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Bill Gross with Janus Henderson. He manages a small portfolio there, as he has done for decades in the bond market. He is also very interested in our economy and the future of the country. Bill Gross, it's great to have you with us today. I must immediately move on to the topic of choosing a Fed chair.
Will Chairman Powell be effective during a crisis? Well, maybe, but he definitely had no experience working in a crisis . I mean, he's been working there for the last 5 years. His experience is mostly in direct investments, he is more of a salesman than an investor. I'm not sure he knows about the inner workings of the financial system.
I would vote for Paul McCully, a former PIMCO employee. It was he who brought us the term " Minsk moment". It was he who actually saved PIMCO . He would have done better during the Lehman crisis, but Powell reminds me of J. William Miller, the last chairman of the real economy era before Volcker, who didn't last long because he didn't know much.
Of course, there is no certainty that Powell will be elected, but these are probably the most likely assumptions. Friends, with that in mind, Bill Gross, we should pay attention to John Taylor and Janet Yellen. If you look at these two respected economists, how much do their economic views overlap? To what extent do Chairwoman Yellen and Professor Taylor's views on economic issues coincide ?
I think, to a large extent. I think both are oriented towards models, perhaps different ones. We know about the Taylor rule, which deals with real interest rates depending on unemployment and what they call the adjusted NAIRU. Yellen, in fact, also focused on models. She focused on a few models during her term, so I believe they are both like that.
They are driven by models, and I would argue that such Fed chairs or members are not what we need right now. We need a subjective type of Fed chairman who can analyze structural factors like demographics, debt, deleveraging, and technology for their impact on inflation in the future, not a Taylor model based on the past 20-25 years.
Very good. We'll move on to discussing debt and deficits soon with Bill Gross of Janus. Anderson, Bill, I want to show you the chart that became famous because of your prediction of a decline from 2.6% to 2.40%, which Scarlett Fu mentioned earlier. We have already reached this mark. The lower yellow line is far from where we were in 2007, in the red circle.
Bill Gross, what are you doing in your portfolio right now to adapt and adjust to this new level of 10- year yields? Well, remember, last month I said that that 240-45 level had to be broken, probably to mark a structural change in our long-term " bull" market. He has not yet been overcome. But, you know, I would just say this: If the Fed is serious about two or three rate hikes in the future, that puts us at 2% on the Fed rate, and with 10-year Treasuries at 230 or 235, you know, there's not a lot of value there.
Why would an investor take on seven or eight years of duration risk, long-term maturity risk, compared to short-term securities at 2%? So we are getting to a point where the potential for capital gains in the bond market is small, and ultimately, as I suggested, if the 240-245 level is broken, there may be some capital losses.
If there are capital losses, which I believe Bill Gross means yields are rising and prices are falling, will we be able to get through this with stability, or will it lead to significant volatility and the associated emotions? I think we will get through this with stability, and the reason is that quantitative easing is still being used by the major central banks in Europe, the eurozone, and Japan.
There are still trillions of dollars coming into these markets , and, you know, if the German 10-year is at 35 basis points, that's still attractive compared to U.S. Treasuries. So I believe these markets will continue to dominate the US Treasury bond market even if the 240-45 level is broken. So it will probably be gradual.
Bill, I think we'll see something about tax reform tomorrow. You wrote about the fiscal condition of the country, our financial obligations to future generations. And what's so striking to me, Bill, and you and I remember this in 1986, is the level of debt at that time. Show the schedule today, if possible.
So, here's the national debt in a nutshell, and all you need to know: Ronald Reagan is in the green circle, and President Trump is in the red circle. Can we do tax reform, Bill, given our total debt and our annual deficits? Well, actually, I do n't think so, but, you know, what's a trillion dollars here or there, I guess.
Let me point out, Tom, although this takes more time than you have, but in terms of the U.S. liabilities, the current cost of Social Security, Medicare, and Medicaid is probably three to four times the nearly $20 trillion in debt that you know the U.S. has right now . And ultimately, you know, all these kinds of liabilities are going to come back to haunt us, and another trillion or a trillion and a half -- that's really not a positive for the markets or the economy.
You're talking, Bill, about the research by Lawrence Kotlikoff of Boston University. This is really important, friends. The total amount of our commitments is much greater than what you usually hear in the media. If we get a rise in interest rates, can we be calm if the 10- year bond returns to 2.8%?
Will 10- year bonds return to 3%? Is this new higher income really starting to affect our financial system? Yes, I think so, and, you know, a lot of analysts, Tom, would say it's not until 3.5% or 4% of the 10-year Treasury yield . I think the US economy, as we just talked about, has more leverage than before.
So the 50 basis point move in the 10-year Treasury , which you know has n't been much of a problem for a long time , now is, because not only the Treasury, but also corporations and individuals have much higher leverage, and a 30- year mortgage at, say, 4% versus 3.5%, makes a difference from a cash flow and present value perspective .
So, I think 50 basis points won't lead to a recession, but I think it will definitely stop the economy from growing. Interesting. One more question, Mr. Gross , if I may. You mentioned future Deputy Chairman Paul McCully when talking about the " Minski moment." It would be interesting to see Mr. McCully as deputy chairman.
But Bill, when we look at the Minsky moment, it seems like an endogenous shock that comes out of nowhere. Are we close to the Minsky moment at the end of 2017? No, I don't think so. You know, Minsky moments come when , you know, security, as opposed to danger, is built into market stability, as opposed to instability.
And I do n't think we're there, at least in most of the world, but in China, which we don't know much about, you know, it certainly has high leverage and the potential for a Minsky moment. Although again, you know, it's very controlled from a capital markets perspective, but leverage ultimately, Tom, leads to Minsky moments.
It's only a matter of time. I don't think that will happen now. Bill Gross, thank you for joining us after today's Fed meeting. William Gross works at Janus Henderson.
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