Bill Gross became known as the Bond King during his legendary, multi-decade run at Pimco, eventually growing the company to manage trillions of dollars. Of course, that success coincided with a remarkable bond bull market — a bull market that came to a screeching halt over the course of the last two years. So what does Gross think of markets today? And could there ever be a new bond king in this environment? During a live episode of the Odd Lots podcast, taped at the Future Proof conference in Huntington Beach, California, Gross talked about the state of the market, reflected on his career, discussed the things that make him happy today, and
addressed old rivals and competitors
. This transcript has been lightly edited for clarity.
Key insights from the pod:
What it was like trading bonds in the 70s — 1:41
Surviving a bear market — 2:48
The origins of active bond trading — 3:49
How much of Bill’s success was luck? — 5:28
Trading in size at Pimco — 7:42
Interest rates and the economy — 10:48
Will interest rates go down again? — 12:51
The inverted yield curve — 15:10
Missing buyers for bonds — 17:08
The return of financial repression — 18:58
How to hedge duration risk now — 21:09
Why own a bond at all? — 23:19
40% of Bill’s portfolio is MLPs — 25:59
Bill’s daily schedule and trading — 28:32
Arbitrage opportunities — 31:29
On private credit — 32:50
China’s economic slowdown — 24:11
Fitch’s downgrade of the US credit rating — 37:44
Can there be another bond king? — 38:52
His legacy — 42:55
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Tracy Alloway: (00:10)
Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.
Joe Weisenthal: (00:14)
And I'm Joe Weisenthal.
Tracy: (00:16)
We are at the Future Proof Conference in glorious Huntington Beach, and we have a very, very special guest. This is something that we recorded live on stage on a beach. We've never done that before.
Joe: (00:30)
Never on a beach before. Truly extraordinary moment. Beautiful Huntington Beach. It really is kind of like a festival here, and this was a really fun conversation to do.
Tracy: (00:38)
Yep. So we are speaking with Bill Gross, the Bond King himself. Obviously, he has a lot of thoughts on the state of the bond market now, but we're also going to talk to him about his career and how investing and trading debt has actually changed over the decades.
Joe: (00:54)
Yeah, really fun conversation. Take a listen.
Tracy: (00:56)
Bill, you brought out the sunglasses, huh?
Bill Gross: (01:01)
I did. It's been 10 years. Last time it didn't work too well, but…
Joe: (01:06)
Try it again.
Bill: (01:06)
Yeah, we'll try it again.
Tracy: (01:07)
It'll be good this time. I want to start out with, you know, we're in the midst of what seems like another interest rate cycle of some sort. No one really knows how long it's going to last. There aren't that many people around nowadays who have lived through different interest rate cycles. And you actually started your career in the 1970s in an era of stagflation, an era where the Fed was hiking. We didn't have derivatives to hedge duration risk. We didn't have Bloomberg terminals, we had Quotrons. What was that like?
Bill: (01:41)
Well, it was much different. You know, bear markets are not as much fun as bull markets depending upon your position. But, you know, interest rates got to 15% and ‘81, ‘82, somewhere in there. And the interesting thing is that they were almost self-hedging because the duration of a 30-year Treasury at 15%, it was about four and a half to five years. It was like a five year today or close to it. And so at 15%, with a very short duration, it meant that interest rates could go up to 18% and you still wouldn't lose money. It was a a golden opportunity.
Joe: (02:25)
When you think back, and, you know, obviously as Tracy mentioned, you started at Pimco in the early seventies, and so there were several years of bond bear market before the great bull market, which we'll talk about. What did you learn then about surviving in a bear market for an asset class?
Bill: (02:48)
Well, you know, it depends on who you're investing for. If you're looking for a client, and trying to grow a business then you have to be aware that relative performance is important. But if it's a significant bear market, that absolute performance is crucial as well. Investors and clients will just leave no matter how good you were relative to the market. So I think that was key back then. Relative performance and then, you know, stepping on the accelerator in ‘81, ‘82, and buying a secular bull market, and it was a bull market.
