This is Masters in Business with Barry Ridholts on Bloomberg Radio. Hi, this is Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio, Bloomberg dot Com, Apple iTunes and everywhere else. This is the second half of our interview with Bill gross By. Now you should have listened to part one, in which he described going into the folks of Pacific Life quote unquote knees knocking and proposing they set up a standalone bond shop. Uh, the early days at PIMCO,
who his mentors were. That's a fascinating conversation. If you haven't heard it, I suggest you find that and listen to that first. This half is really the latter days, and he describes um how PIMCO grew to be the monster it effectively became. He describes his creation of portable Alpha. I don't know if you knew that that's essentially a
Bill gross invention. He describes why and how stability leads to instability, and we get to talk about our mutual friend Paul McCulley, who brought Himan Minsky to his attention. Who Minsky essentially as a person who explains why stability leads to instability. People become complacent, they become more more aggressive, they take more risks, and eventually that that has a
bad ending. And he talks about the FED and QUEI and what it was like in the midst of the crisis, what it was like to when the FED said They're gonna go and buy mortgage backed securities. How come nobody else did. People didn't trust the FED, they didn't believe it. He made a bet that the FED was telling the truth, and it netted him ten billion dollars in returns for the total return fun shareholders. So he also says some very very interesting things about his exit from PIMCO. He
still is is small learning from that. He feels blindsided. He was stunned. He didn't know that a founder slash c I O slash shareholder can be unceremoniously dumped. He says he was fired from PIMCO, and he thinks PIMCO made a mistake. They should have let him. They should have accepted his offer, in Bill's words, to step down from total return, just from run the closed end funds and and sort of sail off into the sunset ala
Peter Lynch. But that didn't happen, and I think, um, he feels he still has something to prove, and that's how he ended up at at Janice Capital. So anyway, this is the second half. Um, it's another hour, and again you'll find Gross to be very forthcoming, very intelligent, and very articulate. I found it to be a fascinating conversation, and I think you will also with no further ado. Here is Bill Gross. This is Masters in Business with
Barry Ridholts on Bloomberg Radio. What is the state of the US economy and what do you think about what's happening in Europe and Japan? Well, the entire world, let's let's start there is suffering from a lack of aggregant demand and that that's almost so undefinable. I suppose it takes a textbook, has to be relatively useless, but it basically means that the the world is suffering from high debt levels, which um which in the past have promoted lots of demand over the past thirty years and can
do so no longer. That the world is in the slow process of a demographic crawl towards older age, and we see that with Japan and Germany and certainly with the boomers in the United States, although our economy is less affected. UM. We see that with technology as robots replaced people uh you know, jobs from Apple and Google. God bless them. They're great companies, but they don't create a lot of jobs. They create gadgets and wonderful uh
you know things to uh to to communicate with. UM. So the world has changed from the standpoint of aggregate demand. There's less of it because of debt, demographics, and technology, other influences and so, UM, you know, we are fighting what Summers called structural headwinds. We're fighting what I call the new normal. Uh. The world uh you know, in the developed world cannot grow the way it used to grow. It's probably a one to growth rate. UM. You know,
shouldn't if Europe ever, you know, get out of the whole. Uh. In emerging market countries that they've got their own problems commodity based, commodity related and dependent upon UH capital inflows which now are being pulled back, and so their growth rates while underdeveloped and having less debt on their balance sheet. And developed countries have problems of their own that from a financial standpoint, limit their ability to grow. So that
the the globe, Yes, still grows. The I m F puts out forecast of three plus and a lot of that's China. But um, so it still grows, but it glows much more slowly. And and so from the standpoint of the US, what we're seeing now at at three plus is a little bit of a mirage. You know. I I believe in the one to two percent structural growth rate that we will you know, very quickly move back down towards. And that's not all that bad relative to everybody else, but it's not what we're used to.
