Bill Gross of Janus Capital spoke with Bloomberg’s Tom Keene about the state of the global economy.

Gross said China’s stock markets are likely to drop 5-6% on Friday: “Based upon the ETF in the United States, China is predicted to be down 5 percent or 6 percent…But China is an artificial market.  All global markets are artificially based.  And to the extent that we have a catharsis, I think, depends upon central banks basically giving up in terms of what they do.  I don’t think that’s going to happen.”

When asked whether the market turmoil will cause Chair Yellen to say the rate hike is done, Gross said: “I don’t think she’ll say that. They’ve been on this track of raising interest rates for so long that she’s not going to come out with one or done. She may come out there — someone may come out — Fischer perhaps — will come out and acknowledge the fact that global markets and that global financial conditions are an important consideration in terms of future policy. But I don’t think they’re going to divulge that they are not raising interest rates for times as Stan Fischer said a few days ago.”
Gross said Central Banks have replaced homeowners as too levered: “Home owners are being replaced by central banks and central banks are writing endless checks of trillions of dollars and supporting stock markets and ultimately you can make the argument that they don’t run out of cash.”

Bill Gross: China Stocks Will Drop 5-6% Friday

Bill Gross: Central Banks Replaced Homeowners as Too Levered

Bill Gross: China Stocks Will Probably Drop 5%-6% Friday

**CREDIT: Bloomberg Television**

TOM KEENE:  Bill, good morning to you, thrilled to speak to you tomorrow on the jobs report.  Let’s talk about the more urgent matters of this market.

First of all, Bill, China is the topic.

Is this about China and their stock market?

Or is there more going on on this January afternoon?

Bill Gross:  Yes, it is about China specifically, Tom.  But there’s a lot more going on and we’ve talked about it in past months.

The global economy is still highly levered and central banks are artificially elevating prices and keeping interest rates low.

Let me tell you this story from last night.  My wife and I saw “The Big Short.”  And afterwards, she said she understood exactly what went on in terms of subprimes and homeowners not being able to pay their bills and how it all collapsed.

And I said, “Well, there is a similarity to today’s market in that basically the same thing is going on except for homeowners are being replaced by central banks.”

And central banks are writing endless checks of trillions of dollars and supporting stock markets and ultimately you can make the argument that they don’t run out of cash.  And I guess you could —

(CROSSTALK)

Bill Gross:  — produces distortions in the global economy that we’re seeing now with oil and other commodity prices.

KEENE:  Yes, David Guro (ph) mentioning the Dow down 404 points, David.  Bill Gross as usual driving the market lower.

Bill, in that movie, there’s a scene at the end where the gentleman is on the deck overlooking Central Park and he has got to make the momentous decision to get in and out of the market.  What are you actually doing within the first three or four trading days of this January?

Bill Gross:  Well, we are trying to keep and to buy safe investments, Tom.  Basically to my way of thinking, because there’s so much volatility, what you want to do is focus on Treasuries and, yes, we know Treasuries are doing well and have done well over the past few days and the past few weeks.

But you want to focus individually, I think, on some closed-in funds that are Treasury-related; the Janus Fund owns a stock called BBN, which is BlackRock Built America (ph), which is half-Treasury guaranteed and yields about 7.5 percent.  So we’re doing things that reserve capital and still provide some type of return for shareholders.

KEENE:  But Bill, this morning, Steve Major HSBC with us outlier call of a dramatically lower yield on  the 10-year, reaffirmed that call and said it may happen sooner than he even thought.

Are you positioned for full faith and credit debt, whether it’s Germany, whether it’s the United States, to drive lower, given a global slowdown?

Bill Gross:  Yes, I’d say we’re basically flat there, Tom.  We have benefited over the past several weeks in terms of being long duration.  We have had some optionality, so to speak, coming to the market over the past few days and so now we are basically flat duration.

So if tonight, there’s a big surprise in terms of the CNY and the Chinese market and Treasuries rally, we don’t benefit overnight.  But I would think that Treasuries are a good investment for the next several weeks while we wait out this particular episode.

KEENE:  One think I’ve noticed, Bill, was the correlations that have become a new year in January particularly seeing as Julie Heine (ph) had mentioned, copper dropping down today and gold moving higher.  There seems to be a new correlate of mix in the market.

Do you agree with that assessment?

Bill Gross:  Yes, I think so.  And there’s a specific correlation — many people don’t know it — to oil and to commodities, but oil specifically.  In terms of foreign currencies, many of the emerging market countries, some of which aren’t really oil exporters, Mexico being one, you know, they’re rather neutral in that regard, are affected by the price of oil as it goes down and so these correlations reflect, I think, Tom, an interlinking basically of global financial markets and positions that — of financiers and investment managers and hedge fund managers have on in terms of relatively levered bets.

And when one goes one way, basically they have to hedge in another direction and that’s why you see such volatility in commodities, oil, currencies and in stock prices as hedge managers are basically trying to get even in terms of their books.

It’s a highly levered world and when something gets out of whack like the Chinese currency or in terms of the oil price, then you see these movements everywhere.

KEENE:  Within a highly levered world, do you see any sense of an immediate catharsis to clear markets?

Or is the theme for early 2016 that we slog along with this rolling pain in search of an abrupt move to clear markets?

Bill Gross:  Well, China announced this morning that they are going to let markets clear.  They haven’t —

(CROSSTALK)

KEENE:  What will we see tomorrow morning?

Bill, what will we see out of Australia and into China tomorrow?

They’re going to go longer than seven or 12 minutes.

What would you predict we will observe?

Bill Gross:  Well, based upon the ETF in the United States, China is predicted to be down 5 percent or 6 percent.  It depends upon whether the Chinese are good to their word in terms of letting markets clear.  They haven’t.  And to the extent that it goes down more than 5 percent or 6 percent, who knows?

But

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