Surveillance Exclusive: Bill Gross On His Retirement

radio worldwide. Uh. Tom Keene in conversation with a gentleman retiring today, but you know he will never slip away from the financial analysis of his c f A Institute. Bill Gross joins us with Janice Anderson. I guess Bill, congratulations on retirement. I want to get to the track record the challenges you've had at Janice Henderson. But how did you get here? How is this decision made in the last number of days? Did you make this unilaterally?

Did you make this with Janie Henderson management? Well, no, I did it unilaterally and in combination with my family and my partner, Amy Schwards. So I'm having so much fun with um. You know, it's been almost a half a century of watching Screenstonge and waking up in the middle of the night to check Asia and Europe and

and Tom Brady equivalent years. That's that's a long time. Um. I've got a few Super Bowl rings along the way to look at, and it's time to enjoy myself and enjoy my family within this is the catalyst of outflows of funds. Was it harder to manage the Janison constrained fund given the repeated and chronic outflows that you've seen over the last number of quarters in even years, Well not really. I mean half half of the fund is mine and and I haven't taken any money out of

the fund. Others have as you've mentioned. You know, I look back on it um and the performance on the unconstrained fund in the past four years with janniss uh has been unsatisfactory, no doubt, but still positively um positive and normal and nominal terms. UM. What I'd like to mention those I've managed some total return accounts what I'm famous for for Jannis, and then they've outperformed like the old days that Pimco hundred basis points over and actually

outperformed Pimco. So maybe I should have stuck a total return and a little more constrained. This is this is a really important point, folks, and that Mr Gross has a number of ideas going here, including you know, fighting the fixed income battles that fixed them income wars of

mutual funds. But I was talking with our John Gilson and Los Angeles, uh, Bill, and within the unconstrained model, the perspective model of this phrase unconstrained, what did you learn about the pros and cons the difficult these of this phrase unconstrained, Well, unconstrained has come to me and basically go anywhere. Um, you know, the total return concept that I developed was was really developed on the concept of measured risk taking. That's what I learned in the

days of blackjack. You didn't put a lot on the table. And so you know, for the past three or four years, the negative trade for unconstrained has always been Germany versus the United States in terms of a spread tenure. German buns started out in my portfolio at a hundred and ninety basis points over and they're now two fifty plus over. And so that's been a you know, it's been the big decider and probably one in which I shouldn't put

too many chips on the table. Well, this is critical, Bill, and this goes to the hedge funds, and so many underperformances of hedge funds, depending on whatever you want to look at with the statistics. Was the underperformance that you faced in the last year with unconstrained was it because

you were not diversified? Is it? Is it the phrase on constraint gets you into a focus where the bets are too big to go back to ed Thorpe, Yeah, I think it did for me, and perhaps for other unconstrained funds too, if only by the nature of the

term um. You know, the old ed Thorpe terms. The Gambler's ruined concept basically said you could only bet UH two of your capital and and and certainly I had positions and unconstrained there were significantly more than that, especially the German US Treasury trade, and that UH probably was too much, but it was an unconstrained portfolio. Investors were expecting hedge fund types of returns of five to ten percent, you know, for for a while there it was only

one to two percent, and that was unsatisfactor. It was unsatisfactor Reinbill, this goes to your perspective now, and we should point out that Mr Gross has written all sorts of academic work for the c f A Institute over the years on finance, on the integrity of financial theory. You've lived it, Bill, Is the hedge fund model broken because it's a non diversified model, Well, I I think

it was broken for a long time, Tom. You know, obviously the hedge fund concepts suggested long and short, but it was really one in which managers took a lot of risks. So when you speak to diversification, you know, perhaps most of those hedge funds were non diversified in

terms of the risk that they were taking. They were taking levered risk and still are and so to the extent that markets moving and risk off type of mode, and they have in December and um other periods of time, then the hedge fund concept is really an exposure of risk as opposed to anything else, and it and it needs to be more diversified for sure. If you're just joining us, William Gross with us, of course, with Janice Henderson announces his retirement today a very young seventy four

unto seventy five years old. Of course, this after for in five decades of work. We continue now with Bill Gross welcoming all of you on Bloomberg Television. And Bloomberg Radio worldwide. Bill Gross, if we look at the investment in the recent investment return in that you mentioned the German trade, the spread trade with Germany? Did the central bankers get in your way? Are you willing to blame any sense of underperformance on Federal Reserve officials, ECB officials, etcetera, etcetera.

