One on One with Bill Gross , Chief Investment Officer of Pimco
Thursday, January 08, 2009
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SUSIE GHARIB: Well, Obama's massive stimulus plan could send billions of dollars to struggling American states and cities. That's why our guest tonight says this is the time for investors to buy municipal bonds. Joining us now, Bill Gross, chief investment officer of Pimco and manager of its total return fund, which is the world's largest bond fund. Hi, Bill and happy New Year to you.
WILLIAM GROSS, FOUNDER & CO-CHIEF INVESTMENT OFFICER, PIMCO: Thanks Susie, same to you.
GHARIB: So I see that you wrote in your January letter to investors that you like munies, tell us why.
GROSS: Well, I like them mainly from the standpoint of valuation. It's not that municipalities don't have their problems. And some of them obviously are of their own making but they depend upon income taxes, both corporate and personal. They depend on property taxes. They depend on sales taxes, all of which are going down. And so they are in a pickle. It seems to us that the Obama administration will ride to the rescue over the next month or two in terms of funding, much like they have done with the TARP and with General Motors and so that the creditworthiness of the municipals are not a problem and the valuations will stay (ph) positive.
GHARIB: Now as you mentioned, there are some states like your state of California that is struggling. Are there areas that investors should avoid and where should investors look for opportunities in terms it of munies?
GROSS: Well, I think they best stick to the larger municipalities, to the states, the large cities, not to discourage some individual project financing. But these days it pays to be a big borrower and a big borrower in need, to the extent that the state of California requires $20 or $30 billion or at least suggests that they do from Uncle Sam, then you want to partner up, so to speak with Uncle Sam in terms of joining hands by purchasing what they purchase or by lending money to an entity that they lend money to. And so I think stick to the big ones and you will be happy down the road.
GHARIB: Bill, you write in your January letter also that are you a fan of TIPS. Now everybody is talking about deflation. Are you worried about inflation?
GROSS: Well, I think down the road that that is the hoped for result of these particular maneuvers and policy decisions, that yes the Fed and yes the Treasury wants to replace the U.S. economy. There is a debate and as you mentioned in terms deflation, there is the possibility that those efforts won't be successful and that's the reason why TIPS, why inflation protected securities don't have as much luster as they used to. But to the extent that you are a believer in at least a partial success in terms of these programs and a return to normalcy in some part on the part of the U.S. economy in later years, then TIPS are excellent ways to participate. They not only provide a real return of two to 2 1/2 percent, but they give you that inflation kicker if, in fact, that is what we will have.
GHARIB: Give us also in this context that we are talking about which direction the economy is going what is your forecast for the U.S. economy for 2009, just your quick big picture.
GROSS: It's not good. 2009 will be a recession year. 2010 will be a slow growth, if at all year. And so Pimco is not on the positive side of the ledger in terms of suggesting that everything will turn up roses going forward. But we do suggest that the U.S. government will come to the rescue in terms of, you know, high quality securities markets, municipalities included and so that there are attractive bargains that you can partner up with the uncle so to speak.
GHARIB: Well, how worried are you about this unbridled government spending? Isn't that bad for the economy?
GROSS: Well, it is a negative there is no doubt. There is no doubt that free enterprise as opposed to government regulation and government control is the way we've done it and the way that it should be done. There's no doubt though that there is a huge hole now in terms of liquidity and in terms of capital. The private system has frozen and is just not willing to take risk. And so at the moment, you know, I see a rather Keynesian, a huge Keynesian type of substitution in the form of trillions of dollars as required going forward. Hopefully there is an exit to that type of maneuvering down the road. I think the government has provided for that. But for the next year or two, we are going to have to live with the government.
GHARIB: All right, we're going to check back with you and see how all these strategies are working out. Thank you for tonight. We really appreciate it.
GROSS: Thank you, Susie.
GHARIB: My guest tonight, Bill Gross of Pimco.
