Bill Gross: Jobs Report Means ‘Fifty-Fifty’ Chance of Fed Sept Interest Rate Move
Interest-Rates / US Interest Rates Sep 04, 2015 - 04:56 PM GMTBy: Bloomberg
Bill Gross of Janus Capital spoke with Bloomberg's Tom Keene and Michael McKee on Bloomberg Radio and Television about today's jobs numbers, the markets and Fed policy.
When asked whether the Fed will raise rates on September 17th, Gross said: "I still think it’s 50/50 and China and global conditions are the dominant factor. Otherwise, I would have said, yes, I think Fischer and Yellen and maybe even Dudley their fingers are itching."
TOM KEENE: Joining us now, Bill Gross of Janus Capital. Bill, good morning.
WILLIAM GROSS: Hi, Tom. Nice to see you.
KEENE: I thought your note with Janus the other day was really dead on about the soup that we are in. Distill for us what matters right now to Janet Yellen.
GROSS: Well, I think what matters most to Janet Yellen are financial conditions, although she wouldn’t place it number one in a press conference. I think she thinks that growth is fine, that unemployment is pressing limits, and inflation ultimately will move to two percent.
And so what she is concerned about are imbalances in financial conditions. That means stock prices. That means yield spreads. That means money moving into various asset classes that suggest some type of potential bubble. And so financial conditions are the key for her Fed, and perhaps the fed of the BOE (ph).
MICHAEL MCKEE: Well, what do you think at this moment from Bill Gross’ perspective about financial conditions?
GROSS: Well, I have the same sense. It’s hard to call the end of a bull market or to speak to bubbles such as the dot.com bubble or any other period of time. But there certainly is speculative fervor in markets and a lack of liquidity. I mean you can’t leave for the bathroom and come back without the market having moved by one percent up or down.
And that, to me, indicates that markets are certainly not stable or steady. They may not be overpriced necessarily, but they are volatile -
KEENE: Right.
GROSS: - and the volatility itself is something that they want to zero in on.
KEENE: If we assume, Bill Gross, that everyone, including you has Fed exhaustion over the linkage of our economic policy to micro analysis of the jobs report, let’s pass out the blame right now. It’s Friday. It’s blame Friday.
Who do you blame for the silliness that we’ve boxed ourselves into?
GROSS: Well, I blame some fundamental forces and factors and analysis, the slowdown in China. I blame the uncertainty in terms of what the Fed is going to do and when they’re going to go, and by how much.
Ultimately, I guess I blame leverage and debt and these models, some of which are levered and dependent upon what we call "VAR" - value at risk. Actually, Tom, that’s been around for a long, long time. That’s not a new deal.
But the thing is when a market moves significantly in one direction of another, the value at risk changes because of that volatility and it induces more selling or more buying.
KEENE: Okay.
GROSS: And that sort of feeds on itself.
KEENE: That’s a nice summary from Bill Gross at Janus Capital. But, Bill, I look at what you mentioned about China and just the VAR we saw overnight from Brazil, China, the Hong Kong PMI. We know those are things Stanley Fischer pays attention to. Will that matter September 17th?
GROSS: Oh, I think it should. I think any central banker, and certainly those at the IMF and other global agencies are well aware that there are significant imbalances in the global economy.
And that speaks to not only trade balances, but it speaks to financial markets. It speaks to currencies. The Brazilian real that you just mentioned is still on a real basis highly overvalued and one would suggest has further to go.
These conditions exist in Asia in terms of their currency levels. Investors are being concerned by the draining of reserves of these countries, China included, tend to support their currencies and how long, and that could continue.
KEENE: Right.
GROSS: And so, yes, imbalances everywhere, and the imbalances are an afterthought or an aftermath of the Great Recession.
KEENE: Right. Well, Bill, you’re unconstrained. Can I make some news this morning? What are you doing on Brazil?
Are you out of Brazil? Do you short Brazil? Or is there an opportunity here?
GROSS: Well, I’m not in Brazil, but yes, it’s enticing. You can invest in the currency and earn 14.5 percent overnight or over a week or over a month.
KEENE: That’s better than Mike McKee does.
GROSS: It is. The question is on an annualized basis, does the currency depreciate by 14.5 percent. So far it’s been doing that, so pick your poison.
But, yes, some of these countries - my favorite emerging market country, the strongest one, in my opinion, and I don’t even think it’s an emerging market country any more, is Mexico. It has got half the debt of the United States.
MCKEE: Yes.
