Billionaire Bond King Talks Inflation, Interest Rates, and More | At Barron's
Summary
TLDRIn 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.
Outlines
📈 Economic Outlook and Bond Market Insights
In the first paragraph, Andy Serwer interviews Bill Gross, the 'Bond King,' discussing the implications of the 10-year treasury yield being at 4.5%, a level not seen since 2007. Gross attributes this to increased inflation, which has risen from 1% a few years ago to the current 4.5%. He predicts real interest rates will be higher, with a debate between 4% and 5% inflation forecasts, leaning towards the latter. He also criticizes the Federal Reserve's actions, particularly Jerome Powell's, suggesting the Fed is more focused on social considerations than economic ones. Gross commends Paul Volcker for combating high inflation in the past. The conversation hints at the challenges in the bond market and the potential for higher interest rates, reflecting concerns about the economy's direction.
💼 Reflections on Total Return Funds and Investment Strategies
The second paragraph delves into the concept of total return funds, which Gross helped popularize. He explains that while bonds traditionally offered interest and potential price gains, the current environment with a 4.5% 10-year yield makes it difficult to achieve the same total returns as in the past. Gross believes that total return funds have become too much like index funds, not delivering the alpha they once did. He shares his strategy of maintaining a duration slightly longer than the index to achieve better returns. The paragraph also touches on his current investment interests, including master limited partnerships in oil and gas pipelines, which offer attractive, tax-deferred yields.
🚀 Exploring Alternative Investments and Market Opportunities
In the third paragraph, the conversation shifts to alternative investments. Gross discusses his interest in master limited partnerships, particularly pipelines, which have seen significant price appreciation and offer high tax-deferred yields. He mentions specific companies like Energy Transfer and Western Pipeline, highlighting their recent performance and potential. Gross also briefly touches on his foray into conservative AI stocks and utility stocks, which have been bolstered by the demand for power from AI companies. He suggests that utility stocks may continue to rise despite low yields, indicating a potential bubble in the market.
🎉 Personal Achievements and Investment Philosophy
The fourth paragraph focuses on Bill Gross's personal and professional achievements. He discusses his new book, 'The King and I,' which compiles 46 years of investment outlooks and personal musings. The book is a reflection of his public image versus his personal thoughts and experiences. Gross also talks about his contrarian and outspoken nature, expressing regret over a comment that cost him a client but also pride in his ability to connect with clients through his writings. He shares his interests outside of finance, including his passion for stamp collecting, which led him to become a significant collector in the field.
🌏 Outlook on Humanity and the Future of Investing
In the final paragraph, the discussion centers on Gross's optimism for the future of the United States and humanity. He acknowledges the challenges faced by society, such as global warming, conflicts, and aging populations, but maintains a positive outlook on human nature and the resilience of societies. Gross believes that it is unwise to bet against the market or people, emphasizing the enduring nature of human progress and the potential for continued societal advancement.
Mindmap
Keywords
💡Barons
💡Bond King
💡10-year Treasury
💡Inflation
💡Real interest rates
💡Fiscal spending
💡Federal Reserve (Fed)
💡Total return
💡Alpha
💡Master Limited Partnerships (MLPs)
💡Utility stocks
💡AI (Artificial Intelligence)
Highlights
Bill Gross, known as the Bond King, discusses the current 10-year treasury rate at 4.5%, its highest since 2007, indicating rising inflation.
Gross believes in a 5% inflation rate, higher than the 4% some predict, reflecting on future inflation forecasts.
He criticizes the Federal Reserve's approach, particularly Jerome Powell's, for not being oriented enough towards economics.
Gross praises Paul Volcker for bringing down inflation with high interest rates, despite the difficulty.
The concept of total return funds for bonds, popularized by Gross, is questioned as he believes it no longer works in the current economic climate.
Gross's strategy for delivering extra return was having a duration slightly longer than the index, which is not common among current fund managers.
He is currently investing in master limited partnerships, particularly pipelines, for their tax-deferred yields and regulatory appeal.
Gross mentions specific investments like Energy Transfer and Western Pipeline for their attractive yields and potential.
Utility stocks are highlighted as an area of interest due to the increased demand for power from AI and tech companies.
Gross has released a new book, 'The King and I', compiling 46 years of investment outlooks and personal reflections.
He expresses regret over a past comment about a baseball umpire that led to losing a client account.
Gross shares his pride in personal writings, particularly poems about 'Out of Africa' and his childhood home.
His interest in stamp collecting was initially inspired by his mother and later became a significant investment strategy.
Gross moved to Southern California after serving in the Navy and has been based there since, despite missing Northern California.
