well, the market likes washington’s tax deal, but does pimco’s bill gross? after all, it does little to nothing to address debt anddeficit levels, and that could eventually impact bonds in a bigway. bill joins us now from pimco headquarters in california, and, bill, your reaction? welcome back, sir. thank you very much. thanks for having me. well, kelly, you know, i think that this rally is really a rally emanating from japan and actually from the fed in terms of its new qe policies. to suggest that it’s a fiscal cliff avoid type of rally i think is a misconception because, you know, basically the central banks are in the process of writing lots of checks, hundred of billions of dollars worth of checks. the fed just today is instituting a new program and so, you know, what we see is central bank check writing asopposed to fiscal cliff avoidance. actually the — the economy and the investment markets are being affected negatively by this package. well, in one of my takes, bill, is that we’reunderestimating the importance of the capital gains rate andthe dividend rate which will now at the top end be only 20%, notthe 40% that had been feared. that a bigositive for investors out there, doesn’t it? well, i think it does. you know, to be fair, the market never really anticipated that it would go all the way up, and the rate is actually 23.5% because of, you know, some additional overlays on top of it. right. so capital gains taxes aregoing from 15 to 23.5, and that’s not a positive. but let’s not be grinchy about all of this. we like higher stock prices and higher bond prices as ll, but ultimately you come to a point really where, you know, the government in terms of this current package, you know, hasn’t addressed spending but has addressed taxation which, you know, experts about a 1.5%,what we call, economists call a fiscal drag on the economy. that means instead of, you know, perhaps 3% growth for 2013 we’regoing to see 1.5%, and that’s a pretty low rate ofwth forcorporate profits to do well. bill, we also are now just two months away to what is shaping up to be an epic fight over the debt ceiling. how concerned are you about that, and how do you expect that to play out? very concerned. there’s really three roadblocks here, kelly, you know. there’s the continuing budgetresolution which means they have to come up with a budget in the next few months and look forward. there’s the sequestration that has to be addressed in the next several months, and then there’s the debt ceiling. one, two, three, the republicans are going to hammer at the administration in terms of what they want in terms of lower spending, as opposed to higher taxes, and so, you know, to my way of thinking, you know, that proves the dysfunctionality really of government on a continuing basis.one of the problems that we’ve seen here in the past month, inthe past several years has been this dysfunctionality whichcaused moody’s and standard & poor’s to, you know, begin tolower their quality ratings, and so the government is not insound hands or in common sensical hands going forward. i think investors should be concerned. bill, but i wonder if we’regetting confused here, confusing the issue to some extentincluding the ratings firms, because they are downgrading onthe inability to really come reach a deal, but they are also saying it’s because we can’t reach a dole that lowers debt levels or at least stabilizes them long term. no one seems to be focusing on the real issue that either the fiscal cliff is ahat is getting lost in all of this which is growth. if we don’t have growth in place, all of the long-term projections look significantly weaker. i think that’s the magic elixir, in the u.s. as well as in the peripherals in euroland. you need growth to basically bail yourself out of asituation, and i think in terms of the rating services, what isreally critical is not what the ratings services say, but it’s what investors do. the whole world has been watching here.someone should ask where are the bond market vigilantes, where are the stock market and cuigilantes? what we’re continuing to witness in 2013 is a dysfunctional government dealing with a dysfunctional sglugt where do you think those bond vigilantes went? they were so influential in the 1980s, and here we are sitting and talking to the guy that is the most influential guy arguably in the whole bond market. where are your peers out there to have some say in this whole proses?let’s be fair about this. the vigilantes have been superceded by the fed. i mean, the fed buys, believe it or not, 80% of everything that the treasury issues now. they are buying $1 trillion worth of bonds and mortgages a year. 85 billion a month and so, youknow, what can the vigilantes do, you know, relative to the fed?right. there’s hardly any bonds for the vigilantes to buy, so not todenigrate our responsibility in all this because i think what avigilante should do in the bond market is sell long-term debt asopposed to intermediate term bent because it’s the next longtestimony debt affected by the higher check writing. we all know we have a dysfunctional congress and you’re unifying very few people who were satisfied with the tax portion of the deal, whether you’re a democrat or republican, especially on both ends of the spectrum so in your view what’s a dysfunctional congress going able to do about spending when we come to the debt ceiling discussion in a couple months? they have to attack entitlements, let’s be fair about this. entitlements going forward are about 45% of the current budget and incrngly, as the boomers get older, bill, you know, it will take up a larger and larger portion of our budget, and so entitlements have to beattacked. that is medicare. that is medicare. that is social youknow, to the extent that there’s some adjustments coming in terms of the inflation base measurement going forward interms of social security, fine. to the extent that they can helphealth care in terms of reing its expenses, fine. but we have a $64 trillion entitlement that isn’t being addressed and at some point that aaa rating has to be at risk despite what moody’s just said. bill gross, thank you so much for your time. thank you.