We're Not In a Bond Rout Yet, Gross Says

and of course on the Bloomberg. We begin our job coverage in this hour with Alan Krueger of Princeton University, truly giant of modern economics, particularly his work on the hourly wage. We can talk about that in a bit. You're piling through one of my books of the summer a couple of years ago, Leonard Oiler Mathematical Genius in the Enlightenment, which is really heavy reading, a lot of math in it, a lot of formulas. Fortunately, Tom, it's

the beginning of the summer. Yeah. But and it's it's it's a tough book to get through because it's got a lot of theory in it. It's a very significant book. I was more interested in his life, which very little about um. And it's tough going. I have to say, to get through the physics and the math, well that's where I wanted to do. It is the physics in the math and the era. Then the mystery why is

our central banking now any different? I mean, do we have an understanding of the physics in the math of our central banking? Thinking you know what it's remarkable for me and thinking about the book is humans have been thinking about developing math for millennia and the progress was slow. Yet in the early eighteenth century they know far more than typical college student knows today. And when it comes to central banking, were you know much earlier in this period,

so we're sort of pre Newton. I'd say, I want I'll put a question you. Tom often puts to two folks who are who are academics, that is, are how engaged with the mathematics or students in your department today students who are studying economics. Are they as engaged with mathematics as they used to be? Oh? Probably more so. I don't think, David, I'd be able to get into graduate school with the math that I had at Cornell today.

But I would say this economics is more logic and more analysis than math, and I think the math is a proxy for someone who can think analytically. There used to be on the g R E exam an analysis part, and that was a stronger predictor of how well economists performed, how well they fared, than the math component. Yeah. But we had a great debate this week with Adam Posen, who defended the orthodoxy of Phillips curvics or etcetera, and

John Riding who took him more Neil Viccellian view. It's the markets, it's we need to improve regulation, we need to change corporate texts, etcetera. More market based, more flow based. Which where's the tendency right now? Are we going to end up back to the orthodoxy of ten years ago? In ten years I don't know. Those are so inconsistent, to be perfectly honest, If you think about where the Phillips curve comes from, I think of it more is coming from my dynamic view of the economy. So I

don't see a conflict. I can tell you I uh put some weight on historical estimates of the Phillips curve, and I also think making sure that we've got a proper regulatory regime for a financial system is important to make UH the economy work for everyone. Let's get to this job support. What are you gonna be looking for today? What's this report going to indicate to you about the health of the U s economy? Well, you know, the most important number in the jobs report is the top

line UH peril growth number. But under the surface labor force participation, what's happening with wages? It seems pretty clear that job growth has been moderating the first six months of this year. That's not surprising given where we are in the business cycle, given that the unemployment rate is

below four and a half percent. So I'll be looking closely to see if their further science of moderation, focusing on manufacturing, which has been pretty much moving sideways, although with the decline in auto sales, I'm concerned that could pull down all of manufacturing. UM. So those are the main aspects of the report. I'll look at from a policy perspective, what what could what could improve those manufacturing numbers?

That do you think? Um, that's a good question. I think fundamentally we need to invest more in research and development, manufacturing, and what drove manufacturing is developing new products, products that can do new things. Uh. Also what drove manufacturing is productivity growth, and that's continuing. It's driving down employment. So I think we need to think more on the product side and how can we leverage our technology to create products that improve people's lives and put people to work.

I think we need to rip up the script. We're coming back and talk to Alan Krueger about everybody wants to hear about. I'm gonna guess Professor Krueger, correct me, Card Krueger. Krueger Card a definitive paper on the labor economy of this nation. There is no other topic in labor economics now about the efficacy and result of twelve, thirteen and fifteen dollars per our minimum wage. Something everyone's been waiting for. Alan Krueger of Princeton on the minimum wage. Okay,

here's the debate. The Washington Examine or conservative rag comes out and says liberals hate this report. And then the Washington Post comes out liberal rag and says, wait, the Washington Examiner's got a point. Essentially correct me if I'm wrong. Professor Seattle and others are finally getting the minimum wage back up to its inflation adjusted level from another time

and place. In recent decades, a minimum wage has been set below that inflation adjusted glide path from before, and now at eleven fifteen dollars an hour, we're really beginning to test what's the best minimum wage. How's the test going? Well, I think it's very preliminary, so I will go with that. I would reserve judgment. I've looked at the studies from Seattle.