He remains optimistic about the human species, believing in the enduring nature of society and progress, despite current challenges.
Gross advises against betting against the market or people, reflecting his contrarian and outspoken approach.
Transcripts
[Music]
hello everyone and welcome to at Barons
I'm Andy serwer and Welcome to our guest
Bill grows investor the bond King we're
here at your house thank you so much for
having us bill it's great to see you
it's great to see you it's a great day
it's 85 degrees and uh nobody on the
course too hot for them you
think yeah they leave after e they go to
Chicago they go to Seattle they they
leave here but may is a good month Bill
let me ask you about the 10-year
treasury which is at 4 and a half% now
hasn't been this High since 2007 that's
a long time what does 4 and a half% on
the 10e tell us about where we are how
we got here and where we're going well
it tells us that uh inflation has gone
up you know back in the day two or three
years ago um
it was
1% now we're at four and a half and and
so inflation has risen and and it's
reflecting the the future of inflation
and to my way you're thinking you know
there's this debate about um 4% or 5%
I'm in the 5% camp but it's basically a
similar debate about inflation will it
be two or will it be three um you know I
think it's fair fairly evident that real
interest rates will be higher than they
were back in the day they couldn't get
much lower um so we're really talking
about an inflation forecast of uh 2%
which is what the FED wants 3% which is
what uh you know many in the marketplace
including myself think is going to
happen why is that why is inflation
persistent why is it higher why is it
maybe higher longer well the government
spends a lot of money um you know we
have annual deficits of
uh1 and a half to2 trillion dollar um
which is five to six% of GDP which is
close to Historic ranges for a a good
period of time of economic growth and so
um you know it's the government spending
it's a fiscal spending coming out of
covid it's the
um uh the economy that's doing much
better than people think at 3 to 4% and
the last 12 to 18 months what kind of
job do you think J Powell has done how
do you rate
him I don't rate him highly um and maybe
this goes back to the the early part of
the century in which uh the FED didn't
know much in terms of derivatives and in
terms of uh you know credit fall swaps
and so on um I I I have a sense that the
FED itself and you talked about J poell
but I I have a sense that the fit itself
that is not as oriented towards
economics as opposed to social uh types
of considerations and so I I'm a little
suspicious of um of their judgment going
forward Powell in the last 12 to 18
months is you know put his foot in the
mouth to some extent on some of his
forecasts he doing sort of good now um
we'll we'll see but um I trust the
market more than J pal um the market I
believe uh trusts Jal too much I'm going
to ask you are there any fed shares that
you think did a good job a lot of people
like to criticize fed shares I feel like
is there anyone you hold up and said now
that person did a good job oh yes it's
Paul Walker you know he shut it down he
shut down uh close to 20% inflation uh
with very high interest rates and it was
painful and hard to do as a Fed chairman
but uh you know he's the mench he's the
man
and that's a long time ago you know
since then there's been uh other
chairman banki and and uh greenan
greenpan oh of course with greenpan um
but I think I think vuler is the
historical uh mench historical mench you
have uh been writing your whole career
we'll talk more about that but most
recently you've written about the
ibility of this notion of Total return
funds and total returns for bonds which
is something a concept and a phrase that
you popularized yourself what does it
mean that total returns for bonds no
longer
works well Total return and the pimpo
total return fund was the first that uh
basically used that that term um you
know it suggested that bonds earn
interest yes and they have a yield yes 4
and a half% um but they also have the
potential uh for Price gains if
appropriately priced and you know back
in the day back in uh the early 80s when
the concept was basically invented um
you know interest rates on the tenure or
15% and so it was a pretty favorable
environment for um treasuries to
appreciate in price go down and yield
and so the total return concept uh you
know it took a 15%
10-year note and combined it with price
appreciation of three to four to 5% a
year over that period of time U and you
produced a total return not of 15% but
of 20% and that was the point where you
know people thought that bonds um could
do as well as stocks and they did for a
long period of time now uh we're at a
point in time time of 4 and a half% 10
years and the debate is whether or not
uh we can resume a bull market produce
price increases and uh produce a total
return greater than 4 and a half per. I
think that's um debatable I I don't
think that's going to happen and I think
investors you know have uh you know to
look forward to a 4 and a
half% return at Best and that the total
return um is something that depends on
price appreciation lower yields and so
therefore um we're not going to see it
the next leg of your criticism beyond
that I think was that the total return
funds have now become essentially index
funds yes and they're not delivering
Alpha you famously delivered Alpha in
addition to just the index return and