And in terms of corporate profits and and growth and and PE ratios, etcetera, etcetera. It's really a suggestion that the as I mentioned in my investment outlook last month, the the good times are over and returns this year in my opinion may h and any cases have minus signs in front of them as opposed to positive signs. So you don't think that five percent print in GDP is sustainable? Oh god no, um, But but that's what they want. That that's what the Fed. The FED wants
five percent nominal GDP. That's their target because if the economy can grow at five percent, it can continue to to pay off you know, it's it's interest rate bills, both publicly and privately. UM. If it only grows at three percent or three percent two percent, then uh, an economy like the United States, a levered economy like the United States, has a difficulty in terms of pain you know, for its past consumption. It's past credit. UM. It's just
that simple and um. You know we shall see. You know, since since Lehman Brothers credit private credit credit I mentioned in the first segment, that had grown from one trillion to fifty eight trillion has grown about a three to four percent clips. Some in some sectors higher like with the government and their deficits, some cases lower like with mortgages and in private consumers. But in any case, that's
been growing at three to four percent UM. The the economy needs credit to grow three for four percent needs nominal GDP or else um uh assets um in order to make the cover to make the interest rate UM, they start to be sold, and that that's the beginning of a debt deflation that all central banks want to prevent. I want to avoid deflation. Let you mentioned you mentioned
aggregate demands. Leads me to a conversation I add with your colleague Paul McCulley, who was defending what the Federal Reserve had done on the basis that Congress had abdicated their responsibility. We normally see following a financial crisis, big stimulus, a lasting stimulus, and a lot of hiring on the state and federal level. We didn't get this time. If anything, we saw a contraction on the state and local level.
And while we had a i want to call it a eight hundred billion dollars stimulus, half of it were temporary tax cuts and on a big chunk of it was temporary extension of unemployment. So you were really left with like a two or a three hundred billion dollar stimulus, and he was talking about a two to three trillion dollar stimulus. Let's talk a little bit about Congress this cycle. Did they do what they should have done following the crisis? And did I'm paraphrasing Paul, did the Fed really have
no option? Was it, Hey, we're the only game in town. If we don't do something, we're just gonna spiral to really bad places. I'm with Paul there with the exception that they shouldn't have gone blow one percent, and that's
the problem now. And I'm with Krugman and Summers and uh and McCauley in in terms of the need for fiscal stimulation and the lack of it as you just described it, there's there's no doubt that at these interest rates, uh, you know, the government could be financing a multitude of infrastructure uh projects. And then we have the Republican view and the democratic view in terms of the uh, the
productivity of public investment. But you know, let's face it, there's lots of areas in terms of roads and um other large projects that the government must do and and has done rather efficiently in the past. And so let's let's borrow money cheaply at two on a tenure basis and use that money to uh, you know, to to create jobs and to to repair obvious deficiencies and uh, you know, our private infrastructure and public infrastructure. So yeah,
I think we've fallen down from a fiscal standpoint. Did the monetary authorities have no other choice? Um? Probably not, But with the the exception of of going going to zero, I think they could have stopped center at one. You know, certain countries have looked at and issued fifty year bonds to finance their long term debt. Is that something that makes sense for the United States now that rates are this low? Yeah, I think someone we're looking at it.
I mean, they put out feelers and uh uh, you know, they bring in private companies like like Pimco, not Channis at the moment, but and asked them as to the you know, to the viability of a fifty year bond and who would be a buyer, and doesn't make sense? And yeah, certainly from the standpoint of pension funds which are terribly um in many cases still underfunded and mismatched.
Uh yeah, fifty years maybe a little long, but you know, their problems emanated from the fact that there liabilities were always much longer than their assets and um, and now they're in many cases they're terribly underfunded. So sure, a fifty year piece of paper would make sense from the buyer. It would probably come at a Yeah, let me take that back. I'm not sure whether they would come at a premium to a to a thirty year piece of
paper because of the convexity inherent in it. But in any case, it would be cheap and half something like that. Probably less, you know, probably less, Yeah, probably closer to this is my money for half a century giving two point seven five? Is that right? Right? Um? Or three percent? And so it would be very cheap financing for a government and could be put to productive us. So I want to get to a lot of the questions that
people had asked on Twitter. But let's I would be remiss if we didn't talk a little bit about that unpleasantness last year. So let's let me fire a few questions is about this and I'll ease into it. Um. And this is a question actually came from Twitter, which was you're reputed to be a tough guy to work for? True false? Um, you know, in some ways, but because a leader has to be exacting. I mean, this is a business of money, of dollars and cents, and mistakes
can be very costly. And if you don't have a leader looking out for mistakes and berating those that make significant mistakes, then what have you? You've got a loose company that ultimately is not doing a service to its clients. So you know, I was always a stickler in terms of details, a stickler in terms of holding me needs and communication and going over the strategy. Um. You know, I thought that that was important. I thought that was my duty to clients to get it right. And so
if they consider that to be an attitude, I guess rightly. So. On the other hand, I'm a pretty quiet guy. Um. I liked to, uh to sort of sit there and look at my Bloomberg screens and and do trades. And when it came to twelve o'clock hour, we would have an investment committee for two and a half hours, so that that would be my time to come together with the company. Uh you know. I I viewed myself as in many cases a mouse as opposed to a lion.