There's more than one, and I think that the conventional wisdom which has become that modest increases in the minimum wage don't have a noticeable impact unemployment is still correct, and we don't know where the turning point is. UM. The UH evidence that we're going to start to get from Washington State, from Los Angeles, from a few other cities, I think might help us to determine where that turning point is. I've been concerned that fifteen dollars and hours

beyond what we've experienced. UM. On the other hand, adjusted for inflation, that would put us throrom eleven twelve dollars an hour. Every business person listening to this right now is going Professor Greg go back to Princeton. We gotta live in the real world. We can't wait for more data,

more time, more responsible economic studies. What do you say to the person going, wait, I gotta go from X to fifteen or thirteen eleven, and the only way I'm gonna do this is productivity, efficiency, robots and depreciate labor unit count. I mean, it's just fewer people employed, right, Well, I think it's more complicated than that. Um. I think what many individual businesses miss is that their competitors are

also facing higher prices. So one of the things we've seen in the past is that minimum wage increases are often passed on in the form of higher prices. UM. And given how low inflation is at the moment, Uh, there might be some who actually think that it's not not the end of the world. But I think that the impact on an individual business is is not as great as often as perceived because it's affecting the entire market. Let me ask you a broader question about policy making

in the year two thousand and seventeen. Tom brings up the minimum wage, but you see a lot of decisions being made at the state and local level that in the past have been made at the federal level. What does that city about the role of the federal government if you have UH cities and states tackling regulatory issues

minimum wage issues. So what's changed. We've seen this before with the minimum wage in the nineteen eighties, when the federal government didn't raise the minimum wage, the states stepped up. That's what's been taking place since two and nine, the last time the federal minimum wage increased. Donald Trump proposed raising the minimum wage to ten dollars an hour when I ran for office. That struck me as a reasonable compromise,

a reasonable level. I don't believe he's ever brought that up again, um and I think that's something which consensus could be formed behind and might lead to a national floor, which is UH leading to UH more people to be able to earn a living that they can survive. On one other thing, I wanted to point out time we're in a strange time now because job openings have been growing very quickly, much faster than hiring, and it raises the question why aren't we seeing more more wage growth?

And historically in that kind of environment, I think we would have seen stronger wage growth. One of the reasons why this is taking place now, I think is because companies have imposed non compete clauses on their workers make it harder for them to switch. Even McDonald's has a requirement that franchisees can't hire away employees from other McDonald's unless they've been out of work for more than six months.

So I think this is chilling the labor market and putting a lid on wages, and it's one of the reasons why we're not seeing wage growth, which the minimum wage. You know, historically when we were in this type of a labor market, we would see an increase in the federal minimum wage. Somebody's nine and they go to eleven dollars to any five cents in our minimum wage, whatever the geography is, whatever the state does. Everybody else go up a buck or two as well. There is often

a big spell over. There's a debate in the profession now about how high that spellover goes. Um that's one of the issues they are looking for. It does tend to ratch it up the whole wage distribution, which makes sense. Workers care about their relative their relative pay. That's one of the reasons why employers resist pay increases because it's not just the individual employee. It's the whole pace will be effective. This is this is desperately important. You just

stated there's a lot of job openings. Why don't they just raise the wage? Money talks. I can't get welders, I can't get economics professors like you know, I can't get why you yet you know, just raise the wage and why you en right? I think employers have gotten used to an environment which were no longer in, but an environment where we had a surplus of labor. And I think we're heading more towards a labor shortage economy, partly because of our demographics, partly because of our new

immigration policy. UM and I think that employers need to adjust to this new environment. And I think the more enlightened ones will see it's in your interests to respond to these market conditions. What do we need to know about the skills gap are calling? Michael McKee was in Cambridge, Massachusetts yesterday. He spoke with a darn a smugglof of m I t about this very issue. It struck me talking to Mike Boston. Cambridge in a very privileged place.

They're surrounded by great academic institutions and have their pick of a lot of those graduates becoming tougher and deffort to get those graduates to stick around the greater Boston area. What do we need to know about the skills gap and how to how to narrow that divine? Well, I think there is a skills gap, and I think we need to start early. I think it's a long term problem. I think it's been a problem for a long time

for the US. But that can't explain the entire puzzle that we're facing because the fastest growth in job openings has been for restaurant workers, for hotel workers, retail um work, which has relatively low credentials uh generally lower education levels. So I don't think it's only a matter of skills. I think it's partly a matter of employer policy and reluctance to pay more for for both high and low skills.

Are we exporting our skilled jobs? I mean you just mentioned three job categories or everybody's going I don't want my kid to do that. You know they can you know, minimum wage, fine, and go get a summer job. Great, But are we struggling with our skilled jobs because they're going abroad? Is that the new globalization? Well, that's a risk I think with our new immigration policy, because, uh, if you look at the mix of immigrants coming to the US, it's both a highly skilled and the low skilled.

It's a barbell and also very ambitious people at all levels. Um And to the extent we're making the US less friendly for immigrants, that's gonna hurt employers. It's gonna hurt employees across the spectrum be cause, uh, the jobs that the skilled workers would help create for less skill workers won't be here, some of them. David mentions Michael Michael mckem. Meeting it up at m I M I T. You may not know the l A M I T is a school up on a river in Boston. I was

very impressive. You can both pronounce as I have Smart. The one that I can pronounce smart. Crumpton helps you know what people don't know. The only reason I can pronounce these names is Crumpton is in my ear telling me how to pronounce it. He's the best. Okay, long term growth and his research up at m I T is institutions, institutions, institutions. Where are we on an institutional flexibility that gives us a better long term growth? I think their own their own smog is an excellent work

in this area. UM. And historically, I think one of the great strengths of the U S has been our institutions, our institutions of free press or institutions of UH Central Banking, Congressional Budget Office, UH checks and balances. That we have a government and UH. Frankly, I'm worried that UH they're they're under stress now with the new administration. UM. I think we need to really praise our our institutions. By the way, I was listening to your show last week

and I heard you both you listen to us. I was driving into work and I just broke and he heard you both mentioned the CBO executive summaries. I think probably on the healthcare bill. UH. CBO's an institution where you have to cherish even when I disagree with him. I think it's an institution that I have tremendous regard for. We're up to seven listeners in New Jersey. That's unbelievable. Why you unreal? Alan Krueger, thank you so much. We'll leave it there with the fact that you listen to us.