Tracy: (03:32)
So nowadays we kind of take for granted that people actively trade bonds -- you buy and sell them -- but when you started out, that wasn't the case at all. Walk us through the thought process and the opportunity that you saw in trading bonds.
Bill: (03:49)
Right. Well, there were no real computers no clearing house overnight types of trades. You, as a matter of fact, at Pimco, which was owned by Pacific Mutual, Downtown LA, we had a billion dollars in a vault. And I would, I was hired not for Pimco, but really for private placements. And one of my jobs, 25% of the $11,000 I made each year was to go down into the vault and to actually clip coupons.
You've heard of coupon clipping? I did a lot of that, and back in the day because the bonds were in the vault, it was pretty hard to get them to New York. It took two or three days to get them to New York, like I say, there were, there were IBM 360s, but nothing in terms of connectivity. And so, you know, the physical trading of bonds and stocks was very difficult and allowed for illiquid markets.
Joe: (05:01)
Talk to us more about, you know, you mentioned ‘81, and then you like pressed down on the accelerator and rode this incredible wave, this incredible roughly, I guess 40 year, basically, bull market in bonds. But talk to us, you know, if you look at your career and you think, you know, the bond king, talk to about the role of timing and how crucial that was, and when you think about the success that you had at Pimco, etc., just the being there at the right time and the role of I guess a little bit of luck?
Bill: (05:28)
Right. Well, it the key at Pimco, for us at Pimco, it wasn't just me -- we had a lot of smart people and more and more as time went on -- but the key was really a book that -- I forget who wrote it. It was called Investing for the Long Term. It was about stocks but it mentioned the long term, the secular movement of financial instruments as opposed to cyclical, as opposed to short-term trading.
And it seemed to me that the bane of investor is emotion. And I'm the same way. I never thought of myself as a good trader. I mean, if Nvidia, you know, hits $500 I'm just as likely to buy it as to sell it and then regret it the next day.
But in any case, if you take a longer term view and not go to sleep, but if you take a longer term view and know that forces in the economy -- inflation, demographics, globalization -- if you know that those are working in the favor of either a bull or a bear, then sticking with what we called a three to five year forecast as opposed to a three to five day forecast was the key.
And it does hurt mentally when you're long and you should be short for a short period of time. Yeah, it does. But you just, you have to stay with that mind frame of a longer term secular market.
Tracy: (07:14)
How did the way you trade actually change as Pimco grew larger? Because I imagine, you know, at one point, Pimco has hundreds of billions of dollars under management, trillions even, and there are pros and cons to that, right? Like, you get first allocation of debt, but maybe it's hard to hug your benchmark because you are gigantic.
Bill: (07:42)
And that's true. So you know, as we grew larger and larger, clients would always say, ‘Well, how can you keep doing this at a hundred billion or 200 billion or 500 billion? Because your size you know, is prohibitive in terms of liquidity.’
It wasn't because we found the futures market. We found the foreign markets. We found markets that, that added liquidity and, you know, actually, we'd stay in this trading room. And this is not a good joke for now, but I'll tell it anyway. The client would say, ‘How can you do it?” And then we'd tell them how we did it, and then we'd go back in the trading room and look at each other and we’d say, ‘You know how we do it? We just add a zero to the ticket!’
Joe: (08:39)
Yeah, it’s that simple. Just add a zero to the ticket.
I mean, I know we're going to talk, we're going to, you know, at some point, talk about this current market a little bit, but maybe as a sort of segue, you know, obviously there were a lot of, in the inflation of the late seventies and early eighties, there were a lot of false dawns, right? Where they thought they had defeated inflation, and the Fed was like, ‘Okay, we're going to be able to bring rates down.’ And then inflation shot up and it took them a long time before it was gone for good. Does it feel today similar to that, or does it feel like the late seventies this inflation, or does it feel like substantively different, what we've experienced over the last few years?
