Bill Gross said that the Federal Reserve may become more “dovish” after oil price drop and would have to take lower prices “into consideration.” If he would to give advice to Stanley Fischer, Gross said, “the Fed as the central banker of the world basically has to worry about financial conditions not just in the United States but the world. And so next week in terms of their language and their stance going forward, they should be very cautious about any type of tightening indications.”

Gross also told Keene:

  • There is very little liquidity in corporate bonds
  • Fed must adjust to drop in oil price
  • ‘new natural’ interest rate is ‘zero percent or lower’
  • Very little liquidity in corporate bonds
Pimco Bill Gross Janus Capital
Bill Gross at the Morningstar conference in Chicago – June 19th 2014

Bill Gross: Fed May Become ‘Dovish’ After Oil Drop

TOM KEENE, HOST, BLOOMBERG NEWS: Joining us from Janus Capital Management, Bill Gross. Bill Gross, good morning.

BILL GROSS, FUND MANAGER, JANUS CAPITAL MANAGEMENT: Hey, Tom.

KEENE: Bill, the markets are moving so much. I want to avoid all the soap opera chit chat right now. What have you done in the last couple days as you see the convexity and the quadratic nature of these markets? How do you adapt to that?

BILL GROSS: Well you have to time your risking and derisking right, Tom. The financial complex is  highly levered. It’s straining for levered returns in all forms and fashions, whether it’s borrowing the Japanese yen or the euro in terms of a funding currency and early investing in either other emerging currencies or high-yield spreads or stocks.

And — and when something changes — and you’ve pointed that out very ably in your recent broadcast in terms of the price of oil. When something changes, it disorients markets in terms of the credit worthiness of either corporations or countries. Then money moves. And when levered money moves and tries to seek a safe haven, basically you have violent — violent price movements, high volatility. We see that with the VIX, and of course treasuries as a safe haven.

KEENE: Bill Gross, many of us take comfort that Stanley Fischer is the vice chairman of the Fed, front and center in 1998. If you were to have a cup of coffee now with the vice chairman, would you suggest that there’s elements or tinges of 1998 in the behavior that we’ve seen the last number of days?

BILL GROSS: Well ‘98 to some extent with the Asian crisis, yes, because many emerging markets in the last few years have borrowed in dollar-denominated terms and now are at risk much like Asia was back then. I don’t think it’s the same extreme, but you’re seeing elements of that. And so Mr. Fischer, if I were to give advice, I’d say simply that the Fed as the central banker of the world basically has to worry about financial conditions not just in the United States but the world. And so next week in terms of their language and their stance going forward, they should be very cautious about any type of tightening indications.

KEENE: Should the market’s moves adapt, adjust, change the behavior of Chair Yellen and the assembled on December 17? Do they change the statement? Do they change their view forward? Do these markets — are they the unexpected that make for Fed adjustment?

BILL GROSS: Well New York President Dudley a week ago basically said there is no Yellen put and there was no Bernanke put and — and —

KEENE: Bill — Bill — Bill, oil’s dropping like a rock. They have to adjust to that, don’t they?

BILL GROSS: I agree. I was just quoting what the formal stance of the Fed was, and it’s on record saying that no, they don’t look at stock markets but they look at financial conditions. To the extent that oil, yes, is a significant  financial condition for the real economy, even more so I think than the stock market, then yeah, they would have to take that into consideration.

Why would they start to — to eliminate language that talked about an extensive period of time when, you know, the US itself is not deflating but disinflating? And certainly not moving in the direction of its 2 percent. So I think, yes, it moves towards a dovish stance relative to what the market expected a few days ago.

KEENE: If you’re just joining us, Bloomberg Radio worldwide, Bill Gross joins us from Janus. Bill, when I look at the liquidity issues, what I hear from every pro is it’s not the same depth of market that we saw back then or two back thens or three back thens. As you’re in the turret at a small platform like Janus, are you frustrated that there’s a new kind of lack of liquidity in your various markets?

BILL GROSS: Well it’s obviously an opportune situation at Janus. Running $2.5 billion is different than running $2 trillion, so it makes it more flexible for me. But you’re right in terms of the liquidity. Everybody’s trying to squeeze through a very small door. On the corporate side for instance, trade are basically three by three or four by four, and that’s millions as opposed to billions.

And it’s remarkable that many of the corporations like Alibaba and Amazon and so on were able to do what they did a few weeks ago in terms of volume. But there is very little liquidity certainly in high yield, very little liquidity in the corporate market, investment grade market .And that I think transfers over to stocks and perhaps even oil, although I’m not an expert on the liquidity of that market.

KEENE: Well I understand that. I thank you for — we have too many oil experts right now getting slaughtered. Gary Shilling was on, of course with a life-long deflationary, disinflationary call. 2.12 percent full faith and credit. Do you have any probabilistic call that we could drive through 2 percent?

BILL GROSS: Well to me, and I’ve had this template for —

KEENE: Yeah, I understand.

BILL GROSS: — several quarters now, the new — I call it the new natural. PIMCO calls it the new neutral.

KEENE: We’ve changed it, have we?

BILL GROSS: Yeah.

KEENE: That’s a Surveillance breaksclusive (inaudible). Continue, Bill.

BILL GROSS: Well actually Fed governors do talk about natural interest rates as opposed to neutral ones, so it’s a better one. In any case, it depends ultimately on where that real Fed funds rate rests going forward and — and of course when it starts to rise. It’s, to my way of thinking, a highly levered world and a still highly levered US economy that’s dependent upon cheap financing and a very sharp yield curve.

You can’t do what Volcker did back in 1979 and flatten and invert the curve because the leverage is significantly more, and so the Fed has to stay very, very positively sloped. And what that means for the natural rate of interest, it’s certainly not what John Taylor suggested in terms of a 2 percent real. I think it’s closer to 0 perent real and maybe even lower, which is close to where we are now.

KEENE: I — I look, Bill, at the ballet of this and the times that we’ve been through it. And I go back to a concept from Dr. El-Erian, which is degrees of freedom. Do you look at the sphere that you work in and then the tactical realities of your bond portfolio and say, I don’t have the wiggle room. I don’t have the degrees of freedom that I used to have.

BILL GROSS: Well the degrees of freedom at Janus, being much smaller, are really suggested by the — the level of spreads and — and the level of prices. To the extent that you have artificial prices, then yeah, the wiggle room is less. There’s more risk relative to the return, and so levered players, whether they’re in hedge funds or unconstrained types of funds or even in total — total return types of funds, the — the ability and the willingness I suppose to take leverage is limited and the wiggle room is limited because the return is simply not there. And in order to get a 5, 6, 7 percent return, you’ve got to lever two, three, four times, and that’s uncomfortable on a day like today.

KEENE: Bill, thank you so much for joining us. One more question. We hope to get you on on jobs day again as you’ve been such a supporter of the program. I thought Mary Childs did a fabulous job of capturing the — the drama and the moment of what happened in Newport Beach. As you wake up every morning and you look back on the good people you worked at at PIMCO, what is the — the memory of it? What is the takeaway that you have as you move on to something new from going back years ago when you opened up envelopes in the mail room?

BILL GROSS: We were talking about that last night. We were having a happy birthday for — a 90th birthday for Harry Bubb, who helped to start PIMCO, and we reminisced with a lot of PIMCO people. And so those are good times. And like Mary said at the beginning of her article, when I left I wrote notes and I said take good care of her. And I think it’s in good hands, and I think Janus is in good hands too. And so everything is looking forward.

KEENE: Bill Gross, thank you so much. Greatly appreciate it. He is with Janus Capital.