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Janice Capital fund manager Bill gross is out with his latest investor newsletter in which he Compares fed share Janet Yellen to Goldilocks and Wars investors to be weary of the Trump Mirage our Eric Shater joins us now with more Eric Scarlet thank you very much Bill gross good to see you manager of the Janice Global unconstrained bond fund Bill the enthusiasm that drove the DOW Industrials to record close 12 times in a row last month and 2,115 just last week has been describe two ways right animal spirits on the one hand sugar high on the other which camper you in well I think uh Sugar High Eric you know Animal Spirits obviously in the market not necessarily animal spirits in the economy as we know the economy is only growing at 1 and a half to 2% at the moment with hopes for 3 to 4% but I I think future market gains in stocks and higher interest rates are dependent on whether by you know the old New Normal phrase originated in 2009 as being replaced by what I would call the old usual a a period of three decades pre- Layman Brothers uh 3 to 4% real growth and significantly higher inflation than in recent years and you know the old usual benefited from globalization and strong labor growth and expanding credit that was lightly levered in comparison to today we had productivity at 3% U much higher levels of investment and it's hard for me to believe in terms of the stock market uh that the US and indeed the global economy can return to those housan days anytime soon are you expecting a selloff we've already seen in the past week something of a selloff or the beginnings of a selloff on high yield oh I don't think so you you know it's hard to step in front of a of a moving freight train especially if it's moving at 100 miles an hour uh so it's best to avoid it and it's hard to to to call for a significant decline in stocks based upon continued expectations of uh you know brighter days ahead I I do think deregulation I do think corporate uh tax cuts I do think you know perhaps uh infrastructure spending will improve economic growth to uh perhaps two to two and a half% but the market expects three to four and that's what I think caps it in terms of those expectations um corporate profits don't grow very much in a 1 to 2% real GDP environment and I I think were in those uh periods of time Bill how much headline risk is there in Washington right now oh there's a lot uh you know not just in Washington but globally uh headline risk in terms of uh you know Health Care headline risk in terms of the tax plan the deficit spending how large will they be no one really knows um there's headline spending of course globally in in terms of hotpots such as uh North Korea and uh EUR land in terms of Elections Italy and uh France and so you know lots of headline risk that investors up until this point have avoided because just simply the uh momentum uh the expectation for 3 to 4% growth uh consistently going forward without any problems I I think has carried us to this point but I would be very careful from this point not necessarily expecting a 10% decline but expecting you know very low returns from uh this point forward how much headline risk is there in president Trump's Twitter account I don't know you know investors have come to expect uh you very strange twitters out of uh president Trump so not necessarily out of their Twitter account I I would think headline risk would come out of uh you know Paul Ryan these days in terms of whether he can put together a a health care package whether he can put together you know a plan for uh a semblance of of budget balance which I don't think he can and so I think it comes out of uh Congress as opposed to Trump we're we're expecting you know strange twitters from Trump anytime soon Bill back in January you called a 2.6% yield on the 10-year treasury an inflection point and as you know and as we've been discussing today we're we're back there once again for the first time the middle since the middle of December you've raised two possibilities that this is either the beginning of the bond bear Market or in your terms the kindness of quantitative EAS and keeps yields in check which is it well I don't know uh you know I think it's it's important to observe and then decide if that 2.6% level is broken significantly by five or 10 basis points you you know there's a long-term downtrend line from 1984 on the 10year you know starting perhaps as high as um oh 11 12% it's it's gone down on average by about 30 basis points a year and you know is that technical mumbo jumbo not really what it really has meant is that the economy has needed uh 10year rates to decline by 30 or 40 basis points a year in order to you know prop up uh investment markets and to prop up economic growth at this point the the decision going forward is whether 2.6 requires you know another 30 or 40 basis point decline in order to keep the market and to keep the economy going and if we break 2.6 on the upside then you know it it would suggest yes a return of some extent to the old usual as opposed to The New Normal in other words inflation of 2% and real real growth of 1 to 2% and therefore a 10-year approaching three as opposed to declining from 26 to 23 into two Bill Janet yellen's words quote unquote would likely be appropriate are still ringing in my ears can you recall another time in your career or perhaps even stretching back further than that when a Fed chairman was that explic licit about a coming rate move no uh you know perhaps during the days in which uh lower interest rates were required and quickly