Bill: (09:17)
Well, the late seventies was influenced by ‘71, ‘72, and Nixon went off the gold standard and it was easier and then easy for central banks to print money. There was also OPEC and once it got going, it was hard to stop.
You know, I think the Fed and other central bankers are more aware now. Hopefully they are, they weren't two years ago. So it's hard to make that claim, but it's a market these days that can be controlled to some extent with higher interest rates, but not necessarily. Not necessarily.
And we're seeing that right now because, you know, the real five-year note in terms of interest rates was bottomed at minus 200 basis points. It's now a plus 250. It's gone up 450 basis points in the last year and a half, which is incredible. And to my way of thinking when we start talking about stocks, it's definitely a negative influence in terms of valuations and PEs, but the market doesn't seem to recognize it.
Tracy: (10:38)
Wait, when you say the economy can't be controlled through interest rates as much as it once maybe could be, can you expound on that? Why is that the case?
Bill: (10:48)
Well, you've got foreign markets, which didn't exist really in size back then, and they have an influence on the Treasury market, although it's usually the other way around, and pretty decent size. And you've got demographics that are important now with the boomers, myself and others that are spending their savings. And that has a significant effect in terms of supply relative to demand. You didn't have that demographic influence back then.
And then you know, globalization crept up in the last 10 years or so, made for higher productivity, and now it's going the other way. So they're just other forces to think about. And that's what Powell is doing. He's trying to gauge the appropriate real interest rate that will produce 2% inflation, which I think is a dream, but that's what he says he's going to do, and that's what he tries to do. And that's why, you know, Fed funds are five and a quarter to five and a half. We'll see what happens.
Joe: (12:25)
A lot of people think that rate cuts are coming, that we're in some abnormally high level of interest rates. And it's only a matter of time before like the Fed is able to normalize. And by normalize what they mean is cut to something that maybe would be more familiar in the, not, you know, not go back to zero, but something that may be more familiar [from] several years ago. Do you see that in the cards? Do you think that the Fed is going to be able to cut sometime soon and rates are going to come back down?
Bill: (12:51)
Yeah, I don't think so unless recession comes with a capital ‘R’ and it doesn't seem to be doing that. Let me give you my valuation metric for the 10 year, the 10 year at four and a quarter for Treasuries.
So Powell wants to get Fed Funds down to 2%, let's say it's successful. Let’s say Powell is successful, which would be seemingly very bullish for the market. And if Fed funds are at two, and then the r*, as they call it, you know, the real Fed funds rate would be a two and a half.
But then there's a term premium, Joe. A term premium that historically has been about 130 basis points over Fed funds. And we're talking about the term premium of the 10 versus the short-term rate. And why is there a premium for a 10 versus a short term rate? Because it's riskier, because it goes up and down and you can lose money, whereas you can't with a bill.
So let's just say that Powell is successful, gets to two, r* is at two and a half, term premium three and a half, close to four. I mean at four and a quarter we're basically anticipating the Fed being successful and containing inflation at a 2% level.
And if he doesn't, then we certainly haven't got a bull market and we certainly don't have a context where Powell and the Fed, you know, are likely to cut interest rates. I just don't see it. It's not that I'm significantly bearish, although we can talk about that in a second. But four and a quarter is not a bad level for now, as long as inflation keeps going down. If it doesn't, then no.
Tracy: (14:39)
I'm going to take you up on, on the bearish offer in a second. But since you mentioned the term premium, when you look at the yield curve right now and the fact that it's inverted, what do you see? What's that telling you? Because I feel like there's a group of people who will say, ‘This time definitely isn't different, it's a traditional indicator of recession.’ And then there are a lot of people who will say ‘Times have changed, the term premium is a lot lower than it used to be. Maybe that's what's causing the inversion.’
Bill: (15:10)
Well, I think it is. But that's another way of saying that the term premium, which appears to be close to zero, is wrong. But I've been baffled by the, you know, the length and the extent of the negative curve. I mean, we had one in ‘79, ‘80, ‘81 and it seemed to work for Volcker, doesn't seem to be working that well now.
