Financial Advisor: The bond market has finally reasserted itself vis a vis the stock market this year. Did that surprise you?

     Gross: I knew it had to come sometime. It's been several years in the making, according to my judgment, so that shows you how early or late I guess I can be. But whenever the Fed is on the move and the economy is perceived to be slowing down with a threat at some point to expected growth rates in terms of corporate profits, that's going to be the case. Now when the Fed is raising rates, that's not always the best environment for bonds either, but it's more destructive for stocks.

     Fuss: It's actually sort of dull this year. What has not changed about the bond market is the low level of liquidity, particularly in the corporate market but in the bond market in general. There was less liquidity than there was two years ago. The liquidity started going out of the market about two years ago and then really left in August of '98 and has only come part way back in, so that's what was new about the market a couple years ago. 

  Now that in and of itself is not necessarily a bad thing. It's very bad for somebody that would want to sell a lot of bonds, obviously, because they're not going to find a welcoming bid. It's equally bad for somebody who needs to buy a lot of bonds because they don't find that much for sale. It also has led to, in my opinion at least, some value distortions. 

    Gross: The big surprise is the liquidity in the government sector. Obviously, the Treasury itself is having a big effect there in terms of buybacks. They're reducing the outstanding liquidity, and there's nothing to be done about that as long as we continue to run a surplus and the Treasury uses the surplus to buy debt and to issue less. 

  It's surprising for that reason, and it's also surprising in the corporate and emerging markets - there's only one real area with any liquidity left, in my opinion: That's the mortgage market. Although it's fair to say that the corporate calendar has been significant and if you measure the liquidity of a market by the ability of buyers to absorb new issues, then the liquidity is there. But there's certainly no liquidity on a secondary basis and no liquidity in the corporate market for lower quality bonds. For the most part, the liquidity of the bond market overall has been substantially reduced relative to where it was before Asia.

     Financial Advisor: Many in the financial markets seem to be assuming that the Fed can engineer another soft landing a la '94-'95. Isn't that kind of a bold assumption?

     Fuss: Wouldn't it be nice? It is bold. It might not be a bad assumption. At this point, I don't even want to make a bet either way on that. But it does look to me like for whatever reason - and I think cost of short-term money is part of it - that business is slowing a bit. It's showing up in consumer hard good sales, and soft good sales for that matter. It's still early on the retail sales numbers. There can be funny stuff in the numbers. The analysts that are working with the retailers, such as the department stores and the discounters, are definitely coming back saying this is not just one store or another. This is fairly widespread. 

  There has clearly been a slowdown, and it's been enough to start to back inventory up at the apparel manufacturers, and for that matter, the people who make washing machines, so there is a slowdown. Now the hard goods, the white goods, the washers, the refrigerators, that kind of stuff slows down as building starts and housing turnover slows.

     Gross: We just had what we call a secular forum, which is a look at the next several years in terms of the global economy and the global financial markets, and we came forward with the suggestion that a significant slowdown, and/or a recession, which is in direct contrast to what you just described as a soft landing, has a higher probability than a soft landing and maybe even as high a probability as greater than 50%.

     Fuss: My guess - and our economics department may laugh at me for this - is we're probably going to drop back to a rate of growth of somewhere around 1.5% or 2%. I always have a hard time trying to figure out what is my forecast and what is my hope. The healthiest thing all the way around would be not too much of a decline in the rate of growth because if our economy really does go down a lot, it may be uncomfortable for us, but God help anybody in Thailand. Because they are net exporters, and if a giant net importer like the United States slows down, they'll feel it in spades.