These people didn't go by the book, and Bill Gross got run over because they did something new and original. We all not necessarily mean they didn't go by the book, and it's up to the portfolio manager to analyze what that new book is in terms of reading um. You know, for five six of in eight years, the quantitative easiness provided an opportunity for bond investors to take advantage of capital gains um. The question became in terms of Germany

versus the United States. You know, what would the effect of US tightening by the Federal Reserve and the ultimate uh, you know, exclusion of quantitative easing in the beginning of quantitative training? What would that do relatives? What was happening with the e c B and it uh. The spread continued to widen and continues to widen eve until the day and that's a that's a very long term situation.

But Bill, this is critical and critical going forward as you invest your own money, and everybody else wants to know what you feel about central banks that got away from Phillips curve theology over to balance sheet adjustment through Q quantitative easy and then onto some set of quantitative tightenings to come. Which of those two was the real harm? Was that the balance sheet dynamics or was at the death of the Philip curve dynamic. Well, I think it's

basically both. In terms of the balance sheet. I find it very interesting, certainly in the US with the Fed. Um you know, the FED expanded its balance sheet during quantitative easing from proximately one trillion to proximately four trillion UM in a world in which credit in the United States was around sixty trillion dollars. You know, to my way of thinking, back in two thousands seven and two thousand and eight, the FED was in a highly levered

situation relative to total credit. It was one trillion versus sixty trillion or sixty to one UM. They expanded that and basically equitized their portfolio to four trillion, and that was a much leverage situation. Now quantitative tightening, reducing that to some extent, although probably going to stop in the

next few quarters or so. UM. You know it perhaps is at a point where the lever inherent in the Fed's balance sheet and the leverage inherent in the US creditum economy is um It's better probably put it that way, although not necessarily satisfactory. So many times I've found Bill Gross I don't want to mention names here, but a lot of acclaim managers in whatever way are shown the door, and then X number of months afterwards, whatever their play was,

works out like a charm. Do you sense any kind of jump condition coming where yields come up or those spreads normalized? I mean, is it going to be smooth functions over one year, two year, three years, or do we get a jump audition and abruptness to some outcome this year two thousand nineteen. Well, we need to speak to different central banks as supposed in different in the US. In the US, the FED is that two and a

half percent in terms of FED funds. If you assume inflations at want to, then you've got a half a percent, and to is a real interest rates, which to my way of thinking, it's about as high as you can go in a levered type of economy, and the rest of the world, you know, let's just take the e c B and take Japan as well, um, with their zero percent interest rates or even negative interest rates in Germany all the way out to seven or eight years um.

You know, there's a very different situation and things haven't really changed, and I wonder versus the US, you know what that means for their economy. And as I've mentioned for many times on your program, Tom, the the disadvantage, in addition to potential inflation down the road, the disadvantage of negative interest rates and low interest rates in the rest of the world is that savers are disadvantaged, and insurance companies and banks are disadvantaged, and so the savings

function is at risk. This is really important for US. And doing one more question on this and then switch themes in this generous conversation with Bill Gross this morning again on Bloomberg Television and Bloomberg Radio. Worldwide, we have negative interest rates. This was a huge theme of Davos in the in the hallways, Bill grows a chronic nature

to negative interest rates in Europe. It redounds on the US is well, is that something that goes to a breaking point or do you have an optimism that e c B in Europe as a political entity can extricate itself from these negative interest rates that don't help savers. Well, I think it will take time to observe, and haven't we had that for the last three or four or

five years. And what we've found, certainly in in the easy in Europe with the e c B, is that these raids are just enough to keep growth above the line and just enough, uh, you know, to keep inflation at one to two percent, you know Japean For me, Tom is the Petri dish because they've been doing this

