PIMCO founder and co-CIO Bill Gross spoke with Bloomberg Television’s Tom Keene today about the launch of the Total Return ETF, investment strategy and the ISDA’s decision on Greek debt.
Gross said that the ETF is “really a mom-and-pop type of thing from my standpoint.” He also said that the ISDA has yet to make a final call on Greek default-swaps and that “it’s not a slam dunk…we expect the next few days, perhaps next few weeks, to ultimately send the ISDA committee back for one final vote.”
Transcript after jump
Gross on the reason for launching an ETF:
“For a long time, I wanted to bring the PIMCO Total Return concept to ETF’s face. My mother way back when wanted to invest $5,000-10,000 in the Total Return Fund, but could not do it because the retail broker could not handle that small a size. This is really a mom and pop type of thing from my standpoint…Small investors can get in and that is the real reason for offering this.”
“It is important to point out that some of these other ETFs, not to discount the competition, they index relative to the market. The yield is about 2% these days. That is pretty low. There is no guarantee, but a 3.5% return as opposed to a 2% return would be a welcome addition. That is why we think our fund is an advantage.”
On whether the 7-year yield will go under 1% or whether there will be further financial repression:
“I think we’re going to see that to the extent of the repression, I think that’s the critical element…For our way of thinking, we are going to see that for a long, long time. It does not mean that the Fed has to stay at 25 basis points forever, but it does mean that the saver will be restricted or repressed for 5-10-15 years.”
On whether PIMCO advised on the ISDA agreement:
“We are a participant in the committee…the ISDA ruling is not final because the PSI and the ultimate result of the exchange between private market holders and EU authorities are not yet known…We expect the next few days to ultimately bring the committee back for one final vote. It is not a slam dunk.”
“It seems to us that there has to be a final result in terms of the exchange, and at that point, things will happen from the standpoint of the European Union and things will happen from the standpoint of Greece that are not known yet. At that point, I would expect the committee to go back and make one final judgment based upon those ultimate results.”
On what is wrong with a triggering event:
“We don’t see anything wrong with it. We don’t have an axe here, we’re not end Greece one way or another. It seems to me that if you are buying insurance, for instance, if it is flood insurance, you do not want the insurance company at the end to basically say that the damage was due to rain as opposed to a flood. These technical legal problems really denigrate the entire market. Ultimately will affect the market for CDS if one side is aggrieved as opposed to the other.”
On whether the days of saying “I want to make 12%” are gone:
“For sure, in the investment-grade bond market. We’ve had a 30-year run from 1981 when Treasuries started at 14.5% on the 30-Year down to 3% or above 3% now. That has produced what we called and labeled in our fund Total Return. That being yield plus capital appreciation. When you get down to the bottom in terms of yield, then the price gains and the capital gain additions that have, to a certain extent, not falsely acclimated bond investors but provided a little bit of an illusion for the past 30 years. It starts to reverse so you want to become defensive as opposed to offensive. You want to protect capital as opposed to expand it.”
On whether investors should focus on nominal or real yields:
“I would say real. It is hard to focus on real returns because they are not daily disseminated, but it is the real return that acts as a discounter for other asset prices. To suggest that the 5 year real interest rate, the tip rate is -1.25% says very little for bonds, but it also says something for stocks. In terms of a dividend discount model, when you discount at a real level, which is what a stock presents, it begins to tell the same story for equities, that all assets have been repriced and perhaps mispriced based upon these extremely low real interest rates.”
On whether it’s a national blessing to look in the long run and expand the debt now:
“Well, it is a blessing in the short term. It is not a blessing in the long term. The Blackstone Group, the CBO and others have basically estimated that we don’t have a $15 trillion debt, but a $60-70 trillion debt when you include Medicare and Medicaid and Social Security. Ultimately, these entitlements have to be taken care of, as do in our opinion, the taxes on the other side.”
On whether PIMCO’s Total Return Fund is too big:
“I’m going to say what you expect me to say, I suppose. I would say that the size question should be answered by the results. Yes, three months in 2011, was that a result of PIMCO being too big? No, it was a result of my misjudging the Treasury market. Over a 2 to 3 to 5 to 10 year period of time in which we’ve been the biggest of the big in terms of bond market managers, our alpha, our 1.25% over the market has been pretty standard. I do not think we are too big.”
On when the mustache will return:
“Never. My wife has finally adjusted, so I do not think it is coming back. But thank you for the vote.”
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