Um in a mouse that sometimes roared, as opposed to a lion that, uh you know, was was constantly on the prowl. So yeah, I I tough but fair? Is that what you're sort of hinting at? Or I think so? I think I think a leader has to be tough. If if you sit around a table and you congenially, um, you know, look for a consensus, uh type of type of outcome, you're in trouble. You can't manage money. You
can't manage money that way. At some point somebody has to step in and said, we're going in this direction and Uh, I studviewed that as as my job, and I think I did it well. So Alians bought PIMCO in nine for I think it was about five point nine billion. Am I getting those numbers more or less? Right? You hung around for another fifteen years, which is very unusual in the world, certainly of technology, when when the founders are bought out, they tend to go on to
the next thing. But you stayed at PIMCO and managed it for another fifteen years. How did that happen? They pretty much left you free reign to do what you wanted. They did, and and it Uh. First of all, I gave them my promise, not for fifteen years, but uh, you know, for a certain long period of time that I'd stick around. At the time, I was only hive so and you were the brand. You were the most
recognizable guy, right, So I gave them a promise. I remember earlier ten years before, a Japanese company had come by and they've been worried about what they called the black box. They didn't know what was in the box. And you know, if if Gross ever left, what was in the box? Um? And and so I told all the answer, Yeah, that was it was good to go and for a good number of years. Um, and I you know, I fulfilled that that promise for them and and for myself. You know, I still want to manage
money and so um uh. You know, it wasn't strange. I wasn't motivated ever by money. It's nice to have money. It's nice to have a nice home or two, uh, and to have the privilege of not worrying about, you know, wearing next paychecks coming. But it was never money that motivated. It was always, um, it was always clients and the recognition from them that I was doing a good job. That's what I always always working for and still am so when so full disclosure for those of you who
are listening. I had written a column last year about the bonus structure at PIMCO, which you responded to by saying, thanks, now I got to get a bodyguard for you revealing all that, But you challenged the track record of I had mentioned in the article that the two thousand and eleven total return never return, never recovered. You challenge that, and it turned out it did recover. The track record
wasn't as people had said. But what struck me as quite fascinating was you directed me to look at the closed end funds you were managing, and the people at morning Star could not stop gushing. You know, they said, well, total Return has had a great track record. It's not in the top decile in the past couple of years, but these closed end funds were ranked one to three, four and six, five of the five of the top six in the entire peer group, they were ninety ninercentile.
It raises a question, why not say, hey, you guys, take over total Return. It's too big for me. I'm happy to just run. Um, I'm happy to just run the closed end funds. Why not? UM? I guess you should have been my agent. Um that because by Barry the truth be told, and you're looking for some truth here. Um,
that's exactly what I did say. UM. I said, if for some reason, you're dissatisfied with me from the standpoint of personality, here from the standpoint of business direction, if you think you want to pursue a different direction as opposed to you know what I called burgers and bonds, the plane vanilla total return type of product. Uh, then fine, Um, you know I'll I'll step down from the executive committee
from a compensation committee and just manage the closed in funds. Uh. You know, I I love I love that area because it's an area where individuals can buy them, you know, for a ten dollar ticket with the Schwab or whoever their broker is. And uh. And you know, if they can find a good one like the ones you mentioned, Uh, you know, they can profit enormously in the bond work. And so I said, hey, I'd be willing to do that.