I'm Bloomberger eleven three oh in serious XM Channel one nineteen. We said good morning one or six one FM Boston, Good morning to all of Sloane at Massachusetts Institute. What's the name of the schools up river? I can't I can't remember Leslie University. Watch yourself younger. That will get us into trouble as well. Really, really, thank Jim Glassman for joining us today from scenic Glendale, calif waking up early for yes, you really appreciate your early morning hours.

How important is this job's report? Dr Glassman? You know, it's always important because it's yet another view of what's really going on in the economy. But I think we got to remember these things can be very volts a month to month, and May, June July have tend to be really volatile in the last couple of years. Remember last year we had a really weeked May, then we got this booming June number. Last month we've got a disappointment, And so you know, you have to sort of lick

through the noise. And I think we got the idea the U s economy is back on its feet. Unapployments quite low. There may be still a few pockets of hidden unemployment. Inkly, Uh, this report is important because it backs up what we already know that the US economy isn't pretty good shape. It doesn't mean we're doesn't mean we solved all the problems, but we're pretty much there. I agree that months a month there seems to be a good metric, but also a new metric where is

normal non farm payroll growth? You and I used to be one eight was terrible, two was okay, to twenty was great. You've got a whole new mathematics now, don't you. Exactly because of the demographics. And you know, the thing to remember is that the population has been growing about one percent a year since over the last ten years, but our labor force has been growing about a half

percent past sixty a month. So this is why economists tell you we really as long as we're getting employment growing set you almill, say seventy five hundred thousand a month, that's considered to be pretty normal with this slow demographics that we have, the demographics I'm referring, who is the baby boom generation moving to retirement. So it's a real big deal. It's we've had to change our mind about what kind of growth you need to get the economy

back on its feet. That's what we've been learning over the last decade or so, and I think that's what we're watching here, and that's why I think it's going to be a tough story to figure out what's good and what's not good. I think the key thing is as long as employment is holding steady at a low level, no matter what the job growth is, it means that we're kind of in steady state. Jim, I know you've been looking at layoffs. What do those numbers tell you

about the state of the labor economy? Pretty darn good, you know. To me. To me, you're getting a lot of news, pockets of news that are kind of squishy and soft, and yet that's just the piece of the economy. The layoffs are telling you something about the entire economy, every corner of the economy that we don't see in the numbers. A lot of it, and those trends that that layoff pace jumping around week a week, But basically we're floating around two fifty thousand per week, which is

a really steady. It just tells you we're holding high and there's nothing really bad happening. Uh. If there are pockets of weakness, there are other pockets that are offsetting it. So it looks pretty good to me, and we've got you know, at this time of the most summer months, the auto industry goes through a lot of adjustments and it could be really noisy, but frankly, these layoff trends

are pretty steady and in a really good zone. What are you gonna learn about the confidence of employers from from this report about the momentum in this US economy? I'm not sure, because as the economy gets on his feet and we get close and closer to full employment, it's gonna be harder for people to hire folks, and so the job growth may slow down. The way you see the confidence is the wage trends start doing better.

People have had to pay up. The interesting thing to me, this is music to economists ears employers everywhere complaining about not being able to find people, not being able to find people with the right skills. So that to me, the fact that that companies are actually hiring and they're having to and they had to pay up for it means to me the businesses are pretty confident of what

lives ahead, and that's why they're doing this. That's why they're hiring aggressively, and you see more and more signs around of people needing help. Help on the signs the old fashioned way. Pretty interesting. Market is not a problem. We're just talking to Allen Krueger about this. Where's the wage growth? It's not there yet, but I think you know, uh, inflation is pretty low too, So you said, I had

to look at things relative to inflation and productivity. But it's it's been a little disappointing right in the last particularly the last several months. But all of us economists sort of hold on to this idea that the closer we get, the tighter labor market gets, the lower unemployment follows. It's just a matter of time before workers start to see better pay increases because companies are having to work harder. So you're seeing a lot of you're seeing really good

gains in areas that are strong that the technology sectors. Uh, we just hadn't seen a real convincing up trends. It looked like he was moving in the right direction, moving up from two and a half percent. Then it kind of stalled out. But I suspect I would be really shocked if this time next year we're not looking at faster gains and in errors in in wage rates. And you know, the other thing to keep in mind is average genially learnings aren't the only part of the labor