And I think perhaps one of the reasons is that fiscal policy has been so expansive. I mean, we're looking at a $2 trillion deficit this year, last year. It was three and a half during Covid. And so, you know, when you have fiscal policy and such a deficit and people spending money, it's like Bernanke, remember Bernanke with a helicopter? I'll be damned, but that's what we did. We threw money out of a helicopter. We threw trillions of dollars out of a helicopter. And so the last of it is just now being spent. I think the reason why term premiums are so low, is that the economy is good and people have money to invest.
Joe: (16:35)
Alright. I'm going to jump, you said, you hinted at maybe, there's something that you're bearish on. What are you bearish on?
Bill: (16:42)
You mean in terms of markets?
Joe: (16:44)
I don't know. I you said, I’m not bearish, and like, I'll get back to that.
Bill: (16:48)
Oh, well, in terms of bonds, so we have a deficit of close to $2 trillion. The outstanding Treasury market is about $33 trillion, I've read on Bloomberg and others…
Joe: (17:05)
A very reputable outlet.
Tracy: (17:06)
Thank you. Thanks for the plug.
Bill: (17:08)
And who's going to buy them at these levels? Well some people are buying them, but it just seems to be a lot of money. And when you add onto that, that Powell is doing quantitative tightening, as you know, and that theoretically is a trillion dollars’ worth of reduced, well, a trillion dollars’ worth of added supply, I guess.
And so it just seems like a very dangerous time based on supply, even if inflation does come down. So I wouldn't necessarily be bearish because I think the Fed talks a good game, even though they don't play a good game. They talk a good game. And they seem to have convinced investors that interest rates will come down once we get close to 2%. I think that's a stretch.
Tracy: (18:27)
You know, given that deluge of supply and the fact that you are going to need a lot more buyers to take that up at exactly the time when it seems like a lot of traditional foreign buyers of US debt have stepped away, do you think financial repression comes back into play? We're already seeing the Fed talk about higher capital rules for some of the banks, things like that. Is that a risk in your mind? I remember you talking about this way back in 2011, 2012.
Bill: (18:58)
Well, I think it is. All of the new rules, you know, in terms of the intermediate banks which followed on from Silicon Valley Bank, the new rules. And Schwab, by the way, not to, if Schwab's out there, Chuck and I play golf once in a while, so sorry about that. The banks have gone overboard in terms of duration.
I mean, Schwab basically takes all their money market instruments and -- not all, sorry, but a lot -- and puts it into long-term bonds. And that's how they've gotten caught. And that's how Silicon Valley got caught. And so, you know, the repression you know, hasn't necessarily, in terms of what I read, come in the form of duration, but it's come in the form of increased capital and increased debt.
A lot of these intermediate banks have been ordered or will be ordered to issue $6 or $7 billion worth of debt in order to absorb, you know, what happened six to 12 months ago. So I think that's an effect of what we have. We have a financial system that that's dependent upon asset prices going up.
If you remember anything I've said today, we have an economy that's based on asset prices going up. If they don't go up, there are problems. There are problems because there's so much debt and there's such high expectations in terms of PE ratios and the like, that if this asset-based economy, which depends upon higher stock prices, depends upon higher or relatively high bond prices, it's precarious at some point. I'm not saying get out, I'm just saying that assets have to go up or else the economy will not do well.
Tracy: (21:09)
Since you mentioned duration, how would you manage or hedge duration risk right now? And you can't just say that you wouldn't take it on. If I gave you a hundred dollars to invest in bonds, how would you hedge that duration risk?
Bill: (21:24)
You know, Pimco was always successful --most people didn't realize it until the books came out -- Pimco was always a great believer in selling volatility. Selling volatility has an alpha, pretty consistent alpha over time.
Momentum doesn't always work, obviously when black swans appear, but momentum is like an insurance company. And so that's the way Buffet works. Buffet doesn't say that's the way it works, but that's the way it works. He takes that float and he sells volatility by investing in longer term stock options, etc., etc.