But for some reason, still unbeknownst to me, they didn't think that was a good idea, and they they did fire me. Barry did Now, you technically quit before they fired you, but you knew it was coming. You said I'm getting out before they formally. Did you not have an inkling this was coming? That this blind side you well? And you know, I'd have to say in the last few weeks that it blindsided me. I had no idea that an executive committee could fire a founder and the
titular leader of the of the company. UM. I found out about two months later. I was visiting a neighbor who was sick and he's eighty years old now and he's a retired Air Force general. But we had a nice discussion about his situation, and then I was as I was leaving, he said, well, he said, you should have come to see me six months ago. And I said, what was that, General? And he said, because I could have told you the first rule of the military. And
I said, what's up? And he said, what's your back? Lieutenants. Yeah, a lot a lot of guys got fragged right back in the in the old days. Um so now you're now you're a janice. You're running an unconstrained fund. Obviously much different. Are you doing anything different? Not from an asset management perspective, but from a business perspective, from an interacting with colleagues perspective. What sort of mark did PIMCO leave on you? Are you changing anything or is it? Hey,
it's a different world. It's a reboot and I'm going to do what I do best well at the end. Constraint is different. I was I was running unconstrained Pimpco. But unconstrained allows you to uh it to be long and to be short. I suppose it's not a hedge fund. It's not highly levered, but you know it does has flexibility and it it's not duration or maturity focused like the total return product. It is, as you've just pointed out, much smaller at two billion. It does allow a lot
more flexibility. It does permit, uh, you know, the incorporation of an idea that can't really be traced by the street or or jumped in front of And so for all those reasons, it's it's it's it's a much more manageable situation. It is smaller. Um. You know, Janis has a large operation in Denver. I use their credit research uh team. As a matter of fact, I'm going to recommend one of their bond funds at at Barrens in just a few hours at the roundtable, five star funds.
So they've got you know, excellent credit research that I utilize. UM. Yeah, they're not as advanced in terms of derivatives. Uh, and we'll bring that up to speed. We've we've got Myron Shoals by the way, uh and uh you know several other people that are really advanced in terms of uh obviously derivative thinking and exposure. And so you know, the
attempt is not to rebuild PIMCO two. I don't want to have twenty one floors, uh, you know, right next to the PIMCO building, but but certainly to to build
a structure that adds value for clients. And that that's the biggest concern very I got at the moment, is that with return so low and with with fees doing what they're doing not coming down very much, maybe in the hedge fund world to some extent it um you know, I I I worry about the plight of the investor and uh, you know, if they can only earn three or four percent annulate, um, I think they need a good deal. Uh maybe not Roosevelt's new deal, but they need a good deal and you know, I hope to
bring that to them through Janis. So anything you've learned personally in terms of the business side, the interpersonal relations side, do you watch your back? You mentioned what do you take away from the the exit to to the new gig? Yeah, I think that although although no, I'm not going to be in a position. I told Dick Weyle, who who's the CEO at Janis that you know, he's running the business. I don't want to be part of those committees. I
just want to manage money, um. And so that aspect is is out of the picture, and I'm not sure there's uh uh too many people have got to watch behind my back. I think Dick has my back in terms of a strong wind behind me and so um, you know a lot of confidence there. But you know, I think that was my big mistake at PIMCO, as I simply assumed that, uh that executives cannot be so uh stupid as to to do what they did. So let's in the last few minutes we have because I
know you gotta get to barons. We have to get you out of here in ten minutes. Let me go to Twitter and fire some Well, this will be the rapid round part. I'll go to the favorite questions that had come up from Twitter. Here's one from George Caracas. What are two or three interests or activities unrelated to investing that have influenced your approach to investing. We obviously talked about about blackjack. What else? Well, I think stamps did um really yeah? And and bonds influence stamps but
uh yeah. When I started collecting stamps, I took the the approach of each uh press a stamp, the value of ones having a provenance much like a money painting um or a picasso, and I tracked them in time for you know, the last century in terms of their sales prices and auction prices, much like uh, you know, going back in terms of the FED and looking at historic interest rates where they bottomed in World War Two, UH, caps and UH and monetary policy and all of that.