pay story. Companies have to pay for all kinds of benefits, health care, insurance and things like that, and so if they have to pay more for that kind of stuff, they can't be as generous with average gerially learnings. And that's part of what may be going on with the health insurance premiums moving up. I'm not underemployment. How much attention should we pay to that figure when we get

it this morning? You know, I think the trends, you know, it's always been worth paying attention to because there's a lot of unemployment that is not reflected in the uneployment rate. So we watch that trend pretty carefully. I look at the involuntary part time guys and the young adults, and the thing that's interesting is all those signs of undeployment

really getting better. And that's that's not visible in the headline numbers when we you the payroll numbers, but it's really something that's been going on in the background which tells you. But you know, whether it's people who are unemployed for very long periods of time, or people who are working part time, or young adults. All of those

trends are getting better. So you know, it doesn't in my book when you take it all into account, I think you could argue despite the fact that the undeployment rate is for I think you could argue that we're still in the top of the ninth inning. We still have a little bit more work to do because there are these pockets of hidden unemployment and underemployment. But I think we're doing a pretty good job getting there. Is it?

Is it okay, Dr Glassman? If I steal your spectacular chart of non farm payrolls and claims inverted, which shows that we are we are. We are in a tenally unusual time. Yeah, we really are. And and I think to think to remember about this. I mean, I love Hayte nonfarm payrolls and job Day because you're getting a real good picture of the economy. But we don't know what's really going on with small businesses. It takes the BLS,

you know, a little while to figure this out. The thing I like about jobless claims is it catches everybody, no matter where you are. No matter who you work for, you're in those numbers. So it's good to compare both and and and Uh. They're both impressive trends. What's the why the claims are as good as they've ever been, Well, there's I think there is a like everything else, we're surprised that the economy is doing as well as it

is with slow growth. But I think the useful thing about claims is it doesn't care what our potential growth is. Is Is just telling you the economy doing well, and it's picking up pockets that we don't see in the in the numbers day to day. And I think what it tells you is companies are now focused on trying to get staffing levels up so no one wants to lay off. They may be having a harder time hiring people. That's what you would expect as we get closer and

closer to full employment. But I think what I think what the claims number tells you is that people are pretty optimistic about the outlook and they're not willing to lay off. And even when their pockets of weaknesses, companies may be willing to ride through that because it's difficult to find people in a tight labor markets, so you don't want to lay off unless you really share your business is in trouble. I'm gonna get this chart on

folks on Twitter. I'll probably feature it on television on Monday. It's extraordinary chart from Dr Glassman about how non firm payils are doing what they're doing, and they're hugely linked to claims up until exactly June of two thousand and fourteen, and then claims have a life of their own. And it's my pleasure this morning to present the Plummest Byline Award d Win Matthew Bosler fedwis Ri reporter here at

Bloomberg News reporting from Vineyard Haven, Massachusetts. Stanley Fisher, the vice chairman, speaking there last night, talked a bit about uncertainty, and he said a cautious approach to investment by US companies may in part reflect the unser about the policy environment. The vice here saying mitigating the dampening effect of uncertainty by providing more clarity on the future direction of government policy is highly desirable. Jim Glassman, how much is uncertainty

policy uncertainty weighing on employers right now? Well, you know, I mean uncertainty is always with us, right, I mean, I can't remember time when we were uncertain about things. And frankly, you have to ask yourself, we had a lot of uncertainty in the last ten years, and yet here we are. The economy has recovered from our pretty

devastating downturn and the underwater problem is largely gone. And so you got to say, despite all of this uncertainty, I think businesses they run things by looking at the possibilities, and there's a lot of a lot of opportunity out there, and I think that's that really helps to dampen the worries that you have about uncertainty. So uncertainty is always a way of life, but frankly, I don't think it gets in the way. And uh, I think the economy

has done a pretty good job despite all this. Let me ask you just how you think that the federals of policymakers like Mr Fisher are going to be viewing what they see to day, we have testimony from a yellow Capitol Hill, two days of testimony. Next week we're gonna get a monetary policy a report as well. How's the FED going to be processing these numbers? You know?

I think I think they're pretty uh encouraged by what's been going on, and I think, uh, you know, even if the numbers are whether it's a little higher or a little low, I don't think it's going to change their mind about what they need to do because the basic idea is we've already got the economy close to full employment, and they've got policy very accommodative, and they'd

like to normalize things gradually. And I think they're doing a good job with this, and the fact that inflation is quite low gives them lots of room to do it. So I don't think they're going to be disputed from the little surprises. I don't think they're gonna change their mind about what they need to do. We saw that last months too. They they they continue to talk about needing to normalize the balance sheet and interest rates, even

though we had a weakish employment numbers. So, you know, I think, particularly when you put this report together with other things we're watching, jobless claims, trends various, Eddie, I think if you see surprises today, you tend to you tend to put in another box. It's not you know, you know, things are volatile. I don't think it's going to change their mind. Are we creating full time jobs? Are we deluding ourselves into a set of part time

jobs to keep going. I think there's both. I mean the fact that overall unemployments down means I mean that there's a lot of people who like to work voluntarily part time jobs voluntarily, there's a there's a lot who have been forced to work part time that's disappearing pretty quickly. So I think the jobs are pretty good, pretty good jobs all around. And you see, uh, you see signs of that everywhere. And you know, we haven't. You haven't seen real confirmation yet in broad trend up in wages.