for ten or fifteen years um. And you know, in e commerce would have predicted that if the government was buying all of the debt issued by its treasury, or if the central bank was buying it, that that would be quite inflationary, but it hasn't been. So the quandary going forward is for other central banks, will this behavior create inflation? And in my context, will this disadvantaged savers to the point where the savings function and the investment

function is severely disrupted. We welcome all of you on Bloomberg television in Bloomberg Radio worldwide, Bill Gross announcing his retirement today from Janice Henderson. We're thrilled to bring him to you on Bloomberg Surveillance. Bill Gross, I want you to speak to the savers of America. You grew up Middletown, Ohio. You went out to San Francisco to get as far away from Tom Brady. Is its theoretically possible? And Bill Gross, you're out in San Francisco. You did more duty in

Vietnam assisting the tet offensive, decorated for that, etcetera. And there was a time there where savers could actually say, if you go back to the seventies, it actually worked. You go back to the eighties, it actually worked. I want you to speak right now to our savers on television and radio who haven't gotten a fair deal in the Gilded Age. When did the savers finally get a break and actually get a real return. Well, to be fair, it's better now than it was a year or two

years ago. They have a chance to basically stay up with inflation with their money market type of account. But um, you know, for a long time it hasn't. And I suspect going forward, if the FED stops here, you know, there won't be the same advantage as you mentioned over the past forty years, all the way back to when I started in the early nineties seventies, And so what does that mean we Ultimately it means to a saver

that you know, they fall behind. Pension funds fall behind, individual savers fall behind in terms of retirement, education for

the kids, etcetera. And it's only been the stock market, um that has been uh, you know, the savior in terms of their necessity to build up an st egg and many um individuals, as you know, uh, don't invest in the stock market, and so um, yeah, you've got to get the interest rate above the inflation rate in order to give savers, pension funds, insurance companies okay, fighting chance to to take care of their liabilities. So that's a great summary. But do you anticipate that will occur

or is there a permanence to our guild Today? The President is going to speak tomor nighted a state of state of the Union with a wide perception across all of politics. Did it's the very narrow haves and a huge body of have nots that can't get a fair shake, Whether fixed income or equity markets. Are we gonna shift to some form of real return in fixed income and indeed per cist with equity total returns? Yeah, I don't think so, tom or or if it does, it will

take a long long time. I mean, what the FED did in two thousand and five and six to raise FED funds to five percent or three percent real or so, it was to basically break the levered economy. Now, someone suggests that we're less levered now in terms of banks and capital, and we are, but the debt to GDP is still at two and climbing, and around the world

it's even higher. And so, um, I think central banks have to be cognizant of the fact that a certain interest rate, you know, could break the global economy again. And as that a realistic observation, yes, but it's also a negative, as we've mentioned, for savings institutions to be able to pay off their liabilities going forward. One of these days, UM, you know, pension funds, large pension funds will simply say, you know, three percent is not enough.

I've I've basically guaranteed five or six percent from my uh pension retirees and uh, you know, we're gonna need some welp here from the government. Well, we got every other city out there, you name, the city's everything, but fancy Newport beaches underwater. We've got serious actuarial assumptions in America that have gone wrong. How urgent is that? And when do the owners of pension, owners of people not making the actual assumption, when do they say enough fixus.

I don't see that pressure out there, Bill, I don't see it either, because it's a long term problem. In politicians and even the public, you know, are our wont to observe a long term problem. They tend to look for the day as opposed to tomorrow. But I think ultimately it is it is a problem. How might it be solved? It might be solved by this melding of fiscal and monetary policy that we've seen in Japan and actually in the United States and elsewhere. What does that mean?