I would, and what have I done? I would sell a put and a call on, say a 10-year Treasury, the TY contract, TYZ3 trades at around 109. You know, I just sell 108 put, 110 call, you know, for 30 days. And the volatility is decent, not as high as it has been, but it's decent. And you just bring those premiums down to the bottom line as long as the market doesn't take off like a firecracker one way or the other.
Joe: (22:35)
So Tracy posed this hypothetical to you, it's like, okay, how would you hedge this duration? But listening to you, I'm just wondering, why should anyone buy a bond?
And the reason that, you know, as you said, at the long end has almost already priced in a sort of success from the Fed, already pricing in a sort of good scenario. There's upside risk. There's this deluge of issuance, and unlike say for the last, at least the last 15 years, going up until 2021 and longer, we're not even getting this sort of inverse correlation to equities in the portfolio. So you no longer get that sort of beautiful 60/40 portfolio where something in your portfolio is green on the day and green on the quarter, right? So why own a bond?
Bill: (23:19)
Well, that's a good question. So say you buy a 10-year Apple or 10-year Amazon, you know, at five and a quarter plus or minus. And this is -- you know, I've been in this business a long time and I've been tax sensitive, but I haven't, I'm not a real estate guy. All my buddies at the country club are in real estate. And they've never paid tax in their life.
Joe: (23:50)
They think you’re a fool for having paid taxes?
Bill: (23:51)
I know. So I'm thinking about this, and so, I paid a lot of taxes. So say you earned five and a half from an Amazon 10-year and say you live in California or New York, just say. So that's a 15% hook right there. And the federal is probably 40% plus or minus depending upon what your bracket is.
So take it up to 55, so the government takes 55 of the 550 and 55 times 550, it's probably like, six well, 55 times 55, it's like 625, whatever. You start to lose it when you're 79 . Anyway, so the government's taking like 55% right away and say you're trying to build an estate, leave something for your grandkids, and yeah, you can set up a trust, etc., etc., but that costs money too.
But the estate tax is 40%, and so if you’ve got 45 left and you got 40% on the estate tax, that's 16%, 17%. And so you're basically up to 70% that the government takes, the government takes 70% of your money and you get 30%. And so why? Why would you risk a hundred percent of your money for a 30% payoff at five and a half? It doesn't make any sense. And it didn't make, it certainly didn't make any sense two years ago or a year and a half ago when interest rates were zero. So you gotta beat the tax man in one form or another. I'm not a pro at that. You know, go buy an go buy an office building in New York, I guess.
Joe: (25:42)
I've heard they have their own problems. The office buildings in New York.
Tracy: (25:46)
Just a few. I mean, Bill, you kind of alluded to this, but you're managing your own money now, right? And you're invested in a lot of different things. So stocks, bonds, MLPs. What's your favorite thing to trade now?
Bill: (25:59)
Well, the best idea, unfortunately, you know, oil is at a cyclical peak, maybe it goes higher, I hope it does. But there's master limited partnerships mainly in the oil and gas pipeline areas. At some point, 10, 15 years ago, Congress, somebody paid off a congressman, and he inserted it into a bill.
So MLPs, you know, basically are partnerships just like real estate, it's a way to get even with your real estate golf buddies. And so what it is, is you don't pay any taxes until you sell it. Okay? Just like real estate, they don't pay any taxes. Even when real estate guys sell it, they transfer it to another property. They don't pay any taxes. They don't pay taxes ever!
Anyway, so these MLPs, and there are about six or seven or eight of them, they trade pretty frequently. The largest one is called Energy Transfer. It's $ET. It's the biggest in the country. It yields 9%. And is that safe? It's been pretty steady, and is it dependent upon oil prices? Yeah, the price of the stock is affected to some extent of oil goes down. But, so I've got an MLP with Energy Transfer at a 9% yield that I don't pay taxes on until I sell it or it pops into an estate, and I don't think you even get taxed then.