But I think when we when we see that, we won't be shocked by it because we have a pretty good idea that the state of the job market is quite good. But if average all the earnings here every year at two point six percent today, are you just assuming with rates up, inflation goes up? How do how does wage growth stay ahead of rising inflation? You know, I don't. I don't think wages drive inflation. I think in the old days, when companies have a lot of protection,

you would agree to certain deals. You figure you can just raise your prices to cover. I don't think people operate that way anymore. So if wages aren't doing well, it's because productivity is slow or because they can move operations elsewhere. So, but I think you know increasing when you hear when you hear people complain and and wring their hands about not finding workers, you just know what's coming. You know that. Well. The way you solve that problem

is you offer better pay. I don't think companies are going to be offering pay that puts them out of business, but so when you if you so, if you see wage trends not doing as well as you just think you should, it might be because the underlying fundamentals aren't there yet companies. Companies can't do things that make them on rosket ball. But I think slowly, over time we're going to see better trends here. And the labor side is the job market is really the best part of

the economy so far. Jimmy last one, stay with us. We'll have you with us as we break the numbers and then move on to Mr Grosser's well, David Garrow, we've gotta again pay homage to G twenty just amazing shots earlier of world leaders gathered in a bright lit, yellow and white room, very bright, cheerful room, a big, large, correctable Prime Minister May over to the left, sitting to the left, facing into the rectangle from Chancellor Miracle. President

Trump two seats away from Chancellor Miracle. When do they meet? When does Fruiting and Trump? They've they've had their handshake. I spoke with the German ambassador of the US yesterday, asked him about that famous handshake between the German Chanceman the President the White House. He said that the two leaders have a good and productive relationship. We've made too much of the body language. We watch what we can.

When Bill Gross visited our old headquarters here a couple of weeks ago, we did the Russian toast thing, locked elbows with a with a stole nia, you know, the Russian toasting. Maybe they'll maybe they'll do that today. Brunch you by Bank of America Mary Lynch. With virtual reality, virtually everything will change. Discover opportunities in a transforming world. Be of a mL dot Com, slash VR. Mary Lynch pierced Fenner and Smith Incorporated and now joining us on

Bloomberg Radio and Bloomberg Television worldwide. We welcome William Gross of Janice Anderson as well. Bill, I want to go over the job market and then get right to the turmoil, the idea that we see higher rates and lower bill note and bond heields as well. This looks like a yelling friendly jobs report. It looks like a jobs report that let's have FED gives them them some room to raise interest rates. What will be the effect when the

Fed raises interest rates? Well, they've been raising interest rates in the effect depends, I suppose, Tom, on how much they raise and when they raise. I still think despite this rather strong jobs report from the standpoint of jobs gain not necessarily from wages, which is what the Yellow launches. UH seriously as well, um that the Fed has one hike perhaps left in the year, and that's probably in December.

I think to a significant accent. It depends, as I've mentioned in prior UH discussions with you, it depends significantly on what other central banks do, and if the ECB and the b o J and others, UH, you know, tend to change their policies and the FED must um not respond. But as a leader, as the central bank global leader, you know they've got to be cognizant of what it might do to currency levels, and so they're

all in the pot at the same time. And I think your question about the FED is important, but it's also important about other central banks around the world with what we've observed in the last number of weeks, and of course we've got rising grades and we'll get the bonds and investment here in a moment, Mr Gross is the idea of a FED that is coordinated and yet at the same time constrained. How coordinated are the central banks? And how constrained is chair yelling because she's limited by

other global activities. Yeah, I don't think they're coordinated at all. Yet you know, obviously in the last few weeks there have been hints from uh, the ECB and hence from the Bank of England that they're on the move or potentially on the move at some point six, twelve, eighteen

months down the road. But they're still you know, a long way back from when we stopped qui in a long way back when when we started to raise our short term interest rates and so um, they were beginning to be coordinated from the standpoint of philosophy, perhaps in the direction, but certainly not in terms of timing and magnitude, and I think ultimately that does have a significant impact or will on currency levels, and central banks want to

keep those currency levels relatively static. Admittedly, each wants to, uh, you know, to lower their currency a little bit so that it gives a push to their real economy, but they got to keep things steady. And so the future coordination is I think it's important. It hasn't been coordinated to this point. Bill, We're seeing a bit of a race here up to the top of the hill to

declaring end of the bull market in bonds. I wonder if you're vying with Ray Dolly of Bridgewater to put a flag there at the top of the hill to say that we're entering a bear market. What say, well, my bear market level and now six months ago, so that isn't really applical one anymore was up at sixty five. You know, I've looked at the long term trend since the early nineteen eighties, and interest rates on the tenure

have been falling by twenty basis points a year since then. Um, you know, is that a technical mumbo jumbo Really not, because it's an indication of what an economy needs in terms of lower interest rates in order to keep going. And so I think ultimately, although we're probably a two thirty five at the moment, you know that to six level is the critical level for interest rates going forward. Do we get there in the next few weeks? Uh?

