Billionaire Bond King Talks Inflation, Interest Rates, and More | At Barron's

Summary

In an insightful interview, 'Bond King' Bill Gross discusses the current economic landscape, highlighting the rise in inflation and its impact on the 10-year treasury rates. He critiques the Federal Reserve's approach under Jerome Powell and expresses skepticism about the future of total return funds for bonds. Gross shares his investment strategies, advocating for master limited partnerships in pipelines for their tax-deferred yields. He also touches on his personal interests, including a new book, 'The King and I,' which compiles 46 years of his investment outlooks and musings.

Takeaways

• 📈 The 10-year treasury rate is at 4.5%, indicating a rise in inflation from 1% a few years ago to the current rate, reflecting concerns about future inflation.
• 💭 There's a debate on whether inflation will stabilize at 4% or 5%, with Bill Gross leaning towards the latter.
• 📊 Real interest rates are expected to be higher than in the past, suggesting an inflation forecast of 2-3%, which is the Federal Reserve's target and market expectation, respectively.
• 🏛 High government spending and annual deficits, around 5-6% of GDP, are contributing to persistent inflation.
• 🤔 Bill Gross does not rate Jerome Powell highly, believing the Federal Reserve is more focused on social considerations than economic ones.
• 👴 Paul Volcker is praised for successfully reducing high inflation in the past, making him a standout Federal Reserve Chairman.
• 📉 The concept of total return for bonds, which Gross popularized, may no longer be as effective due to current interest rate environments.
• 📌 Gross's strategy for delivering extra return was to have a duration slightly longer than the index, which could produce decent total return through price appreciation.
• 🚫 Total return funds have become more like index funds, not delivering the alpha that investors might expect.
• 🛢️ Gross is currently investing in master limited partnerships, particularly pipelines, for their steady returns, low risk, and high tax benefits.
• ✍️ His new book, 'The King and I,' is a compilation of 46 years of investment outlooks and personal reflections, offering insights into his thought process and approach to investing.
• 🌍 Despite challenges like global warming and aging populations, Gross remains optimistic about the human species and the potential for societal progress.

Q & A

What is the current rate of the 10-year treasury and what does it indicate about inflation?

The 10-year treasury is currently at 4.5%, which is the highest it has been since 2007. This rate indicates that inflation has risen significantly, moving from around 1% a few years ago to the current 4.5%.

What is Bill Gross's stance on the future inflation rate?

Bill Gross is in the camp that believes inflation will be around 5%, but acknowledges a debate about whether it will be closer to 2% or 3%. He suggests that real interest rates will likely be higher than in the past.

What are the reasons behind the persistent inflation according to Bill Gross?

Gross attributes the persistent inflation to government spending, with annual deficits of 1.5 to 2 trillion dollars, which is 5 to 6% of GDP, and the economy performing better than people think, growing at 3 to 4% in the last 12 to 18 months.

How does Bill Gross rate Jerome Powell's performance as the Federal Reserve Chairman?

Bill Gross does not rate Jerome Powell highly, suggesting that the Federal Reserve is not as oriented towards economics as it should be and that Powell has made some inaccurate forecasts in the past.

Who does Bill Gross consider to have done a good job as a Federal Reserve Chairman?

Gross holds Paul Volcker in high regard for having successfully reduced inflation close to 20% with high interest rates, which he acknowledges was a difficult task.

What is the concept of total return funds for bonds as popularized by Bill Gross?

Total return funds for bonds, a concept popularized by Gross, suggest that bonds can earn not only interest but also potential price gains if appropriately priced. This was particularly effective in the early 80s when interest rates were high, and bonds could appreciate significantly in price.

Why does Bill Gross believe that the total return strategy for bonds no longer works?

Gross thinks that the total return strategy for bonds no longer works because current interest rates are at 4.5%, making it debatable whether a bull market can produce price increases and a total return greater than 4.5%. He suggests that investors should expect a 4.5% return at best.

What does Bill Gross criticize about current total return funds?

Gross criticizes that total return funds have become essentially index funds and are not delivering alpha. He contrasts this with his time at PIMCO where they were able to deliver alpha by having a duration slightly longer than the index.

What is Bill Gross currently investing in, given his lack of interest in bonds?

Gross is investing in master limited partnerships, specifically pipelines in the oil and gas sector, which offer 8 to 9% tax-deferred yields and have shown significant price appreciation in the last 12 to 18 months.

Can you name some of the master limited partnerships that Bill Gross finds attractive?

Gross mentions Energy Transfer, which yields about 7.9%, and Western Pipeline, which has recently raised its dividend by 30 to 40% and yields 9.9%.

What are Bill Gross's thoughts on utility stocks and their potential?

Gross believes that utility stocks, despite their low yields of around 4%, have the potential to go higher due to the tremendous demand for power from AI-generated companies.

What is the title of Bill Gross's new book and what does it contain?

The title of Bill Gross's new book is 'The King and I', which is a compendium of 46 years of investment outlooks, musings, and common sensical thoughts from him. It includes personal reflections as well as investment forecasts.

What does Bill Gross regret about one of his past writings?

Gross regrets writing an introduction about Norm McEner, an overweight baseball umpire who died of a heart attack, where he criticized the umpire's weight, which led to losing the account of managing a fund for the National League Umpires Association.

What are some of Bill Gross's personal interests outside of finance?

Outside of finance, Bill Gross has interests in stamp collecting, where he became one of the largest stamp collectors, and he also served in Vietnam and used to play blackjack.

How did Bill Gross end up in Southern California?

Bill Gross ended up in Southern California after serving in the Navy in San Diego. He then applied to and attended Anderson at UCLA, which kept him in Southern California.

What is Bill Gross's outlook on the United States and the human species?

Gross is optimistic about the human species, stating that it will endure and that human nature is generally optimistic. However, he acknowledges the challenges such as global warming, conflicts, and demographic shifts, particularly the aging of the baby boomer population.