And so I took a historic approach to two stamps and tracked the progress of prices up and down during recessions and recoveries, etcetera, etcetera, and uh, I think became a real good buyer of stamps at the right price. Problem with stamps is, how do you know what a little piece of papers worth? It's the same thing as that with a Picasso. How do you know what what a you know, a picture of you know, Picasso's blond haired girlfriend looks like, uh, what is it worth? Um?
It's worth what you're willing to pay for it. But there is a there's a fundamental basis for it all in and the basis is is the growth of GDP and the growth of growth of wealth over time. And so I applied that the stamps as well, and did did pretty well. You were you were on CBS Sunday morning. You have one of the only one of the few complete collections of U S stamps US American stamps around is that? Is that accurate? The only one ever ever? Ever.
So here's a question from Jim Arnold's in two parts, what are your thoughts of the impact of China on the future of money management? And do you need an intern? Yeah, I think he's volunteer. So so China and the impact of money management, well, I think significant in terms of uh, you know, China's growth and UH, China's um currency position, whether they want the the reman be to to appreciate or to gradually depreciate like it has in the last three four or five weeks, and what they intend to
do ultimately with all of their treasuries. UM. You know. It used to be the a sense bury of the bond vigilantes, the pimcos of the world. Where the vigilantes, the real vigilantes these days are China and Japan, UH, and UH the Russia in a small way. They they can move markets and and so yeah, the impact of China going forward not just in terms of what they hold in terms of their reserves, but there the monetary um organization that they're trying to create as a counter
influence to the I m f uh. You know, trying to combine Brazil and South American countries and other Asian countries as a counter balance and a counterweight. Um, you know, all that will be significantly important in terms of the balance of the world and who controls uh the gold so speak. Here's an interesting question from Charles Biello. Uh in in the era of negative interest rates and QE, do the textbooks on bond math and net present value need to be rewritten? Um? You know, I don't think so.
It is fascinating and studying to to see negative interest rates, something that two years ago I would theoretically have said couldn't happen. But you know, the fact is at the moment in Europe, investors are willing to pay the government to hold their money. UM. I suppose that's the same concept as putting precious stones in a vault and paying a price in order to do that. But yeah, I don't think you have to to over ruled Macaulay and
duration a considerations that you know, the mathematics will always hold. Uh. The question is how or below zero could we practically go? And I I don't think we can go practically much below zero Before the mattress as opposed to the euro or or even the dollar become a dominant consideration. Ultimately, you can you can just put your money in a mattress and not pay a fee. In the last two minutes, three quick questions. One comes from Kurt Marco. What do
you contribute your success to? What's the most important attribute or experience for that success? Oh? I I think it's you know, putting the focus on on the client as opposed to, um, you know, the company or on yourself personally. If you always focus in terms of what they require, the risk that you're taking for them, the fact that you know the protection of their principle is the critical element in terms of what you're doing and knowing that, uh,
you know, ultimately the investors success is your success. I think that's that's the critical focus. So last question, given your age and your accomplishments, why not just kick back and retire? Why keep working and working so hard? Well? I could have done that, but you know, I thought about it in terms of, you know, a game of basketball where you're shooting hoops for your own pleasure and they go in or they don't go in, and uh, it's fun, but it's it's much more fun to play
a game of horse with somebody else. They got an age. You gotta know they gottat. Are you gonna l uh? You know it's a it's a game of competition as opposed to simply play in a game. And I could have played the game, but I want to beat the pants off of the competition like I have for the past thirty or thirty five years. I want to prove that it seventy that I haven't lost my touch, and that PIMCO was wrong and letting me go. And so for all those reasons, I'm here and expect to be
around for a while. Bill, Thank you so much for spending so much time with us. This has been an absolute pleasure. I appreciate um you sitting with us for two hours. We've been speaking to Bill Gross, who runs the Young Constrained Funds at Janice, formerly of PIMCO. Thank you so much for coming in. Thank you, Barry boy, it's been a short two hours. Yeah, for sure. You're listening to Masters in Business with Barry rid Holts on Bloomberg Radio.