You see that in the stock market. We've had a very liquid economy, a very productive economy, and that combination in the seventh or eighth year of our economic recovery has sort of given us an additional push and it's allowed us to grow and to reduce unemployment levels down to 4% or less with very little inflationary pickup simply because of this productivity miracle.
From this point forward though, with our 4% unemployment, there's no one left to work. That's an exaggeration. But the reverse of liquefication, the tightening on the part of the Fed and the tightening on the part of the ECB and the popping so far of the Nasdaq bubble are going to have an effect, so all of those things are working now and in the other direction. The big question is whether we can move down to 2% or 3% growth, which was what your soft landings imply, or whether we'd go down to 0% or a little bit less. A lot depends on that wealth effect. A lot depends on central bank overreach.
Financial Advisor: Isn't it possible with a lot of these dot-coms starting to lay off people and construction and real estate starting to lay off people, that the sort of virtuous cycle we saw in the mid- to late '90s could resurface? Or do you think there's just not enough slack left in the system anymore?
Gross: I don't think there's much slack. I think the reversal of the dot-com phenomenon does more to produce a psychological vicious cycle as opposed to a virtuous circle, you know, the layoffs, the failures, the stocks plunging from $100 to $1 or $2 in terms of the stock market price. All those things send negative feedback signals to investors and consumers in the economy, so if anything it's moving now in the other direction.
Financial Advisor: Some people think it's healthy.
Gross: Well, you know, to the extent that capitalism involves creative destruction and we're seeing some destruction, sure. It's healthy over longer periods of time. But it's certainly not healthy in the next few quarters or the next several years because it involves layoffs.
Financial Advisor: What sectors of the bond market do you like? What are you avoiding? What do you think the next big surprises will be?
Gross: The key emphasis on the bond market should be quality as opposed to duration and maturity or any type of international fix. I think if the potential for recession is there, then a focus on high quality is, in my mind, Ginnie Mae mortgages as the primary focal point for any investment portfolio. We have about 50% of our portfolios in Ginnie Mae mortgages. But those are high-quality pieces of paper, and they carry with them some yield at the same time.
The problems I have with governments and with corporates is governments are high-quality investments and I accept that in an economic slowdown that they're obviously a safe haven. The deterioration that I see coming forward or going forward is in the corporate side.
It's amazing to me that defaults are where they are and downgrades are where they are with GDP increasing by 5% or 6% on an annual basis. You wonder what will happen even if annual growth rates are reduced in half to 2% or 3%.