large as people believe. It is the reason that I, you know, really give in to this idea that we do have a K shape recovery is because it's a simplific way to highlight manufacturing is really doing quite fine. We press

a button, our conveyor belts come back on. They do not have to operate with social distancing in effect. That's critical because manufacturing is only ten percent of the economy, but its forty to fift of earnings the market cap in the SMP. So the segment of the economy that's actually doing really well and is V shaped is the one that's most tied to the stock market. Job services are less in the stock market, So this K shape recovery actually becomes a fundamental investment thesis, and it helps

to explain some, not all, of this disconnect. You see, Francis, this is some and Pool. It's not about whether fundamentals matter or not. It's about how they matter going forward from here, and how they matter for central banks as well twenty years ago, for the last I don't know, a hundred years, for the Federal Reserve, the story has always been when things get bad, you cut rights, and

when things get better, you hike them. The new story at the Federal Reserve is when things get bad, you cut rights and throw everything at it, and when things get better, maybe you do nothing. And Francis, that's something we've still got to get our hands around, possibly for the next decade or so. How are you thinking about this shift at the Fed? Well, effectively, with that translates too, is I spend an awful lot more time thinking about

fiscal policy than I do monetary policy. It also means, for example, when I'm generating five year forecasts, I actually have some moderate inflationary pressures in my forecast, but I don't have higher policy rates and I don't have materially higher rates in the market between your tenure. Why is that Because we have this disconnect, now we can allow for higher inflation and not necessarily mean that that the

entire interest rates. And this is a paradigm shift in the way that we see those two factors playing together. But ultimately what it means is is known for a long time, monetary policy is a very blunt instrument. It's one tool across the full economy. The shift here, and you know, I mean my career off of commenting on central bank that is kind of the old world. The new world is how is siscal policy going to target specific sectors that need help? And how will pascal policy

and issuance affect the shape of the curve? What are wages gonna do here in the Donald new world? Amazon with a hundred thousand jobs today as a round number, it's eleven of the workforce. It's probably a greater percent of the cardboard box force is well fifteen bucks an hour with benefits? Does that get it done? I mean, Francis, what does what do wages do? In your new world? So wages is the one component of the election that I think matters more than even say tax types or

tax cuts for example. So if we do get this new composition of government, then we're going to be talking differently about healthcare. I use the benefits that you're alluding to. Are we getting a minimum wages fifteen dollars? In this new paradigm? We're going to see two courses. We're going to see higher corporate concentration, which means they're going to have more pricing power but also more abilities to price

their own labor. But we're also going to have a focus on redistributive policies demands for higher wages, but they're probably going to be fighting against each other. Ultimately. I am in a moderate inflation camp. I do think wages are going to move up moderately through this period, but we probably need to think about how they get there in a different way than we have historically, which was

all Philip's curve and you know output gaps. No, the new world is one where we're probably going to be making sort of sort of more manual changes to the way we look at insplation, like Francis grib to catch up as always, fransics Donald the of manual Life Asset Management. Right now, Lisa brand Wins and I really want to get to something that's very visceral for both of us, and that is the transportation challenges that we see across

New York. That is a Metropolitan Transit authority. You can do that with pet Foy and you can do all the suit and type stuff, or you can read Jennifer Gunnerman's fantabulous article in the New Yorker magazine on driving the bus across Central Park North through this pandemic. It is extraordinary journalism. And Petfoy, I know you saw that article about one of your bus drivers, Terence Lane as well.

I love deep in the article where they say, and I'm gonna paraphrase Fosts, the policeman seeing when you're needed, the fireman see you when you're needed. But the bus driver and all of your mt A, you guys see us each and every day. That's Tom h n t A employees UH performed heroically during the pandemic, as they did after nine eleven, as they did after Superstorm Sandy. Obviously, the coronavirus exactive or an incredible pull across across New York UH and at the mt AT one of our

colleagues passed away from the virus. New York was the epicenter. But a heroic work of men and women working on subways and buses and Metro North and Long Island railroad and accessor ride and bridges and tunnels is extraordinary. And each of those men and women played an incredible role in supporting New York and moving first responders and essential employees during the pandemic, which I'll remind your viewers is continuing.

What's so important here is with the funding shortfall, and if you do not get aid from various larger governments, how many layoffs do you perceive? But we are asking the federal government for an additional twelve billion dollars, which is the amount of loss we will have in the remainder of and into ridership is down. It's down, actually subways, buses, Mentro North and Long Island significantly greater than during the

Great Depression, which which is which is extraordinary. If we don't get federal aid, and that's really in come in upon the Republican Senate leadership UH to to move that, to move that bill and move that funding. UH. We may have to cut subway and bus service up the seventy and Way off about seventy employees, and up to fifty service reduction on Metro North on Long Island Railroad.

Those cuts would be devastating and frankly, the the m t A is really the circulatory system of the New York City regional economy, and jobs will not be created, the recovery will be stunted and thwarted if we don't get that level of funding. I also just want to point out the following. The Chicago Transit Authority, important and well run agency pre pandemic, carried on an average day about two point five million customers last week in the in the in the throes of the pandemic, we carry

two point six million. UH. So that's a pre pandemic UH comparison on on the in the case of Chicago and during the pandemic in the case of the n t A, And it just demonstrates how important the m t A is. UH. If If we don't get that funding and have to make those cuts, it will have a significant drastic effect on the New York economy. Top somebody Pad who grew up in New York City riding the subway system and who has seen it through this

through the eighties through the nineties. There is a fear that we're heading back to another era with the subway system. How realistic is it that we are going to make those cuts. I mean, a lot of people hear what you're saying and just sort of chalk it up as a negotiating tactic. Are we on the brink of heading back to the eighties and the nineties for the subway system? It's not a negotiating attact, Lisa. We've been downgraded again.

The rating agencies are not not political figures. They're calling it as as we see it. UH. Going into the into we expected an eighty million dollars surplus. We expected to take hundreds of millions of dollars out of the expense space of the m t A UH. We we've done that. We expect to take an additional billion out in h one. But this is not a negotiating uh MET measure. We have a twelve billion dollar deficit. We've got to face. The only level of government that can

fund that is the federal government. Uh, every state and every city has broke, including the State of New York, in the City of New York. And it's only the federal government. This is a national crisis that requires a national solution. Pat Given that financial backdrop, how do you plan on deploying the resources to enforce the new mandate to wear masks on the subways and buses or face a fifty dollar fine? So it's it's it's a great question.

So the mask fine provision went into effect this morning. We've been serving our customers physically, counting mass compliance before today was about on buses, on subways, well over ninety on Metro North and Long Island Railroad. I spent the morning this morning with the m T a masked task Force.

I wrote the e UH in Queens from Jamaica that got of if it's seventy four Street and Roosevelt Dave and you took the seven, then got on the UH the four of the five from a Grand Central down to what the Bowling Green, which is where the NBA's office is. I will tell you that of the thousands of people we saw this morning, there was only one without a mask. My colleagues and I handed out probably a couple of hundred masks to people so who already had them so they'd have them for tomorrow. Masker and

are available from station agents. They are also being distributed by Long Island Railroad and metro work. Our goal is not to find anybody. This is not a revenue matter. UH. It's in the it's in the interest of public health, protecting our customers UH and our employees. Wearing a mask is the most important thing to do that we don't know. We were not looking to issue a lot of fines that we're out of time, but we say congratulations to you and all the essential workers of your mt A.

Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, so Cloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.