Bill Gross: Trump Election Victory Won't Lead to More Economic Growth
Economics / US Economy Nov 09, 2016 - 04:53 PM GMTBy: Bloomberg
Bill Gross of Janus Capital was interviewed by Erik Schatzker on Bloomberg Markets this morning.
Gross discussed market reaction to the U.S. presidential election, telling Schatzker that Trump's victory won't lead to more economic growth.
SCHATZKER: "Well, let's consider those things for a moment. Let's consider demographics. Let's consider some of the structural obstacles. Can you envision a scenario, all of those things considered, in which the economy grows four percent a year, and in which we add 25 million jobs over who knows what period?"
GROSS: "No. If that's the objective or the stated goal of the Trump administration, they are bound to fail. We're in a period of time not just in the U.S. but globally where growth has stunted, for a number of reasons I just mentioned in terms of structural, and the reason that basically our old economist friend Keynes hasn't been mentioned in a number of years. It's all something that relates to infrastructure. If fiscal spending is confined to shovel ready infrastructure, then there's not much to be had in terms of growth. And so I would still stick to the one to two percent growth rate that the IMF and others are suggesting for the U.S. I don't think a Trump victory will really do much there in terms of the policies that he's now advocating."
Full transcript:
VONNIE QUINN, BLOOMBERG ANCHOR: For what Donald Trump's election will mean to the bond market now, let's turn to Bloomberg's Erik Schatzker and Janus Capital Fund Manager, Bill Gross, who joins us from Newport Beach, California. Erik, a big shift in the bond market, a rating change, maybe?
ERIK SCHATZKER, BLOOMBERG ANCHOR: We'll have to see, Vonnie. Let's put these questions to Bill Gross. Bill, good morning to you. Let me begin with this. What did Bill Gross, American citizen, voter, I presume, investor, philanthropist, think when he saw the results?
BILL GROSS, UNCONSTRAINED BOND FUND PORTFOLIO MANAGER, JANUS CAPITAL: Well, I was having a doctor's appointment, believe it or not, and after I finished, I came out, I was driving home, and was certainly stunned by the reversal of the last hour or two. It just wasn't expected to happen. I wasn't stunned necessarily because of the implications going forward. I was stunned by the upset. And we're just going to have to see what the Trump policies pre-election and the Trump policies post-election are in terms of how they come together.
SCHATZKER: What are the implications going forward? And, Bill, what message is the market sending with prices where they are now? We've seen an enormous reversal, as you know, in stocks. Dow futures were off some 800 points at some moments overnight. The dollar was dramatically weaker. Now both are, the dollar, I believe, is a little higher, and stocks are flat.
GROSS: Yes. Well there's two messages, right. The message of the people via the election, and I think that's a Brexit with a capital B in terms of populism versus globalization. We saw that in the Midwest with Wisconsin and Minnesota and the rust belt states that sort of were neglected before the election by both parties, and so I think that movement's alive. I also think because of the triple play by Trump and the executive and Congress that they won't necessarily have a free hand, but they've got a hand to implement policies that are corporate friendly.
We're talking about corporate tax reform and that should favor corporations and profits. It's hard to believe the specifics of it, but it looks like corporations will benefit, and individuals won't, but I would say in terms of the policy that the people voted, that there's unrest and there's the need to, yes, to stimulate growth in order to increase real wages, but I -- I'm still skeptical as to whether Trump or even Hillary could have done that.
SCHATZKER: Bill, with treasuries selling off, the yield curve steepening, that's what we've seen this morning, how's that affecting your portfolio in the Janus Global Unconstrained Fund?
GROSS: Well, Janus Unconstrained had some volatility sales at wide levels for interest rates, and so far, so good. Janus Unconstrained had a risk off type of posture looking for the stock market to go down a little bit and for high yield bonds to widen in terms of spread. That's happening this morning. So I haven't seen the specific number, but I think Janus is doing well (technical difficulties). I think that has been risk off and that has been currency negative, dollar positive, I think does well in the circumstance, but we're going to have to see, as the day and the Thursday and the Friday wind on, because as you say, lots of volatility, and it was up and it was down and perhaps it goes up again in terms of whatever market you're talking about.
SCHATZKER: Bill, let's look at both ends of the curve. On the short end, does it make sense to you that that's firming with the expectation it appears that the Fed is going to have to move more slowly now that Donald Trump is the president? And similarly on the long end, I'm curious to know, how far do 10s and 30s have to sell off before Bill Gross gets interested?
GROSS: Yes, lots of good questions there. Well, it depends to some extent on the current Fed Chairman, Janet Yellen. It depends on what happens after Trump is inaugurated in terms of how he views the Fed and whether Yellen is his person, so to speak. But I think Yellen has bluffed so much that given financial market stability or relative stability that they go ahead in December. If not, if markets tank by 5 to 10 percent, then there's not much chance in my view of short rates going up.
Now in terms of 10s and 30s, yes, the curve is steepening significantly today as you mentioned, on the long end, because of potential deficit spending by the new administration. But I would be cautious there as well because as I've mentioned before, it's a global marketplace in terms of bonds, and there are other central banks. The Japanese central bank basically has pinned (ph) their own 10-year at zero basis points and it's close to that level now.