And all of these MLPs are like eight, eight and a half, 9%. And you know, that suggests that there's a lot of risk there. And I suppose there is, they've gone down and they'll go down again. But from a tax standpoint, I really like them. And about 40% of my portfolios are in oil and gas MLPs, the other symbols would be $MMP (Magellan), $MPLX, $NS (NuStar), there's like eight of them. Just get your Bloomberg and hit RV for relative value, and it'll show you everything you should invest in.
Tracy: (28:14)
We asked Bill to give you tips on terminal functions.
Joe: (28:16)
I love [that] you know the exact price of the part of the Treasury futures curve, where it's trading right now, the various tickers and their yields of MLPs. So you're still getting up at 5.30am every day still, and just as active as ever?
Bill: (28:32)
Yeah, and I know that's sort of stupid, and people say, ‘Smell the roses,’ and I think I do, my wife Amy and I play golf in the afternoon, that's smelling the roses. But in the morning, what else would I do? I'm not going to watch the morning talk shows. And so yeah, I get up and I watch the market and it's fun.
You know, I told you this backstage, but there's a good definition of happiness. It's not the only definition. You've got plenty, I'm sure. But one definition says you need someone to love. That's for sure. You need something to do and something to look forward to.
And so for me, the market is something to do in the morning and something to look forward to. I look forward to Nvidia and the earnings announcement, I'm hanging at one o'clock Pacific time just waiting for that announcement, and I go, ‘What are you doing? Why is this so important to you?’ But I guess it is.
Joe: (29:37)
I love that of the three things you need to be happy, the market is two of them for you.
Tracy: (29:44)
All right. Well, on a related note, I remember in one of your very famous investment outlooks, you said that you didn't consider yourself a good trader. So fast forward many years, do you think you're a good trader now? Have you gotten better?
Bill: (29:59)
No, I'm not a good trader. I’m as emotional as everybody else, and that's the problem -- you can't be emotional. And so, you know, take Buffett. Buffett's not emotional. He's funny , he's a great personality, but I don't see him as an emotional person. He's just dried, dry, in terms of how he looks at markets and the timing. He looks at markets going forward. And so it kicks the emotion out of there.
Yes, he's got to be right if he thinks the market's going up or going down, he's got to be right on a long term. But the emotions out of there. And so you know, I found for myself, I'm very emotional. If I make a trade during a day and it closes lower than where I bought it, I'm not in a good mood. Amy knows that , sorry. But I'm not a good trader. I am a good long-term secular investor. I have a good sense of what makes for markets in the long term.
Joe: (31:16)
You mentioned, did you say 40%, by the way, of your [portfolio] in MLPs these days? What are the other big, or what's the other 60%? What are the other long-term things that you want to bet on right now?
Bill: (31:29)
Well, so you know, there's a lot of not totally safe arbitrage situations that yield 10% to 20%. I mean you all know the Microsoft Activision deal that probably in two weeks will be approved by the UK. It trades at 92, they're going to pay 95. That's three points for a month. I think it's a month. And that's a 36% annualized return.
There are others. There's a new one called Capri, which is, Amy told me about this be because they sell Jimmy Choos. I'm sure some of the women know Jimmy Choos, Versace, and there's one other company. Anyway, they're being acquired by a private entity. You know, there's a 10% to 15% discount in a relatively safe industry. It's not a high tech industry.
And there's quite a few others where a five, 10, 15% return relative safety can be achieved. And so I look for those and you know, it's better than 5% Treasuries, but certainly riskier as well.
Tracy: (32:50)
I don't know if anyone's ever asked you this before, but are you ever tempted by private credit? It seems to be all the rage at the moment. I've heard one person describe it as bonds without the liquidity issues of publicly-traded debt. Is that something that interests you?
Bill: (33:06)
Well, no. I think you'd be, most of you would be surprised, I'm not well connected. I never was well connected. I came into Newport, I sat at my desk, I had my investment committee, I had great people working with me, but I didn't know many people in New York or Chicago. and I don't know many people now. I wouldn't, if I wanted to invest in private equity, I wouldn't know where to go. So I'd say no.
