Financial Advisor: Much less in recession?
Gross: Exactly. Most importantly though, this new age global economy, to the extent it incorporates technology and productivity increases and all the advances of the net and so on, is really not a positive for the corporate bond market. The reason is simply that if the new age economy reflects the same attitude that the stock market does, there'll be a few winners and lots of little losers. Amazon.com will survive but lots of little dot-coms will fail. That's fine for stockholders because they can have a diversified portfolio of stocks. Say half of them don't make it but the other half go up four or five times, then they're still far ahead.
On the corporate bond side, corporate bondholders, even with Ama-zon.com, only get 100-cents back on the dollar so they can't profit by the same philosophy as a diversified portfolio. I apply this same winner-take-all philosophy to corporate America, not just to the Internet stocks but to industrial America, in which GM and Ford and Chrysler cut their costs by 10% or 15% by using the net and therefore reduce the profit margins of their suppliers, etc., etc. The fact is that corporate bondholders do not thrive in a new age economy.
They get hurt significantly because the losers give you 20, 10, and zero cents on the dollar, and the winners only stay at 100.
Financial Advisor: Dan, what do you like?
Fuss: Right now I like everything other than Treasuries. I'm staying within the U.S. dollar block right now.
There's nothing wrong with Treasuries; it's just that everything else is cheaper so I like everything else. In particular, I like the agency market. I like the investment grade corporate market, but I'm using far more caution these days, not because of the cycle but because of a change.
Many companies are borrowing to buy in their stock, so I'm being very cautious with the single A and double A-rated type corporate names. I'm afraid what they're doing through financial policy will gradually bring their rating down to the BBB range.
Because of where we are in the cycle and because of this less liquidity situation, you have wider spreads on everything else relative to Treasuries, particularly corporates.
It's a really strange market. It used to be at this phase of the cycle, I'd much rather be buying the widget types who are your basic industrial suppliers and ignoring the commodities. This cycle, I'd much rather be buying the commodities and ignoring the industrial suppliers so you really have to sort of stand on your head when you do it.