One on One with William Gross, Chief Investment Officer of Pimco
Tuesday, June 17, 2008
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SUSIE GHARIB: Back now to our top story, inflation and the markets. Joining us for more analysis, William Gross, the founder and chief investment officer of Pimco, the world's largest bond fund. Hi, Bill.
BILL GROSS, FOUNDER & CHIEF INVESTMENT OFFICER, PIMCO: Hi, Susie.
GHARIB: I'd like to get your take on what the bond market is telling us. It seems like we've been getting mixed signals recently. A few days ago, it seemed that they were signaling that inflation is a real problem and that the Fed is going to raise interest rates, but today a different story. What's your take on that?
GROSS: I think it is a confusing market and a confusing economy, sort of a duality of (INAUDIBLE) the margin, if you will, in that there's two sides to the equation. In terms of what the Fed has to do, they have a dual mandate to contain inflation and to promote economic growth, but due to oil prices, which are going up and home prices which are going down, Chairman Bernanke doesn't know which way to look. He is sort of like trying to cross a busy street and caught in rush hour traffic. So there's a problem here. I sense that Chairman Bernanke will probably stay where he is. But no doubt he is very concerned.
GHARIB: You heard our story and the debate about what the Fed will do next. Majority of people seem to think that the Fed -- next week's meeting will probably stand pat on interest rates. But what about August or a looking further down the road into the fall? What do you think is going to happen with the Federal fund's interest rate?
GROSS: I think the Fed has to talk tough. I mean, inflation is a problem. There's this disparity between core inflation and headline inflation as you pointed out. Headline inflation whether it's PPI or CPI in the 4's and 5s, the core down around 2. The Fed prefers to look at core but people pay headline. And so there's no doubt that the Fed has to talk tough, but it's difficult to raise interest rates when the economy is near recession and when housing prices are going down at double digit levels. So I think the Fed stays where they are and continues to sound very, very tough.
GHARIB: Well, it's interesting you bring that up because usually when the Fed raises interest rates, it's because inflation is -- it's because the economy is overheating. We're not seeing the economy overheating right now, right?
GROSS: No, not at all. The problem, I think is that the domestic economy, the U.S. economy, is very, very slow, close to recessionary levels but the global economy in many cases is over heating. Asia and the emerging markets are doing very, very well. And so, their inflation rates which are 5 to 10 and in some cases double digit levels are influencing our inflation rates through oil prices and through commodity prices. So this is a globalized economy that we're not quite used to and so the Fed has problems in terms of balance both of those considerations.
GHARIB: Given that it is a very delicate balancing act, what is your outlook of - let's talk about interest rates. The yield on the 10-year bond for example, where do you see that going over the next couple of months? It's roughly 4.2 percent now. Where do you see it going?
GROSS: I think higher, Susie and I think those that buy it at 4.2 percent aren't getting value for their money. For the most part, 10-year Treasuries are bought by foreign entities, by foreign central banks with the money that they have in terms of surplus reserves, China, the middle eastern countries and so on. I don't think U.S. investors should be investing at 4.2 percent when inflation is 4 to 5 percent. So I think they should look elsewhere. The stocks are really typically inflation hedges and although the stock market has problems of its own in terms of de- levering, there's no doubt they have an ability to adjust to inflation much better than bonds do.
GHARIB: You say that the markets have -- the stock market has a better chance of adjusting to inflation. What impact do you think higher interest rates, if the Fed does go on the interest rate hiking scenario, what impact is it going to have on the stock market, which seems so fragile right now?
GROSS: Right. I think so, too and I think that's another consideration. You have to look at housing prices. They have to know that the financial markets are in the process of de-levering. That is, they're raising capital in terms of banks and selling assets in order to get down to more appropriate leverage ratios. And so the Fed has to be very careful because if they raise interest rates, they raise the cost of that leverage. That's another reason why 2 percent Fed funds is probably here not to stay, but similar to the rest of the year.
GHARIB: All right. Thank you so much Bill for your insights. You gave us interesting things to think about.
GROSS: Thank you, Susie.
GHARIB: My guest tonight, William Gross of Pimco.