Probably not. You know, we've had a thirty basis point increase or twenty basis point increase over the last few weeks due to the bund taper so to speak. So um, but I think we're moving higher. Creeman wants you to come over here for Bloomberg Television. I'm gonna show this chart. We'll show it out on radio. Go to Twitter with that as well. Bill, for the first time in ages, I'm showing bond price. Here's part on the Germany tenure.

Down we go, Bill, As you know, looking at your Monro trader, we're down about three percent on full faith and credit, higher yield. Did you know this bill? Higher yields, lower bond prices. When does it begin to hurt? Mr? Gross, Well, that's my old teen or todder Thomas. Obvious interest rates up, prices down, and that's what you've talked about. Boons up by thirty basis points with the direction of about nine. Yeah,

it's about three points. When does it begin to hurt? Um, I think it begins to hurt at the margin here in the United States on mortgages. Ultimately it begins to hurt.

And this is an unobserved fact. I guess by the by the street that that interest payments as a percentage of expenses, corporate expenses are significant, perhaps thirty and so it begins to hurt lower yielding corporations, junk bond corporations when they try to roll over their dead in two thousand and seventeen late and two thousand and eighteen early.

And so as interest rates rise generally, and as interest rates and spreads widen, you know, the hurt begins to to affect those lower quality corporations as well as individuals. I want to buy a home bill gross, You're unconstrained. How do you adapt within your portfolio? Janis Anderson? How do you adapt to a higher rate environment? Do you get under the desk? Do you start rooting for the

New York Patriots? What's what do you do New York? Well, of course, the way to adapt if you were sure of higher interest rates, and if you were sure that those rates would be higher than what we call the forward yield curve, which isn't much um than what you

do is you go negative duration. The problem with negative duration, and it sounds very hedgy, Tom, but the problem with negative duration meaning's short bonds, basically is that you give up the valued carry, the carry of a positive interest rate, limited though it maybe, and so investors for the past thirty or thirty five years have been reluctant to give up carry. It's been a carry trade as interest rates

have come down and stock prices have gone up. Carry is a function of not only interest rates, but spreads and risk taking, and so giving up carrying going into the negative column is a very difficult thing to do because you need higher interest rates in order to justify your position. But that's what you do. And the Jenison Constraint Fund has been you know, short carry and negative

perhaps by half a year relative to its bogey. And and the bogey, by the way, is live or three months paper, so it's basically an effective duration of a minus half a year at the moment. Build very quickly here, what did you take away from the meeting in Central last week? All these central bankers, there are a lot of confusion surrounding what the ECB president Mario Drag had to say, the market interpreting what he had to say differently. What was your takeaway? Yeah, I think there's a lot

of confusion, and that's typical. There's a lot of confusion now at the FED in terms of what they're going to do as well in terms of UH the lack of quantitative easy in or buying back selling treasure is basically into the market. I think Drag is focused on containing volatility. I think other central anchors within the e c B and members within the ECB are focused on the negative aspects of interest rates and what they're doing in terms of German insurance companies. So, um, it's pluses

and minuses. It does our privilege to bring you William Gross of Janice Henderson right now. Is he always joins us on jobs today? We love that opportunity Bill Gross. Um. Yeah. I look at the whole mix here, the cocktail of you will of investment, and I guess it comes to when do we get a bear market in bonds? Let's

begin with can you predict a bear market in bonds? Well, predicting bear markets bonds are are used to be a function tom of inflation and the potential for higher inflation followed by FED tightening these days with the extraordinary provisions on the part of central banks, quantitative e s and so on, you know, the ECB and the b o J and the Fed of purchase thirteen trillion dollars with the bonds and stocks via que over the last four

or five years. And so it becomes a function of their persuasion as much as inflation, and um, what we know from their ideas in terms of future inflation are there that it hasn't gone up to their targets. All central banks are looking at a two percent target and

most are dismayed that they haven't reached those targets. So a bear market and bonds is a function of what central bankers believe and at the moment, because they're pumping in so much money and because the inflationary targets haven't been hit, Yeah, we probably don't have a bear market and bonds until we see the whites of the central bankers eyes. That's a nice way of putting it in a military basis. In the attack and battle that we're in, when does the public catch up with the new normal

of low yields. Psychologically, I haven't observed that yet. We're still trying to get back to a decent nominal in really yield return. And I respectfully say, Mr Gross, it ain't there. No when I've said that for a few years. To have that, I that I've that. I feel that real interest rates and nominal rates, uh, you know, themselves have to go up in order to afford the small saver and large savers, by the way, insurance companies, pension funds and so on, to earn satisfactory return. What is

that return? Well, you know, based upon historical historical examples, individuals probably think that they're in a six to seven to eight percent return world in terms of a fifty fifty portfolio. I don't think so. Insurance companies and pension funds, as we know with the State of Illinois and others, you know, expect a seven to seven and a percent return from their diversified portfolio. I don't think that's going

to happen, and that's why they're having problems. And so, you know, ultimately, despite the fact that tightening and higher interest rates has a negative impact historically unemployment and potentially could produce a recession, I think we have to get up there in order to avoid a future recession. You know,

they're one last point. They've been studies by uh, you know, Princeton and others now in academia to point out that once you drop below two percent in terms of the short term rate, it really doesn't do much or hasn't done much in terms of stimulating the economy. And so I think ultimately we have to get back up to a level that stimulates savings investment in the real economy as opposed to simply channel funds into the financial economy. We've seen the German ten year an eighteen month high.

