The bond market
Interview: Pimco---Bill Gross--Chief Investment Officer
Interview: Pimco---Paul Mcculley---Managing Director
>> we’re back. brian sullivan talked, of course, with pimco’s bill gross and paul mcculley. together, they help manage about $400 billion in bonds, including the world’s single largest bond fund. in part two of his interview, brian asked bill gross if the bond market has already accounted for the federal reserve’s next interest rate move.
>> how much do you think has been baked in right now and do you think that too much has been baked in, i guess, of the fed, especially by the financial services companies?
>> two good questions. we think that the market is anticipating and actually pimco correctly agrees―not necessarily correctly―but agrees with that anticipation. that funds 12 months from now will be in the 2.5 -- perhaps close to 3% range, which would be 150 to 200-basis-point hike. the critical question, brian, is just what that neutral fed funds level will be in this type of economy, in a levered economy with lots of debt and serious imbalances in currency and debt levels. so that’s something at pimco that we’ve talked about the last six to 12 months. we sense that because the u.s. and the global economy is highly levered, that this time around it won’t be possible for the fed to raise rates as much as they have. typically, 300 basis points or so has been the cyclical response on the part of this central bank to a tightening. we sense this time around it’s probably more like 200 but we’ll have to see as we get closer.
>> 2% in your view is the most the fed can raise rates safely over the next two years or would that still be a risky move, 200 basis points?
>> there’s even somewhat of a risk in that. greenspan, i think is correct from the standpoint that he must pursue a gradual type of move upward. he looks at the japanese example of the past 10 years in which they raised rates at too high of a level. that may be one of the reasons why they have been mired in recession most of that time. and of course the example of the 1930’s in terms of a deflationary liquidity trap so greenspan knows these are problems. we may not have a deflationary problem now as opposed to six to 12 months ago but nonetheless, one could be precipitated if short-term interest rates, namely real interest rates, were raised too high.
>> you’ve mentioned the word “imbalance” a couple of times already. in your view, what is the greatest imbalance out there globally right now on any basis, currencies, bonds, debt, what have you?
>> i think probably the housing market , not just in the united states, but in the u.k. and australia. there are a number of bubbles, currency bubbles, trade deficit imbalances, commodity bubbles in certain areas. but the housing market has been a wealth generator in the united states, in the u.k. and australia to the extent that those markets are based upon leverage and cheap financing, which they have been, when you raise that cost of financing, then you potentially create problems. that’s one of the reasons why greenspan has to walk the wire delicately here. the american homeowner is sensitive to commodities and votes with their pocket book to a certain extent and you have mortgage rates, i think are critical going forward. the housing bubble --
>> is it a housing bubble?
>> it’s a mini bubble. certainly, the extremes in terms of valuation are perhaps 10% to 15% and that doesn’t speak to a nasdaq 5,000 level but it’s probably more extreme than we’ve seen over the past 20 to 30 years or perhaps in the history, recent history, for the past 50 to 100 years in the united states. so to that extent, it’s overextended.
>> that, of course, the chief investment officer at pimco, bill gross, and managing director, paul mcculley. hundreds of goldman sachs group employees may reap more than $4.25 billion this month by selling shares in the new york firm. since the 1999 initial stock sale, goldman has limited how often and how many shares insiders can sell and is now lifting the restrictions for a month to let 261 members of that exclusive club sell a total of 46 million shares, working out to $16 million for each employee. goldman’s i.p.o. created billions of dollars in paper wealth for the firm’s partners and employees. changes at interpublic group, highering insurance executive michael roth to replace david bell as its chairman, plus it named a new chief financial officer. this after interpublic lost money for five straight quarters quarters. the company is trying to restore profitability by shedding money-losing businesses and cutting expenses. the company’s accounting is being investigated by the securities and exchange commission. for the record, roth will be interpublic’s third chairman since 2001. up next, our weekly focus on sports and money, we’ll count the gains from the u.s. open and counting the cost of defeat on the soccer field.