Joe: (33:39)
Extremely plugged in to random merger arbitrage opportunities, but don’t know all the fancy people with their private deals. Let's talk about a few other topics that are sort of in the news. A lot of interest these days in China and whether there's going to be a sustained slow down there. But I feel like, you know, there's certain things that people talk about every 10 years, and people have been warning that their model's going to implode and it's like a permanent thing. Does it, having followed these things for years, does it feel like there's something different going on globally or in China in particular?
Bill: (34:11)
Yeah, certainly in China. You know, at Pimco long ago we were onto this long ago -- 15 years too early. But China has, during their stretch of success been successful because of investment, not because of consumption. They don't consume 70% of the economy like we do in the US, it's probably more like 40-45%.
And the trick for China has been to increase that to be more like, you know, western economies and certainly the US. Where they've gone wrong is that they've reached the sort of a dead end with their investment in housing and construction. They've built bridges to nowhere just to keep on building and to keep on investing and keep jobs plentiful. And so it seems, like I say, at Pimco we were talking about this 15 years ago and it never happened, but it seems to be happening now.
And so the Chinese miracle of 6% growth, I mean, we would wonder how could that happen? How could that keep on happening with such a large economy, how could they grow at six or seven every year? And of course they did because they kept on building condos and apartments that are now vacant.
So I think China's got a problem. They’ve got a debt problem, like most countries. Like the US has a debt problem. Japan has a huge debt problem, but they've got a debt problem that they're going to have to figure out.
And it always seemed to me that -- and this has been disproven because China has grown and grown and grown successfully and become not just an economic force, but a geopolitical force -- so they've grown and grown and grown, but at some point, it seems, you just can't grow at 6% anymore. And as we know, much of the world, is dependent upon China. And not just their imports, but their exports as well.
So I would think the Chinese situation is a serious one and should be factored into to market expectations. But it isn't really. I mean, people, investors, once you get on the AI train, and that's okay, I'm a believer in that. I don't know much about it, but I have a sense that it will improve productivity by a half or maybe 1% a year. That's big time stuff. But once you get on the AI train you know, you're looking for 20, 30, 40% hits. You know what Peter Lynch used to say five bangers or 10 bangers. I never liked Peter Lynch, mainly because I thought he got out too early. And people were always calling me the Peter Lynch of bonds. And I said ‘That sucks.’
Tracy: (37:31)
Okay. All right. We did China, we did AI, we did Peter Lynch. Shall I just throw out some more topics? And you can just opine on them. The Fitch downgrade of the US credit rating.
Bill: (37:44)
Well, I think it reflects a certain reality, not that the US could ever default in terms of not being able to cover its bills. The Treasury just hands it off to the Fed and the Fed prints money, like the helicopter that Bernanke talked about. So I don't think that's realistic.
But the interruptions are potentially realistic, as we know. Every time that, you know, it comes up for approval, there's something that takes place. And so I think from the standpoint of a downgrade, AA+, it is probably appropriate, but there's no default ahead. It just, maybe it affects the CDS spread a little bit.
Joe: (38:32)
Sorry, I know we’re throwing out topic. Going back to bonds though, for a second, and speaking to the bond king, could there be another bond king in a bond bear market? Could there, or do you, or if you're in bonds and it's like, or does it just mean you're going to have to like move somewhere else? Could there be a great bond manager at a time [when] we don't have a great bond bull market?
Bill: (38:52)
See, I sort of wrote this as I was leaving, which is a little, I don't know what the right adjective for that is, but I shouldn't have said it, but I don't, I think to be a, I don't think there could be another bond king, because my reputation as a bond king was first of all, made by Fortune, they printed a four page article with me standing on my head doing yoga.
And I was supposedly the bond king. And that was good because it sold tickets. But I never really believed it. The minute you start believing it, you're cooked. The minute you start you're at the three point line you think you can't miss, you miss.