I'm curious Bill what your specific
strategies were to deliver that extra
return
well the the main thing was to to have a
duration longer than the index um it
didn't take much but half a year longer
one year longer in terms of duration
would produce you know some decent Total
return price
appreciation um in the PCO Total return
these days um as I observe uh haven't
talked to Pimco and haven't talked to
Black Rock haven't talked to a lot of
them but um you they seem to be very
closely following an index and the the
Vanguard index um ETF uh or Index Fund
over the last five years has only uh
produced a total return of
0.15% cumulatively cumula not annually
cumulative cumulative so an investor in
bonds for the last five years if you
followed that index type of approach
would would come out with uh certainly a
negative return relative to inflation
and so um I I I simply think that most
managers have fallen in love with yeah
being a little longer than the index
being a little shorter than the index if
they can just produce an alpha of 50
basis points perhaps they'll uh keep
their uh client base you know back in
the day with the Pimco tural return fund
we were willing to take a little more
than that uh because we had a view we
had a view on the secular forecast in
terms of interest rates that they would
be going lower and so you know it was
relatively constant in terms of a half a
year one year longer than uh the index
itself and that was enough yeah what do
they say you can't eat relative returns
for lunch if it's relative to a negative
number for instance or something like
that you need an absolute exactly I know
you still follow the markets what are
you can you tell us what you're
investing in these days or what you're
following in what you're interested in
well actually I've got a few clients
I've got a large Foundation uh which is
$500 million um which is I guess my
largest client and then there's uh my
own money and my kids trust money and so
um there's a lot of money working um you
know what I decided to do since I don't
like bonds um the bond King doesn't like
bonds right not at the moment um but to
find Bond equivalence um where the
return is relatively steady the risk is
relatively low the tax benefits are U
very high and and so that's been in
master limited partnership pipelines um
there's only six or seven of these
things left oil and gas pipelines yes um
but they're Partnerships and and the
reason they're so attractive is that
first of all their their dividends by
law um are deferred until sold um and
second of all mutual funds for the most
part can't buy a partnership and so you
have this huge base of potential buyers
that have been cut out of the market
because of you know regulatory law and
so attractive um 8 to 9% tax deferred
yields um they've gone up by 25 to 30 to
35% in the last 12 to 18 months it's
been a Wonder it's been almost as good
as AI
okay Nvidia watch out so and they're
still upside at this point you think for
these things or at least the yield I
think they've sort of peaked out in
terms of price appreciation but the
yields um you know assuming that um
there are any disasters in terms of
energy and uh pipeline regulatory uh uh
measures going forward uh you know an 8%
tax deferred yield uh if you blend in
the tax deferral which I do it's it's
really a 10 or
11% equivalent yield to uh basically
anything else so I I like them what are
some of those names can you share those
with us um energy transfer is the
biggest in the business um it yields
about 7.9% now
um Western pipeline my favorite um you
know has just raised its dividend by 30
40% in the last two or three months the
market really doesn't have a sense of
that I don't think but it yields
99.9% um tax deferred prospects are good
um I don't know how you I know how you
go wrong but I don't think you go
wrong awesome um so any other equities
though or anything else that you want to
talk about I've taken a dabble in uh
some of the conservative AIS I own
Microsoft I own IBM um never in Nvidia
um just to upside downside for me um but
those have been the the primary ones
there's you know there's an interesting
play now in in terms of utility stocks
they've done very well um and it's not
necessarily because interest rates have
uh gone down a little it's because of
the the tremendous demand for power from
AI uh generated U you know types of
companies and so you know you see stocks
like Edison or Con Edison um and others
dominion and so on that uh you know
despite their low yields of 4% or so
they uh have gone up by 10 or 15% and so
yeah there's a little bubble potential
there but I I think um utility stocks
believe it or not have uh the potential
to go higher you uh just had a big
birthday happy birthday to you oh thank
you um and I'm 80 now 80 years old yeah
um and you have uh a new book which is a
compendium relates called The King and I
46 years of investment outlooks musing
and common sensical thoughts from Bon
King Bill gross do I have that right you
do have that right okay what's The King
and I who who else is here well that's a
u Briner type of thing I guess and it
came from my publicist but uh it it's
meant to basically say there was uh a
public King and then there was I there
was me uh nowhere close
to what the uh what the Public Image was
uh to my way thinking and my wife
Amy uh very bashful guy so the writings
in this book it's a digital book yes and
you can buy it $9.95 all right there you
are um a bargain uh how many pieces is
