Bill Gross of Janus Capital spoke with Bloomberg’s Tom Keene following today’s jobs report.
Gross said he sees the Fed raising interest rates in September by 25 basis points: “There have some pretty strong signals from Lockhart and others that September is the number. And I think it’s because of financial conditions. We know that inflation is close to zero. Yes, unemployment is steady, but low… Whether it’s 25 or 50 basis points– probably 25, I hope. 50 would scare the market.”
He added, the Fed is: “mentally committed to moving before year end.” And that a move in September is “not a unanimous opinion, but it’s a majority opinion at the moment.:
When asked about wage inflation, Gross said: “Well it’s in Brazil, unfortunately, but it’s not in the developed countries. And that, I think, is a significant break from normal thinking, from Taylor model thinking in which by this time you would have expected some wage growth.”
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Bill Gross: No Wage Inflation in Developed Countries
MATT MILLER: Bill Gross is speaking right now live with Tom Keene on Bloomberg Radio. I want to get to that and let us all listen in.
BILL GROSS: — that really wants to get off the time. And there have some pretty strong signals from Lockhart and others that September is the number. And I think it’s because of financial conditions. We know that inflation is close to zero. Yes, unemployment is steady, but low.
There are reasons why the Fed shouldn’t move, but I think the Fed will move because of financial conditions. And I’ll just briefly describe that. It’s a situation in which I think central banks are beginning to recognize that there are negatives to low interest rates, as opposed to positives. The BIS put out a report last month that basically said there are medium term negatives, and they include some big corporations. And they include destruction of business models —
TOM KEENE: Right.
BILL GROSS: — and a function in insurance land. And so I think they would simply want to get off zero and show the world that a move towards normalization as possible.
KEENE: Okay, Bill Gross with us. We welcome all of you on Bloomberg television worldwide as well with Mr. Gross. Bill, I want to move on from the jobs report just because it was sort of kind of like was boring today, except for one single issue, hourly earnings year-over-year and on 2.1 percent where the survey was for a higher number. There is just no wage inflation. Where is it?
BILL GROSS: Well it’s in Brazil, unfortunately, but it’s not in the developed countries. And that, I think, is a significant break from normal thinking, from Taylor model thinking in which by this time you would have expected some wage growth. And long ago, six, nine, 12 months ago one of the Fed governors it suggested that inflation would have to exceed three percent —
BILL GROSS: — in order to raise interest rates, because productivity had assumed one percent. It’s actually much lower, would provide that two percent inflation rate target. And we’re nowhere close to it, are we?
KEENE: My male from viewers and listeners agrees with what you say. There is no productivity. It’s sort of a soggy, nominal GDP. Does Bill Gross look for a policy prescription or an overt monetary prescription, as Olivier Blanchard has talked about, to jumpstart the inflation that Yellen and Carney don’t see?
BILL GROSS: Well the monetary prescription is difficult. It’s definitely a new neutral world. No one really knows what the proper policy reach would be. And I think over a longer term, or as the Fed would put it, over the intermediate term it should be close to two, as opposed to zero, and would raising Fed funds to two from close to zero increase wage inflation? That’s the argument.
It sounds counterintuitive. It’s almost a mirror type of image in terms of logic, but to think that by raising interest rates you could increase investment, you could increase bank loans and margins —
KEENE: Do you buy that idea?
BILL GROSS: — (INAUDIBLE) for financial companies, I think that’s a possibility.
KEENE: Well within that possibility and, folks, I think this is the debate that we’ve had for seven or eight years, and Bill Gross has nailed the length of this great distortion. Everyone wants to get out of the spiral that we’re in, Bill, including what we observed yesterday with the Bank of England. They came out with a more dovish statement. Do you really believe they will act in September after what we observed yesterday from the Bank of England?
BILL GROSS: Agree, Bank of England was dovish. They’re talking next year as opposed to this year.
BILL GROSS: And the markets assume their number two, but if number two is sufficiently behind September, well the market makers and investors wonder whether September is the date. I still think it is. I think they’re almost mentally committed to moving before year end, and whether it’s 25 or 50 basis points, —
BILL GROSS: — probably 25, I hope. 50 would scare the market. 25 then I think September is almost a — well it’s not a unanimous opinion, but it’s a majority opinion at the moment.
KEENE: What will happen to the markets when they act? I think the great mystery into this weekend among the sophisticates, Bill Gross, Jeff Gundlach, even academic economists like Ken Rogoff or Brad DeLong, there’s a knowledge base here you can work off of. Our audience can’t do that. What will be the market reaction when Janet Yellen and Stanley Fischer finally raise rates?
BILL GROSS: Well it spends on their language, and by how much, and what the forward curve assumes. And I’m looking at a Bloomberg page here.
KEENE: We like that.
BILL GROSS: Yes. You could punch it up by fwcm that gives the active forward curve for all countries, but in the U.S. in two years the Fed funds rate is assumed to be one and half percent. And so if we get there in 2017, there should be no market reaction whatsoever because it’s priced into the forward curve. And I know that’s a little bit complicated, but all it says is that basically investors expect funds to be at two, and one and half percent two years from now. And so anything less is positive for the bond market. And anything more is negative.
KEENE: Okay, fair. Are you managing for total return? Are you fighting just to keep principal and grab the coupon that you can get? How is Bill Gross managing day-to-day, given the back-and-forth that we see?
BILL GROSS: Well I think at the moment bond managing risk off. I mean that’s the dominant flavor of what I’m doing. I think for over half a century, I guess, investors have been used to finance-based capitalism, which has always provided a near guaranteed return —
BILL GROSS: — either by the central bank bailing them out, or simply the dynamic movement of capitalism. Now with interest rates so low, I think we have to question whether a positive carry produces positive returns going forward. And so if you sense a deflationary world, and around much of the globe in terms of commodity prices and currencies, the dramatic decline in emerging market currencies basically are a deflationary force for the United States, but if you sense that then it’s rather negative, —
BILL GROSS: — or certainly not a positive for equities and risk market.
KEENE: Okay. In the minute that we have here, Bill, and we’ll have you come back with further perspective, the idea of the deflationary impulse of a crash in Brazilian real, or what we see in Mexico, or what we see within deflation in euro, that has to filter over to Janet Yellen’s decision, doesn’t?
BILL GROSS: I hope so. They always stress that currency isn’t one of their considerations, or if so it’s number four on the list. I hope it becomes a consideration because when markets move so dramatically, and they have in emerging markets, and they have in developed markets 15, 20 percent over six months in many cases and more over a year’s period of time that’s a dramatic move. That’s almost a bubble in reverse. And it has significant implications for inflation in the U.S., and call it deflation, if you will, but we’re moving close to that point.
KEENE: We’re going to come back with Bill Gross. We’ll focus on this commodities —
ERIK SCHATZKER: That was Bill Gross of Janus Capital talking with Bloomberg’s Tom Keene, Bloomberg’s — Bloomberg Radio “Surveillance” underway right now.