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

[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]

Channel: Barron's

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Length: 21min 6sec (1266 seconds)

Published: Thu May 16 2024