GROSS: It still has two percent growth. Inflation is under three percent. It has got the cast of emerging markets. And so when risk off appears on your screens, then Mexico won’t do well.
But I think there are some emerging market countries that can do well. And, by the way, just to point out, Mexico’s forward yield curve going forward is, in the next two years, perhaps 300 basis points higher in terms of the future increase than in the United States. So I think it’s really over extended and ultimately is of value.
MCKEE: All right. I’ve just got a minute left. We’ll ask you the money question when we come back. But in the meantime, all the things you mentioned, if the Fed moves, if the Fed doesn’t move, does it affect those things? Or are we just going to be talking about this volatility ad infinitum until they do?
GROSS: Yes, well, it depends on how they move. How many times have I said that, you heard that? It depends on the press conference in September where the plan is supposedly laid out.
They don’t want to make it conditional, but yet they in fact know that they have to make it somewhat conditional in order to dampen volatility. And so we’ll listen to Yellen then very closely.
KEENE: Right.
GROSS: I think they are one and done for six months. I think that’s all they can do. And if any other language pops up, then you’re going to see more volatility.
KEENE: We’re not one and done with Bill Gross. We’ll come back with Mr. Gross of Janus Capital and look at the enticing opportunities that he sees as the markets gyrate.
(BREAK)
KEENE: It is jobs day with a market reaction. Michael McKee, you thought Bill Gross snuck in something there at the end of our conversation that deserved a further round of beating him to death.
MCKEE: Well, we wouldn’t call it beating him to death. We could bring up the 49ers if we wanted to do that.
Bill is with us on the T-Mobile phone line. T-Mobile at work, switch your business to the uncarrier today.
Bill, you suggested the Fed is one and done and waits. Does that mean you are, at this point, convinced they are going to raise rates on September 17th?
GROSS: I still think it’s 50:50 and China and global conditions are the dominant factor. Otherwise, I would have said, yes, I think Fischer and Yellen and maybe even Dudley their fingers are itching.
What they want to do is, yes, normalize to the extent that they can. But they also want to try out this fancy, new system that they’ve got or they think they have in terms of repo and paying on overnight bank reserves to see how they can finesse that in a systematic way that produces a stable overnight money market rate.
And so I think they want to start to experiment because, at some point, six, 12, 18, 24 months down the road, they may have to really put it into effect. And so this is sort of like a trial that they want to get going quickly.
MCKEE: You’re going to want to invest in whatever they do, so at what point do you make a decision and on what basis do you make a decision on what you think they will ultimately accomplish?
GROSS: Well, my view, Mike, has been for a long time that two percent nominal is the new normal. That’s where they should be. That’s where they can be. That’s where the real economy isn’t really affected.
Unfortunately, the financial markets will be affected by it because we have been low for so long, for five to six years, that there is inherent expectation of at the moment 1.25 percent Fed funds two years from now. And that affects the value of stocks and private equity and arbitrage situations in real estate and so on.
KEENE: Right.
GROSS: And so if it’s two percent instead of 1.25 percent, which is what is in the curve, then there is going to be a shock to the financial markets. So the financial markets versus the real economy, I think the real economy can stand it, needs it.
You know, they need a savings rate at that level, which promotes investment, which promotes economic growth and productivity. But I don’t think they are going to get there anytime soon.
KEENE: Right. Bill, I want to switch to the bond market and tumult of the moment and 1998. But first, Rick on the terminal, the Bloomberg terminal sends in a question I asked a few days ago holding a pipe in my hand trying to act like Arthur Burns.
Can we stop looking at quarter point moves and go to smaller rate increase? Why wouldn’t we do that?
GROSS: Well, I supposed you can - of course, you could. Didn’t we do that way back when -
KEENE: Yes.
GROSS: - with eighths and quarters in terms of stock prices and it worked out pretty fine.
KEENE: Exactly.
GROSS: I do think it cuts it a little bit fine, but it is certainly possible.
KEENE: Yes, I agree.
GROSS: It’s just that an eighth in terms of the overall scheme of things probably doesn’t mean much.
KEENE: Yes.
GROSS: It may mean more in signaling than in terms of reality. But they could do that.
KEENE: Yes, Neil Dutta of Renaissance Macro out with an email saying full time employment a new record high - not population adjusted, but just a new record high with green on the screen. Futures deteriorate negative 27.
We are with Bill Gross of Janus Capital. Bill, I want to look at the bond markets and I want to look at the correlations that are out there.