We've seen the emerging market to sovereign dollar bonds posting their worst weeks since since November. What are the Bill Gross bell Weather bonds when you look around the world, what are the ones that you look to to tell you what's happening in the bond market overall? Well, I

follow the Bund very seriously relative to tenure treasuries. I think there's a has been a rather dramatic correlation in the past few months, and indeed it makes sense that there should be a correlation period when the ten year German Bund exceeded fifty basis points yesterday or the day before. You know. To me, that was the say know that you know their yields are moving higher um, and that

means that treasuries would be under pressure as well. The Bank of Japan has this ten basis point cap on their tenure rates, and we've gone up to the ten basis points, and I assume they're doing some easy policies in order to keep it there. But the ten basis points in Japan, the fifty basis points in Germany UH, and ultimately, as I mentioned, the two sixty level on ten years are critical in terms of determining whether or

not bonds are in a bear market or not. It's going back to the minutes that we got this week from the Fed. Yes, but also from the the e c B. There was this by any means necessary line, or at least a version of that implicit in the in those in the policy of the e c B for so along. What do you make of its removal? Do do we see a change in tack here from the e c B? Well, I think ultimately, I know drug is very very devilsh and doesn't want to upset markets.

It doesn't adhere to my particular philosophy that have just discussed in terms of their negative aspects of rates UM. I think ultimately we have to wait until two thousand and eighteen before they begin to taper um. You know, at what pace will that be? Probably limited? You know. I continue to see the e c B buying and increasing their balance sheet from perhaps four trillion to five trillion over the next eighteen months, and that's a stimulative

type of monetary policy. So yes, taper is beginning probably next year, but it's going to be slow and gradual, and that's just the way Droggy does it. Within the movement in bonds. Bill Gross remember this idea. Bill youngera doesn't remember this. There was a point where yield actually competed with dividends. This happened long ago and far away. How close are we to where we return to the

day to day battle of yield competing with equity dividends? Well, I think we have to get beyond the two particular

factors that lie underneath that historical comparison. Tom One, we have to observe the amount of buybacks on the part of companies, and to date, although they've been coming down, they've been moving at a billion dollar a year pace, and and many investors consider, and I think there's logic to it that that five billion dollars a year is akin to the dividend, and so you can increase the dividend rate that we see by that amount, and that

amounts to perhaps another one to one and a half percent. Uh. Secondly, though, I think that the corporations in terms of their dividends ultimately are a reflection of the potential for growth and the expectations for growth. And to the extent that growth is now moving down and investors are beginning to look at two as opposed to three and less fiscal stimulation on the part of Trump and tax policies and so on, that ultimately, uh, you know, stock yields as a reflection

of growth. Um, you know have to have to start to increase in terms of immediate return as opposed to a future return. How will reached it, We'll be How worried are you about the contagion associated with this route that this could get into that we could see this move into other Uh, this is not a route that's being inflammatory. Gross Gross Bill Gross remembers the day where Alexander Hamilton wanted to coalesce all the state bonds into

a federal bond bill. Gross Seriously, this is important, folks, for the hysteria we're all going to read about over the weekend bill. Gross. This is not a bound route, is it? No? Not yet? You know, thirty basis points in Germany is not a bound route. And uh, you know, we've come down from very low levels in terms of term premium and in terms of compressed volatility, and the volatility that we've seen in the last few days UM,

even as expressed in the VIX, is certainly not a route. UM. You don't have to see volatil in double and triple UM and and and prices declined by two or three points a week in terms of a bond route. So no, not yet. But ultimately, inflationary expectations and central bank policies will try to contain volatility, will try to dampen interest rates. UM. Whether the market agrees with him forever, I think will be the ultimate question. Yields to my way of thinking,

should move higher? David, get one more question here. I do want to point out Grosser's portfolio in the last thirty days is in the percentile. So he's being very rowdy because David's being very as I moved to the surveillance time out share from our mispeak. There, there you go, Phil, Let me just ask you lastly what you're going go ahead. I was gonna say that's that's a function of being negative on German interest rates and to the extent that they've gone up by thirty and prices down, and then