It means ultimately that the United States could you know, issue dead to solve these problems. But you know, have the central bank buy it back itself? And is that a negative? Is that a potential harm to the account certainly, But what we've seen in Japan is that so far it's working so ultimately to me a long term forecast. I used to be really negative on this about the fifty or sixty trillion dollars of liabilities with social Security and healthcare and so on. But the Fed can basically

buy it back. And if it's non inflationary, which is the critical key, If it's non inflationary, then perhaps they can pull a rabbit out of the hat. I don't think so, but I think they might try. I'm Bloomberg Television and Bloomberg Radio. William Gross with us today. He retires from Janice Henderson. We're thrilled that he could join us for this extensive and special conversation. Bill Gross, I want to go back to the theory the moment I

got Marko. It's his book on My Desk from ninety two, which is a bunch of fancy theory that you've written about at the cf A Institute. I think of Abby, Joseph Cohen and others that have written about the architecture that all of our listeners and viewers rely on. Does that architecture still work? Is the efficient frontier still there? Does the sharp ratio still work? And all the other

mumbo jumbo the alchemy of the trade. Well, I think it does, but it's much less than it used to be because the financial markets have become so sophisticated with UH you know, and not only advanced theories, but with speed trading and UH computer iration and al goes and so on. But um, I think it still works. But to expect information and sharp ratios to be higher than one or one okay for what we have done, I think it's a little unrealistic, certainly in an era of

low interest rate. This is the critical folks. You've got to understand this out at Pacific Investment Management Company, and I'm sure over at Jane Anderson, Mr grow Hit on his desk before the Bloomberg terminal a Monroe trader, which is how he got his information advantage. Bill, Are you suggesting that the information advantage for all of active management equity and indeed fixed income as well, has to give

way to the wonderful John Bogel's passive investment? Please a comment on active versus passive and the legacy you know from Mr Bogel. Well, I'm still believing believer in active management, and and Jack and I would go back and forth

on this. I've always been willing to acknowledge that indexation's primary benefit and Jack would have said this too, you know, is that it's low fees and and investors in some cases don't pay any fees now for index funds, whereas active management can charge fifty hundred and fifty basis points depending on um, you know, the risk asset itself and so um. You know, can active managers produce those types

of retains to compensate for those fees? I think with interest rates as low as they are, and remember Tom, that low interest rates basically or the foundation for returns for all other assets absent you know, euphoria, which we've we've seen certainly in the past few years. Um, you know, the the alpha the information ratio of the sharks ratios. Um,

they're going to be much less than they were. And if they are, then active managers have got to lower their own fees and recognition of their inability to return a proper rate of return to their investors. On the time that I've got left to you with Bloomberg Television and Bloomberg Radio today, I want to touch upon your philanthropy. Do you still own any stamps or if you sold it off for medical research. I still got. I've got

six auctions going forward. I've got you know, the bulk of my stamp collection is still to go, and it's it's a little tier, I guess every auction that I have. But you know, in the past ten years since I started these functions, you know, probably forty five to fifty million dollars to philanthropic institutions, including a a Smithsonian stamp exhibit and post office in Washington, d C. Which is lovely and so uh. You know, there's a lot more

to come. I still have a few left. I may keep one or two, uh in the next few years. One final question, if I can, Bill Gross, I would note the uh, the discussion that Gronk may retire from the New England Patriots. I guess Edelman will go forever. But there's this guy Tom Brady, who you have clearly

shown a lack of affinity for over the years. You're not going out on top after a difficult track record at janis uh Anderson, Bill Gross, do you suggest that Mr Brady take the high road and retire today and go out strong? Now I've based upon last night's performance. I mean Tom eats right, he uh, he works out right. He has a belief that he can keep on going for another few years. And as a quarterback, um, he doesn't need to be fast, he needs to have a

strong arm. So um, you know, let the guy go and uh evidently uh and perhaps going forward he'll be defeated in a super Bowl and cash and his chips. But he's got a lot of rings. And like I said, I've got a lot of rings too. I'm very proud of total return concept. I'm very proud of the you know, the innovative assets that we were able to move into like mortgages and financial futures and UH tips and so on, which was really the basis for performance in PIMCO. And

so I've got a great career. I'm proud of it. Uh the last few years. UM, you know, we'll we'll wipe those off the magic slate and go forward having fun and uh enjoy life. Bill gross thank you so much for these comments this morning on UH philanthropy and there of course on active passive and as well on the state of the economics, finance and investment that we all live. Mr Grosser's with Janice Henderson we greatly appreciate

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