And so I never really believed it, but, you know, it was a function of a bull market for 30 years that was growing, and Pimco was doing well, and there are too many names I could mention of Pimco that helped me along.
But, you know, today to be a bond king, the bond kings and queens now are at the Fed. They rule, they determine, for the most part, which way interest rates are going, sometimes not so well. So they're in charge. And there was a time where, yeah, Pimco was pretty much in it in 2009 and ‘08. And those were my most proud moments, where Pimco was called upon by the Treasury and by Warren Buffett to help save the economy. And we did that because we were sizable. We had a reputation, and the government let us support them in the mortgage market, and we made money at the same time. But I don't think so.
And certainly, so I nailed Peter Lynch, so I'll nail Jeff Gundlach because he nailed me. When I was leaving Pimco, I went up to his house and said, ‘You know, maybe I could work with you? We could be two bond kings.’ And he trashed me for the next 12 months, you know, in the press. And so I'm just, I'm a sensitive guy.
Tracy: (41:19)
We’ll get you both on stage to duke it out.
Joe: (41:21)
A lot of folks catching strays in this interview.
Bill: (41:24)
Anyway, so if Jeff Gundlach is a bond [king], first of all, to be a bond king or a queen, you need a kingdom. You need a kingdom, okay? Pimco had $2 trillion, okay? DoubleLine’s got like $55 billion. Come on, come on. That's no kingdom. That's like Latvia or for Estonia, whatever. Okay. And then look at his record for the last five, six, seven years, how does 60th percentile smack of a bond King? It doesn't. There, I got you back, Jeff!
Tracy: (42:09)
Wow. I'm trying to think where to take the conversation next. All right. I want to ask a kind of serious question because we only have a few minutes left, but you've been very modest and humble sort of -- except for that last answer! You've sort of rejected parts of the bond king story. You've attributed a lot of your success to the bull run in bonds. You still think you're not a great trader. How do you want people to think of your legacy? When people think ‘Bill Gross,’ what do you want them to think about? And I realize, you know, you've written your own book on yourself, right? Someone else has also written a book about you. What is the legacy that you want?
Bill: (42:55)
Hmm. Well, I think Pimco was, and they’re still close to $2 trillion. So they're still an important factor in the marketplace. But the growing of Pimco from nothing, I mean that, I mean you talk about careers where you're assisted by this and by that, by parents and whatever. You know, I had nothing.
And PIMCO had nothing. And so to go from nothing to $2 trillion, you know, we not only did something right, but we did something for our clients. I mean, Pimco, the Pimco mantra was ‘the client comes first.’ And, and that sounds like bullsh*t, but it wasn't. We traded for clients, not for ourselves. And we knew, or we thought, as it turned out, that if we traded for clients, that that would read down to our own benefit.
And so, I'm proud of the growth. I'm proud of our, like I say, the financial crisis and how we helped to salvage the economy during those days. I'm not so proud of, you know, the aftermath with, you know, Pimco firing me. I still have no idea why a company at $2 trillion would fire a person and the next week they would lose $500 billion. I have no idea from a business standpoint why that would happen.
But for some reason, you know, they thought my time was over. And I guess it was, but I'm certainly proud of not just the growth, but the importance of Pimco in the capital markets, and helping people along. I mean, people come up to me, I don't know how they still recognize me at 79, I look in a mirror and I can't recognize myself, but they come up and they say, ‘You know, you really helped me. That Total Return Fund, it made my portfolio. And so those are the plaudits and the compliments that I really treasure the most.
Joe: (45:19)
Bill Gross, incredible to chat with you here on the beach and really appreciate you doing this interview with us. This was a blast.
Bill: (45:27)
Thank you. And I was going to say like in the US Open, we're at one o'clock in the morning where Djokovic or Coco or whatever they say. ‘And thanks for staying so late!’ Thank you!
You can follow Bill Gross at
@real_bill_gross
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