Janice has done well, there you go. Bill. Let me ask you lastly, here's push ahead to next week, we get a monetary policy report, we hear from the FED chair. What are you gonna be listening for when she speaks on Capitol Hill two days next week? I believe on Wednesday and Thursday, Well, the doverishness, hawkishness, uh, you know, focus on inflation and financial conditions. I guess that's the debate that I see. I mean, yelling suggests that financial

conditions aren't important. Others such as the you know, the president of New York Fed, um, you know, suggest that stock prices and financial conditions are important. So I'd like to see answers between that those two heavyweights, uh, in terms of whether stock prices are key or not key? Bill Gross, thank you, so much, greatly appreciate it. Mr

Gross is with Jamie Anderson. It's been a remarkable day and we've now got a nice move in the bond market off the jobs report of better jobs report yields higher I guess h two point nine and the thirty year bond. A lot of the different American media maybe has moved away from Hamburg and the meetings, but to be honest, David Gura, across the Bloomberg, the headlines continue and they're really pretty important. The President meeting with the

leadership of Mexico UH. Trump says Mexico should quote absolutely unquote pay for border uh wall. There's headlines on China China blast G twenty overtrade hands were shaken uh and Hamburg is calling in a little more security. So as we go to our next guest, David Gura, it's sort of a stew here in Germany on this Friday. Well done, A pleasure here to bring an ambassador, Max Bauchi's former US Ambassador to China, former US Senator of course, from the great state of Montana. He joins us on our

phone lines. Since let me get your respective ambassadory if I could, from your time in Beijing. I imagine this issue, the North three issue, loomed large while you were there. What changed for you? Earlier this week July four, I went North three, attested this new missile. How did the political calculus change? Well? First, um, not much changed, because even though we Americans, including President Obama and Secretary of State Carry others, spoke very frequently as that I with

the Chinese leadership about North Korea. Um, the birth Koreans with excuse me, the Chinese, but come back with platitudes, they wouldn't say anything. Meanwhile, Kim Jong un proceeds and

develops his missiles. In a certain sense, nothing changed. What's more imminent now though, is that how far he's developed his missils capability and and how Also it's becoming more clear than China is not only not willing to help very much, but maybe even sat in with Brusha and opposition some degree to United States ways to try to solve this issue. So it's it's it's becoming more ominous in my judgments, help us with with urgency and diplomacy.

We we heard from the President this week via Twitter we had to try with China. It sounded like he was given up on applying pressure to China on the issue of North Korea. You've lived this, how how difficult is it to get things to move faster diplomatically? Well, I think it's a mistake for him to conduct foreign policy Vida's twitter. Um, it's um, it's it one hand. His statements are inconsistent, sometimes it's bombastic, and sometimes it

were reasonable. And foreign leaders therefore, including Kim Jong and President she really don't know what to expect. It's it's inconsistency rather, and a second is all public Rather, I think it's it's such the United States to buckle down, dig down really deep, work with other countries and figure out much more solid planned It puts a lot more

pressure on all countries. In this case, it's not just North Korea, but it's on China and on other allies of ours who interned and put pressure on China and on Russia to get a solution. Near all countries now or involved, if can can shued an, I GBM that threatens the world, and it says stays it's be presidential beast dates but like and not do not conduct all

these sweets. Let me ask a senator from Montana question, did you ever go home you know, I mean, I know, I know Max Bock has only took five or six days a year off. But when you did go home to Montana, did were you ever greeted with the emotion in anger that you see your colleagues greeted with. Now, is this a new thing or do this used to happen to you? Well? No, I got it um when I took my trips home to very frequently, remember two or three healthcare meetings, And I also found that it

worked if I just stood there. I totally respected if people are asking the questions and respected that people are pretty angry, kind of ticked off, and listen. You gotta really listen. And after about an hour and an hour and a half of meetings, but maybe if it's a hundred people, two hundred people potend you to calm down a lot, and I think there's a lot more mutual

self respect. Now. They may not really like the health care ability we passed that much, but at least there was a strong communication that we talked to a lot of with with American with with my constituents. Second in issue really came up a lot as a second amendment gun control Man oh Man that's that's hot, and in Montana, and so again I just listened to people and be very respectful. I started meeting by saying, Hey, Okay, I know you're upset. All I ask you give me five

minutes and let me speak uninterrupted. Then we'll let let the roof blown off a letter riff and center backus. We treasure when you're on with us. I'm gonna ask you a deeply emotional question for a national audience, and

particularly our audience in New York. Can we have gun legislation that meets the constituencies of your Montana and at the same times meets the constituencies of our urban areas, and particularly after this horrific I use this word folks with immense respect for NYPD for the assassination of a police officer in the last forty eight or seventy two hours. Can we have two gun policies? Max pocus, I frankly

don't see it. I mean, um, if we had one gun policy in Montana, where people are hunters outdoors respect guns of our crime rates very low, and another gun policy in New York where handguns aversely banned, that might work in New York as well as uh the outline the approach I outlined from Montana. The trouble is guns go across the lines, and I answer your questions. I just don't see how they can combine these two. We have to leave it there. Too many as you always

enjoy to speak to you Inbassador Bocas. Thank you, uh something, David. There's never enough time with Max. Bob always great to get on healthcare, on finance, indeed on China relations as well, China relations as well. 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 Keene. David Gura is at David Gura. Before the podcast,

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