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Wall Street widely expects the central bank to raise its Benchmark interest rate but investors will also be on the lookout for any clues into the fed's outlook for the remainder of the year and although the US economy appears strong my next guest says investors they need to exercise some caution before jumping head first into the financial markets joining me right now is legendary investor and Janice Capital portfolio manager Bill gross Bill good to have you here good to see you hey so we got the market thank you Trish good to be here it keeps moving up but this is getting you worried right now you're worried about these Val valuation levels tell us why well I am I I I think all markets all asset markets whether it's low bond yields and high bond prices or high stock prices and high PE ratios you know are all being influenced by artificial money coming from central banks um you know up uh for the last four years Trish uh central banks have put into the markets 8 trillion dollar worth of money through their quantitative deving policies and they've kept interest rates close to zero and so there there's no doubt that prices are artificial the only question is you know will it lead to real economic growth and uh if not when does the uh Musical Chairs game end I I hear you on this but yet at the same time you've got a Fed that has backed off some of that aggressive money printing uh and they're in an interest rate Rising environment right now bill so are you telling me that the hangover effect is still there enough to cause you real concern hangover I mean from all the money I mean yeah the the ECB and the bank of Japan are are both uh you know buying bonds to the extent of 60 to 65 billion dollar a month that's over a trillion dollars of a year where does that money go yes it goes into the bond market but then it flows out into risk markets because bonds uh that they're buying are close to zero or negative interest rates and so it's a it's an artificial game to the extent that central banks at some point uh in my opinion certainly uh have to stop uh buying bonds and renormalize the economy so let me just ask you though how that gets you to real concern and perhaps I'm saying real concern you should Define the concern for me are you worried how worried are you about current valuations in the equity markets a and frankly the fixed income Market as well well I'm worried that they're Toppy and plateauing uh as opposed to about to sink uh you know we're not headed in my opinion for a Black Swan event like lemman but you know to this no systemic issue in your view and apolog apologies for interrupting but I just want to clarify that is there a systemic problem right now not not a systemic a finance-based problem there are secular considerations of Aging demographics Boomers aging that uh you know have less less demand for goods and services there are problems with you know relatively high debt levels on a global basis but no systemic problem that I see at the moment uh unless we have some type of financial catastrophe uh okay and and the chances of that I mean you know I only ask that because you know Bill you and I have known each other a long time and I feel like you you can sense it right you can just feel it in the marketplace before there's a real systemic problem and there's a difference obviously between the systemic problem Alla 2008 and Leman brothers and perhaps just a runup in valuations similar to what we saw with you know NASDAQ in 2000 so when you look at the world that we now live in would you tell investors be cautious because you're worried about something like 2000 that you know things just get too high and people say okay enough no I'd say be be cautious because um the expectations of of what we've seen over the past 12 months or certainly since Trump was elected you know probably are not going to continue and so if you're expecting double digit types of returns or even six seven or 8% types of returns I I think prices are at a level where we're more apt to see 3 to 4% type of returns so lower expectations and perhaps sa what's the reason for that you in fact need money is that because are you hesitant as to you know whether or not tax reform is going to get through whether repeal and replace is going to happen Etc well I think that's part of it I I I think in in addition uh you know money uh credit is Flowing basically into financial markets money is making money uh as we've seen in the past uh 10 20 30 capitalism itself depends upon money flowing into the real economy and I think you know for a number of years now money has simply bought stocks as opposed to bought investment in the real economy and so we have a 2% growth rate as opposed to a three or a four Bill how does that change I mean if the FED can't do anything anything else right and other central banks are just effectively propping things up artificially in your view H how do we actually start to generate some real growth so we can justify valuations such as we see well uh you know to a certain extent monetary policy has helped uh we're looking at fiscal policy in terms of tax cuts and deregulation you know I wonder uh how much that will boost real economic growth you know I I think investors basically uh and politicians and citizens on a global basis have to get used to the fact that productivity which is the essence of growth and the essence of real earnings growth you know basically is much lower than what it was and and will continue to be simply because secular forces are keeping a lid on our ability to grow despite fiscal and monetary polies that are very stimulative these secular forces but I mean is it is it sort of a a systemic shift as well in other words our economy is changing so drastically so quickly technolog is playing such a bigger role frankly you know displacing a lot of people in terms of their jobs we also live in a in a global economy right Bill where a lot of manufacturing has shifted overseas and I it's like the Genies out of the bottle I mean h how do you stop it at this point these are the changes that we all need to confront and sort of get used to yeah I think there are TR and they're not happening quickly but they're happening gradually so that many investors can't really notice them I'm talking about demographics where the world is basically aging I'm talking about yes uh uh regulatory policies that have gone uh perhaps too far I'm talking about um you know situations and technology that you mentioned where robots are displacing people and and those are hard forces to stop and I think I I see them continuing and I see real economic growth therefore lower than what it was in the past that's it's scary when you think about that I mean for all our kids' future we want them to have the best opportunity in the world and yet there's all these things happening that really suggest a kind of stagnant environment um but back to your initial point I mean tax policy uh things that we can do out of Washington hopefully to you know less regulation to try and generate things that might uh that might actually make the difference bill before I let you go I you know I always like to get a sense from you on on where you think yields are heading and we've got the the FED of course tomorrow do you anticipate that they're going to continue on this interest rate Rising path and if so what does it mean for treasuries yes I think tomorrow 25 basis points but I I would wonder uh after that uh that means the balance of 2017 perhaps not and maybe 25 basis points in 2018 that's what the market expects they basically expect not only the US fed but other central banks to just raise interest rates by very small increments and so yes that that keeps a lid basically on volatility that facilitates stock prices but back to my original theme I I think we simply plateaued and we move up gradually as opposed to move up significantly all right well you know gradual might be better for the markets to digest it than gradually Bill thank you sir always a pleasure to see you thank you Trish
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