you know during the banki period perhaps in terms of lowering interest rates but not in terms of raising interest rates I I think it's a slam dunk there's no doubt that uh the fed's going to raise interest rates it's in the market and uh stocks are doing well which is a significant indicator for them um so I think they'll raise interest rates what they do going forward is depend upon economic growth and and yes the strength of the dollar they don't want the dollar to strengthen too much or else you know it presents problems for the global economy well at the moment Futures tell us that the FED will raise rates again in June and again in December what do you expect well that's the key so uh two uh more interest rate hikes after the this one that would be three for the year you know and it approaches 2% I I think the FED believes that the new interest rate in nominal terms is around 2% Eric and that suggests that if inflation is 2% that real interest rates real short-term interest rates should be close to zero and in its neutral State and certainly the economy today inflation today you know is perhaps a little above neutral in terms of its heat and so yeah I I think uh three interest rate hikes during this particular year is what we should expect absence some significant uh Global event that we we've talked about economic growth is key as you say the level of the dollar also important what about crude crude is in a freeall the past couple of days how closely are you paying attention to the oil Market well I am uh you know crude is an indicator of um the the current state of the economy to a certain extent it's also an indicator of uh UND Supply and over Supply uh we have a problem in terms of adjusting over the last year or two uh to the situation in the United States where where uh fracking uh can oversupply or under Supply based upon a marginal price of oil so I'm not that worried about it um you know actually a lower oil price to my way of thinking would you know stimulate consumer spending and so um I'm thinking about it more in terms of inflation because for more than two years after uh you know that Thanksgiving Day decision by the Saudis the FED cited uh earlier declines in Energy prices as a reason inflation either wasn't running at 2% or for a good time until September of last year a reason not to raise interest rates yeah I can go with that you know I don't want to argue with your premise um but I would say that oil hasn't declined that much in order to produce you know some type of deflationary momentum obviously the fed or any Central Bank is concerned about deflation to the extent that uh we have oil where it is to me that's not a deflationary indicator if it went another five bucks down you know perhaps we have problems you say in your monthly investment Outlook which is uh published today on janice.com anybody who hasn't read it ought to go and read it as soon as we're finished here uh and you say quote Bill our highly levered Financial system is like a truckload of nitroglycerin on a bumpy road one mistake can set off a credit implosion where holders of stocks High bonds and yes subprime mortgages all run to the bank are you ringing the alarm Bell or just putting people on notice well I think putting people on notice you know uh calling Armageddon uh bringing alarm belt is really hard uh you know it's easy to see the smoke it's not necessarily uh easy to see the the flames and uh what I talked about in in the investment Outlook was the creation of credit or the growth of credit from the early 70s at $1 trillion to perhaps 65 trillion today in the US uh we know it's grown tremendously in uh countries like China and Brazil and other countries and so the the growth of credit can be uh very danger is is if uh interest rates are not accommodated for it is that to say as well there's not enough capital in the banking system to absorb that kind of shock yeah I think so and and there's not enough Capital uh to my way of thinking uh in in terms of the fed's balance sheet you know they have $4 trillion worth of us treasuries we have $65 trillion worth of credit what does that imply implies perhaps a six to 7% Equity uh you know in the in the credit system and is that enough uh you know compared to a bank which requires N9 or 10 or 11% equity um I I think it's at the margin and so what does that mean what does that mean to the markets it means that the FED to my way think it can never um uh practically delever its balance sheet they can't sell their treasuries because that would delever the system in the process what about the banking system itself the commercial banking system Jamie Diamond the JP Morgan CEO said today in an interview with Bloomberg television that he hopes the Trump Administration will give American Banks relief on Capital standards based on what you've just said is that such a good idea well you know I I respect Jamie Diamond he's done a great job but uh you know to to be asking for uh relief in in in terms of uh the amount of equity a bank is supposed to hold after only you know six or seven years uh following a a crisis that created the Great Recession and perhaps the potential for another Great Depression I think a that is a little bit much let's let's get some Equity into the banks let's keep it it there let's make it grow uh because that more than anything is the regulatory measure which makes Banks safe bill I want to thank you very much great seeing you as always that is Bill growth of Janice Capital he is the manager of the Janice Global unconstrained Bond fun
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