October 2017: Bill Gross Reacts To The Latest Employment Report

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by: Janus Henderson Investors

By Bill Gross

Bill Gross reacts to the latest jobs report on Bloomberg Surveillance, featuring Tom Keene.

Tom Keene:

Now on Bloomberg Radio, Bloomberg Television Worldwide, William Gross joins us. He is with Janus Henderson, as we look at markets on the move. I know that on television, Jon Ferro and the team have been doing the market movement today, but yields higher, dollar stronger. Bill Gross, just simply, is it morning in America?

Bill Gross:

Well it's certainly morning, beginning to be morning here in Newport Beach. I think to the extent that your question implies wages are moving higher and that the average wage earner will make more and spend more, I think that's probably a positive. I note that the wages, Tom, were revised higher in terms of the last month. And so you had a 2.7% YOY, perhaps higher. So I think that's good for American workers.

Keene:

Within this is pretty good revisions. I mean, we revised up, I guess, pre-hurricane and that. How does Janus Henderson adapt and adjust to the hurricane distraction?

Gross:

Well you basically try and throw it out for a month in terms of the employment numbers, you know, were negative as you mentioned, in terms of the job growth, so you throw that out. You look at the wages and you wonder whether or not that to some extent was affected by distortions, but probably not as much. And so this is definitely a situation here at Janus with analysis of the Fed, looking at the Fed, a rate hike in December, you know, as long as financial markets are firm, and they certainly are, as long as wages begin to rise towards 3%, they certainly are, and I think the Fed is slam dunk in terms of raising rates in December, yes.

Keene:

You know, David West has given me great charts on Bloomberg Daybreak, on television, folks, of weaker Japanese Yen. You've really got a jump condition to a weaker Japanese Yen.

Let's take the word "transitory," Bill Gross, over from Yellen and inflation over to William Gross and you've got to run a bond portfolio. Will these higher yields be transitory; and is it lower for longer, wherever that band may be?

Gross:

Well, I think we are lower for longer, there's no doubt about that, and that is what the Fed and other central banks describe as the neutral real Fed funds rate supposedly now around zero with inflation somewhere around 1.5 or so. But I think it won't be transitory. I think if in fact we move above 2.40 instead of 2.60, remember I said that interest rates are falling by 20 bases once a year and that 2.60 was about a year ago. But if we move above 2.40 then I think there is a chance that this long-term bull market and bonds is broken and the bond investors should be on the defensive as opposed to the offensive.

Keene:

That's an exceptionally important statement you've heard there from Mr. Gross in the over a decade that we've spoken to him. Let's dive into that deeper now. I'm going to quote the four digits, 2.3841%. Bill, with that important statement of a regime change with a 2.40 print, how do we adapt and adjust? Let's start with the equity market correlated into bonds. Is the stock market linked into your 2.40% yield world?

Gross:

Well sure, they're all linked. And you know, the typical questions and responses to those types of questions we'll say, well we're okay on the stock market until we get to 3% on the ten-year or 4% on the ten-year. I think we're inexorably linked on a much shorter-term basis. It's not to say that five basis points on the ten-year will mean a hundred negative points on the Dow. But those things are connected. It's all connected. We said last night, an article from The Economist, in terms of the overvaluation of all assets, to my way of thinking, is true.

The low interest rates everywhere, and they're negative in many parts of the world still, basically have distorted prices in terms of equity, in terms of commercial real estate, in terms of spreads on how yield bonds, etc., etc. And so, yes, this is critically important on the ten-year to define other asset prices. And if we move significantly higher, 2.40, 2.50, 2.60, investors have got to understand that the connection is a negative influence on their asset holdings.

Keene:

Bill, one final question here. I want to come back and really address this important statement from Mr. Gross, folks, on the idea of a regime change at 2.40%. When we do that will we do it with live pass of stability or will there be a lot more volatility in those old jump conditions that made you gray years ago? Which is it going to be there, Bill?

Gross:

I think stability because not many people will believe me in terms of the long-term downtrend. They look at other things. They'll look at the Bollinger band and they'll look at the near-term statistics, and so, and the Fed will come in and try and talk markets down. So I think it will be a gradual up move, but to my way of thinking, if 2.40, 2.45, let me hedge it here, but 2.40, 2.45 is broken, to me, that's a significant sign that the long-term bull market is over.

Keene:

We're going to come back with Bill Gross.

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