it it's from 1978 from your earliest
days at pinco the company you helped
found right there are 40 years worth of
investment outlooks and you know back in
the day um nobody wanted to at Pimco
nobody wanted to write a monthly Outlook
I thought it was important to connect
with clients and uh so I started writing
outl but didn't want to make them dry
and boring and so I
introduced um you know the first page or
the second page in terms of
introspective uh ideas about myself
about it human nature Etc and there's 40
years worth of these and I I guess it's
in addition to the forecast which
obviously produced you know incredible
results going forward um you know I I
think the first or second pages of many
of these um investment outlooks are what
are important to me and what I want my
kids to know about me and to read
they've read some of them but I doubt
they've read all 40 years worth so
you're known to be frank contrarian
outspoken even sometimes I wonder if you
have any uh regrets about some of those
things you've written or and then then
also you know what are the highlights
what are the things you're most proud of
I guess it's a pluses and minuses there
is one regret uh we we managed a fund
for the National League
umpires um Association Baseball umpires
yes and I I came out with a uh an intro
about Norm mcer who was a overweight
umpire and who died of a heart attack
within um the first um I think few
Innings of opening day and so I I
criticized his fatness so to speak and U
we lost the account so I I regret that I
guess but it was very funny and I still
would recommend that to potential
readers going forward um what are you
most proud of most proud of you know
some personal things one uh that was a
really a poem uh about Out of Africa one
of the famous movies of 30 or 40 years
ago of Merill Street um and um one about
uh you know basically my my home and uh
what's called Butler Creek um where I
grew up in Ohio so those personal ones
are the my most favorite and I think U
they generated the most reaction from
the public themselves right you have all
these other interests and their
backgrounds pretty remarkable you served
in Viet Nam um you played blackjack yes
do you still play blackjack no um it's
too it's too boring and um takes the you
know I like the action on the craft
table although the craft table uh the
odds are a little against the roller um
but on a blackjack table if you're
counting cards properly they're a little
in the favor of the player and so um you
know you would wonder why I don't play
Black it just it takes too long and the
people at the table usually are
disgusted and um angry because they're
losing money and they throw their cards
at the table and so I like the craft
table better where you can yell and
scream and
71 and and what about I'm curious why
you got so interested in stamp
collecting you became one of the biggest
stamp stamp collectors ever ever right
ever stamps very proud of that for 20
years my my mother um collected
commemorative stamps 3 Cent stamps uh
back in the day to send me to college
and she gave me a box when I was 17 said
Bill take these to San Francisco and
sell them I tried uh they wouldn't offer
me anything other than three cents on
the on the dollar and um so I said well
she had a good idea but maybe she bought
the wrong stamps and so I applied the
the outwork of uh Bond investing to
stamps in terms of the provenance
inflation GDP growth what are they worth
now versus what are they worth uh 50
years ago and it uh seemed to have
worked out pretty well I became the um
perhaps
the largest uh
fatalist um in a long long time I know
you moved to San Francisco the Bay Area
when you were young with your family but
how did you end up in Southern
California well I ended up in the Navy
uh that was San Diego and coming out of
San Diego I had to get a job had to get
an
education um applied to Anderson um in
at UCLA and uh so sort of kept me in
Southern California um Miss Northern
California still root for the 49ers but
uh uh I've been a Southern California
guy for a long time and final question
Bill how optimistic are you about the
United States and the human species even
RIT
large well uh the the human species will
endure uh you know we will move on and
um you know to to doubt um human nature
is to take the wrong side human nature
in terms of optimism uh usually carries
today but we have our problems as we you
know uh in terms of uh global
warming globally in terms of conflicts
um demographics in terms of
Aging uh people the boomers are getting
much older now and they uh spend less as
opposed to more and so all of these
things have uh you know risk elements to
them in terms of the forward pricing of
of markets um you asked about human
nature I I think um you know there will
always be people there will always be
societies that uh want to do well want
to do better and and will do and so um
it uh it doesn't pay to bet bet against
um the market so to speak or to bet
against
people Bill gross thank you so much for
your time and thank you for having us
here well great to be
here this is at barens I'm Andy serwer
we'll catch you next time
[Music]
Посмотреть больше похожих видео
Citadel's Ken Griffin Speaks at Qatar Economic Forum
Must Watch for Every 20 to 45 Year Old | How to Escape Rat Race
just lost LOTS of money - wtf just happened
「薩姆規則」觸發⚠美國1500萬人將失業😱?|又一「衰退警號」?|聯儲局不減息屬玩火|投資甚麼自保?🙏【施追擊】#股市 #美股 #投資 #crypto
Macro and Flows Update: June 2022 - e06
Cathie Wood on Fed, Stocks, Jobs Report, Nvidia
5.0 / 5 (0 votes)