One on One with William Gross, Founder & Chief Investment Strategist of Pimco
Tuesday, April 08, 2008
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SUSIE GHARIB: Our guest tonight says the bull market for Treasuries could be coming to an end. Joining us now to explain, William Gross, the founder and chief investment strategist of Pimco, the world's largest bond fund company. Hi, Bill, nice to see you again.
WILLIAM GROSS, FOUNDER & CHIEF INVESTMENT OFFICER, PIMCO: Thank you, Susie. It's nice to be here.
GHARIB: Let me first start by talking to you about the minutes that were released from the Federal Reserve today. How are you factoring in that new information into your investment strategy that the Fed is saying that the economy is going to get worse in the near term?
GROSS: I think, Susie, that there was something in there for everyone. The minutes were five to six pages long and it takes a lot of analysis. We've done that in the last three hours here at Pimco in terms of our investment committee. But you know the important change to me was the observation that the Fed staff, which is critical to the Fed governors in terms of the decision, the Fed staff forecasted that in 2009, the economy would return to above trend growth. And if that's the case, if that expectation holds in April, then I expect the Fed to cut to 2 percent, but to suggest at least through the minutes that perhaps you're going to take a wait-and-see and see exactly if that stronger growth comes about in the next 12 to 18 months.
GHARIB: So what are you saying here? Do you think that the worst is over in terms of this economic and financial crisis?
GROSS: Well, no, I'm not saying that. I think there is a continuing problem in terms of housing and a necessity to support housing prices which may take something beyond what the Fed can do in terms of interest rate policy. The Fed minutes today again to refer to them did suggest that there are limits to monetary policy in terms of solving the housing crisis and the financial crisis that we've experienced for the past several months. And I think that's the key. I think what has to be done and what Fed Chairman Bernanke is hoping for and expecting basically, is for the administration and for the Congress to come forth with their own program in terms of housing support that in some form or fashion will lead to a supportive housing prices. That is the critical element in this economy.
GHARIB: So given your analysis, tell us a little bit more about how that fits in with your thinking that the rally in Treasuries is over. And given that there are still all these uncertainties that are hanging over the economy.
GROSS: Sure. Well, let's suggest for the moment that the Fed goes to 2 percent in late April and stops there for a while. It doesn't mean that they can't continue forward. But they stop there for a few months at least. We have two-year Treasuries at 1.85 to 1.9 percent. We have lots of five and 10 year Treasuries in the two to low threes. That to me suggests that the Treasury market itself, the high quality Treasury market is overvalued. And as I suggested recently is probably the most overvalued asset in the world. These yields are not really respective of potential inflation going forward and they don't provide the proper return for investors. So I simply suggest that if the Fed stops at two, that the Treasury market itself in terms of lower yields and higher prices basically is done and that we should look to other avenues in terms of potential returns.
GHARIB: Bill, where do you stand in this whole debate about inflation? You heard our story at the top program. Are you concerned about inflation now?
GROSS: I think so. There is a natural tendency. And I think it will happen, that inflation will come down over the next six to 12 months. That's the cyclical response to a recession area environment which I think we're in. But that also suggests that since we've started at 4 percent or more in terms of headline inflation, that perhaps the 3 percent rate or a 2.5 percent headline rate is nothing to be proud of in terms of a cyclical adjustment. I simply think that inflation going forward as evidenced in the rest of the world with food prices, with petroleum prices, with you know China and India and those countries experiencing higher rates of inflation that we are in an inflationary problem going forward and that yes it will come down, but it won't come down far enough.
GHARIB: You have given us a lot of interesting things to think about. Thank you so much Bill for coming on the program. We really appreciate it.
GROSS: Thank you, Susie.
GHARIB: My guest tonight, William Gross, founder and chief investment strategist of Pimco.