There are whispers here of 1998. I know you’re going to tell me, no, it’s not the same. Vice Chairman Fischer is right. But come on, I’m looking at the Brazil printing a 3.80 as we speak. I’m looking at Mexico near a 17 again. You can pick your other three countries.
Are there elements of what’s going on now that gets your attention?
GROSS: Well, yes. And that’s because of what has happened over the past five years. We’ve had a period of cheap, cheap money from developed markets that has deserted developed markets because of that cheapness and moved into emerging markets.
In addition to emerging market countries, corporates have borrowed in dollars because the arbitrage works perfectly in that direction. And so high levels of debt in emerging markets are a problem, especially when the dollar appreciates because that debt that they have, in many cases, is denominated in dollars and paid back in dollars.
And so we have the beginning of a mismatch and an imbalance in terms of emerging market debt that is dollar denominated and that’s just the first imbalance. Other imbalances are obviously significant current account imbalances, -
KEENE: Right.
GROSS: - (inaudible) currency levels, stock markets that are being supported artificially. I could go on and on.
KEENE: Okay, but within the tumult that’s out there, let me ask a direct question. Bill Gross, are you a bond vigilante?
GROSS: No, I don’t think that applies anymore, certainly not at Janus at $2 billion. And I don’t think even my neighbor here -
KEENE: What’s the name of the company? Mike, help me, Bill - what’s it Newport Beach, what’s the name?
GROSS: It starts with a "P," and ends with an "O."
KEENE: Thank you.
MCKEE: I think the word is "past."
KEENE: Okay.
GROSS: Anyway, I don’t think they can be a vigilante. I think the vigilantes are the central banks and the central banks these days are in the process of devaluing their currencies on a competitive basis. They’re the ones that are setting the rates, if that’s what a vigilante means.
And it doesn’t necessarily mean that the result will be positive, as in the prior term where vigilante was applied. But it significantly means that the central banks are the players and you simply want to gauge where they’re going to go.
You want to listen to Mario Draghi yesterday and see what he’s going to do for the next year and a half. You want to listen obviously to Yellen in September. You know, these maestros so to speak are in charge of the global monetary system, not necessarily the global economy. And what they do artificially will determine where asset prices go.
That doesn’t mean you should hang around forever because, as we’ve seen in China, artificiality can disappear overnight with a policy change or even with a market reaction. So we need to be careful and observant that these prices, whether they’re stock prices or bond prices or policy rates are artificial and that real prices will be revealed at some point undetermined.
MCKEE: Well, let’s get down to the money question here. Chairman Gross, when you’re sitting around the table leading the rest of the FOMC, would it be a mistake on September 17th, a policy mistake for the Fed to raise rates?
GROSS: I think probably now. And I would point to inflation. I’m a person that is more persuaded that deflation is a greater fear than inflation. You know, central banks and the Fed certainly have historically been pointing upwards than pointing downwards. And that’s what their models will be biased towards.
I’m not expecting deflation any time soon in terms of an overall number. You’ve seen it in oil and you’ve seen it in commodities. But no, it seems farcical to me to raise interest rates in the face of two percent growth and less than one percent inflation and a strong dollar, and turmoil in the global markets with commodities and emerging markets and so on.
MCKEE: What do we get out of zero interest rates except more distortions in markets?
GROSS: You get nothing, and you get negatives like you said. You get distortions in terms of business models. Insurance companies can’t live at these rates for longer.
Pension funds, as we’re beginning to see all over the country, can’t continue to live without earning four percent to five percent to six percent on their bonds, let alone eight percent to nine percent to ten percent on their stocks. You get very negative consequences in terms of the real economy.
KEENE: Well, Bill, in 40 seconds, your great call is of financial repression out ten years, the great distortion it continues. Even with Fed action, do you see any let up in the real rate rate distortion?
GROSS: No, I don’t. And when you go back in history, the Rogoff and Reinhart experience and history is history if portrayed accurately. And I think they do.
But we had negative rates and financial repression for 50 years or so up until 1979 with Volcker after World War II. And these periods of time can continue and continue and continue. And it’s the one great way, Tom, that governments can not only finance cheaply but run up savers of their money by offering them a rate - a real rate less than zero.
So we’re going to continue to see it. And the challenge for an investor is to find an investment that is safe enough and that can beat any negative real interest rate.
KEENE: Okay. Bill, thank you so much. Bill Gross with Janus Capital. We value immensely the work of Jim Glassman and Mr. Gross on this jobs day.
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