Japanese investors can sell their JGBs and buy treasuries at a decent spread currency hedge, now probably around 40 or 45 basis points. If that curve widens, then the 10-year in the U.S. has a lid, so to speak. I think that's probably around two percent. Anything higher than two percent, it will become so enticing for global investors that they will move into treasuries and out of gilts and out of JGBs and out of German Bunds.
SCHATZKER: Well, we're pretty close, we're at almost 1.97 on the 10 and we're at 2.78 on the 30. Are they cheap enough for you yet, or does Bill Gross wait?
GROSS: Well, I want to see how the day ends. Not necessarily how the week ends, because opportunities present themselves, but yes, I mentioned two percent. I think two percent on a 10-year relative to zero percent on a 10-year JGB is a historically, or close to a historically wide spread. Is it justified under these types of circumstances? Perhaps. But I think the value would be there, around two percent. And so yes, to answer your question, I'd be a buyer of duration, buyer of the 10-year, not necessarily the 30-year, but the 10-year, because it's tucked in a little bit closer to the front end of the curve, and hope for lower rates at some point going forward.
SCHATZKER: Bill, what do you think the market is pricing into these longer yields? Is it growth in inflation? Is it the four percent GDP growth and 25 million added jobs that Donald Trump has promised, or perhaps something less than that? Or is it the expectation that we're going to see additional supply flood the market with deficit spending?
GROSS: Well, supposedly, that goes together, deficit spending and growth, not necessarily.
SCHATZKER: Maybe not coincidentally.
GROSS: No. Shovel ready types of things. But I do think there's a fear at the moment on the long end that inflation and growth, and sometimes they go together. They usually go together, will force longer rates higher even in the face of a very, very cautious Fed. I think we're approaching, as I said, with a 10-year at 2 percent, a point where the curve doesn't steepen very much further, simply because we have questions as to how much deficit spending, we have questions.
The biggest question, Erik, is to, will these measures, whether they're regulatory, whether they're spending, whether they're tax related, will these measures really make a difference in terms of U.S. growth? To my way of thinking, the structural arguments still hold sway in terms of demographics, in terms of debt delivering, in terms of technology displacing labor, et cetera, et cetera. So it's not necessarily a slam dunk despite the fact that Republicans have all three houses.
SCHATZKER: Well, let's consider those things for a moment. Let's consider demographics. Let's consider some of the structural obstacles. Can you envision a scenario, all of those things considered, in which the economy grows four percent a year, and in which we add 25 million jobs over who knows what period?
GROSS: No. If that's the objective or the stated goal of the Trump administration, they are bound to fail. We're in a period of time not just in the U.S. but globally where growth has stunted, for a number of reasons I just mentioned in terms of structural, and the reason that basically our old economist friend Keynes hasn't been mentioned in a number of years. It's all something that relates to infrastructure.
If fiscal spending is confined to shovel ready infrastructure, then there's not much to be had in terms of growth. And so I would still stick to the one to two percent growth rate that the IMF and others are suggesting for the U.S. I don't think a Trump victory will really do much there in terms of the policies that he's now advocating.
SCHATZKER: One of the places we might look, Bill, to anticipate policy change is spreads on high yield bonds sector by sector. Today, we see spreads widening in healthcare. Perhaps not a surprise given the widespread expectation that he wants to do something on Obamacare. Is that the kind of place that you and the Janus Global Unconstrained Fund will be prospecting?
GROSS: Yes, I think that's a good sector, a rather certain sector in terms of Obamacare related corporations, to my way of thinking. His incessant attack on Obamacare and Republicans continued attack on Obamacare suggests that there will be substantial changes or an abrogation of the entire program going forward. I would favor the former as opposed to the latter. These things have to take time. But healthcare is definitely on the chopping block in terms of corporate spread and corporate quality, and so that would probably be the first place I would look.
In terms of other corporate sectors, defense would be very much of a positive, and so I would look for defense corporate bonds. Those are rather high quality, but nonetheless, they can still narrow in spread because defense is seen as a Trump initiative.
SCHATZKER: Bill, what about emerging markets and sovereign spreads in general, given what president elect Trump has said about trade policy?
GROSS: Well, the Mexican peso is being picked upon. It sort of is the best of the emerging markets, and we've seen the peso go up by what, or down by four, five percent. It's above 20. And their bond market is going down in terms of price. You know, I think it's very attractive, it's just a question of when to jump in. For instance, the Mexican 10-year TIP (ph) yields 3.06 percent versus the U.S. 10-year TIP (ph) at 20 basis points. So you have a 300 basis point spread there, and that's a rather significant spread if you think that Mexican inflation is going to be higher than the U.S.
There have to be selected markets. There's no doubt that emerging market countries have suffered overnight and now this morning because of the Trump victory. Developed countries and developed currencies are suffering mildly, but not significantly. So it will be for a short while a very dollar positive type of move on both ends, I think, and that perhaps is something that Janus will choose to take advantage of over the next few days.
SCHATZKER: Bill, I really appreciate your taking time to spend with us here on Bloomberg Television the day after a historic election result. That is Bill Gross of Janus Capital.
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