Financial Advisor: Bill, you've been a lot more pessimistic about the economy in the last five years than the economy has actually been, but it really hasn't hurt your performance. Do you try to look for bets you can place that you'll win if you're right or wrong?
Gross: That's the secret to it. Bond people tend to be more negative than the stock people and maybe even more negative than your typical economist, so that shows through I think. But the performance, nonetheless, has done very well because we've found the areas that we prosper under both scenarios. That has meant buying emerging markets at the right time, not before the Asia crisis but after. Buying mortgages throughout most of the period of time, making the proper duration, maturity playing, all of that said.
I would agree with you that my skepticism of the U.S. economy has been overdone and that the economy has done much better than what I had thought and what I would have hoped and at any point over the last six, 12, 18, 24, 36 or 48 months.
Fuss: I'm being careful because it's sort of a matter of corporate financial policy that your optimum point is triple B or triple B+, whereas it used to be A+, so I'd rather wait until it's a triple B+ before I buy the bonds. This means our buying is focused in the triple B area where we see decent credits and don't see a difficult pricing environment.
You have areas where if you're a part supplier to anybody, take auto parts, probably one of the best examples, you have a highly fragmented business. There are a zillion different auto parts manufacturers but the auto industry has changed and you now have sort of tier one and tier two through 100. Tier one are the handful of suppliers who can design, manufacture, and deliver around the world.
Financial Advisor: What do you think the implications of your bond-market outlook are for stocks?
Gross: It's actually vice versa, the implication of the stock market on the bond market. Now at least temporarily, it's the reverse. Over a long term basis, you have to believe that if corporate bonds go the way that I think they're going to go that because corporate bonds are at least senior obligations to corporate stocks, that 9%, 10% or 11% yields on - high-yield or even BAA corporate bonds, have to be sending some type of message to some investors out there that stocks may not be able to match those returns. Whatever the discount rate is that's applied to corporate earnings, if I could be so irreligious in suggesting the thought, whatever the discount rate is, the fact is that if rates move up and earnings are discounted forward at a higher rate, they are worth less.
Financial Advisor: Bonds have outperformed stocks so far this year. You think that'll continue in the second half?
Fuss: Yes, you have to be careful what stock index you're using. I think bonds will outperform the S&P or the Wishire. In the longer term, a lot of what is happening in here is actually very, very good news for stocks and not half bad news for bonds, but you'll feel it much more in stocks. The problem with stocks is that they got too high. The market had all this liquidity and it got ahead of itself.
Financial Advisor: It got a life of its own.