When: Today, Wednesday, June 8th at 7pm ET
Where: CNBC's "The Kudlow Report"
Following is the unofficial transcript of a CNBC interview with Bill Gross, PIMCO Founder and co-CIO, on CNBC’s “The Kudlow Report” tonight at 7pm ET. All references must be sourced to CNBC.
LARRY KUDLOW, host: Joining me now from the Morningstar Conference in Chicago is Bill Gross, co-chief investment officer and founder of PIMCO. Bill Gross, welcome to the show. Thank you very much for doing this.
Mr. BILL GROSS: Thank you, Larry. It's nice to be here. Thank you.
KUDLOW: All right, let me begin with the bond story. In recent months, as you know, bond rates have been tumbling. Today the 10-year fell all the way down to 2.95 percent. You've been expecting bond rates to go up, instead they've come down. Tell me why you think rates have fallen so much?
Mr. GROSS: Well, I think for a number of reasons. Obviously we have a slow growth patch and have had for the last month or two. We've had a quantitative easing program annualized at a trillion dollars in which the Fed has been buying treasuries. And in combination, I think, interest rates basically have come down, down, down. I mean, that's been the experience for the past two and a half years during the entire quantitative years easing experience. Real interest rates have fallen from 4 percent at a five-year maturity level to a minus .5 percent. So it's been a quantitative easing, slow growth, perhaps lower inflationary environment that have aided bonds here for the last few months.
KUDLOW: Do you think it's going to continue? I mean, there's a big bond rally. Do you think rates keep falling? Do you think the economy keeps sputtering, Bill? How do you see this? Have you changed your own view towards the movement of rates?
Mr. GROSS: Well, not in terms of treasuries. I mean, Larry, our view is always that treasuries were the vehicle to avoid in terms of their low yield relative to corporate and to mortgages, and to developing country bonds in non-dollar space. Actually, PIMCO has done very well during the first six months of the year relative to our index. We're up about 4 percent for the Total Return Fund. The index is up about 3 1/2. So no tears here from our standpoint. We've simple said that treasuries are the most overvalued bond in the universe. Let me make a comparison. The average treasury yield--and this includes twos, fives, 10s, 30s--all of them together, you know, basically yield about 1.55 percent. In Japan, all of their bonds in a dead economy, basically a lost decade, several decades economy in which no growth and no inflation exists, you know, their bond market yields .8 percent. There's only a .7 percent difference between JGBs in Japan and the United States, in a non vigorous/vigorous type of economic differential.
KUDLOW: So basically you're saying stay out of bonds. Let me ask you about stocks, Bill Gross. Stocks have corrected lower by about 6 percent as the bond rates have come down. What's your outlook for the stock market? What do you say to investors?
Mr. GROSS: OK. Well, basically I said stay out of treasury bonds. I didn't say stay out of bonds. I think bonds, you know, in emerging market developing space, corporate space, can produce 4 to 5 percent types of yields. The PIMCO Return Fund fund yields 4 1/2 percent, so don't stay out of bonds. Stay out treasury bonds. In terms of the stock market, yes, there are amazing opportunities in real interest space. I mean, a Procter, a Johnson & Johnson, a utility company, Southern, Duke, you know, as a whole they yield 3 1/2 to 4 percent in terms of their dividend yield compared to a negative .5 percent in treasury space on that five-year. And so there's a huge gap and a huge differential if an investor is willing to take a minor downgrade in terms of credit.
KUDLOW: Do you think there's going to be profit mark downs that might hurt the stock market some more as part of this sputtering economic story?
Mr. GROSS: I think that lies ahead, Larry, for the next three to five years. I mean, profit and margins in corporate profits basically are at a peak. I mean, corporations are in the catbird seat. They've got cheap financing, cheap leverage. They've got cheap labor and the ability to move from one country to another at their will. And so corporations basically have done very well, will probably continue to do very well. But to expert their margins to expand at the expense of labor here in the United States, at the expense of laying off additional workers, you know, relative to their wages, real wages and their total, you know, nominal wage growth I think is an unrealistic expectation. I think corporations, you know, basically are at the top in terms of profit margins. Doesn't mean, you know, that stocks are going to go down. It simply means that the catbird seat basically has been taken advantage of and that the heyday is probably in the past as opposed to the future.
KUDLOW: What about the energy story, Bill? We had this sort of wild and crazy OPEC meeting today. They didn't vote together to raise output, but I guess Saudi Arabia is going to raise output. Nobody knows for sure. Meanwhile, energy stocks outperformed a little bit today. What do you think about energy? What do you think about the price of oil?
Mr. GROSS: Well, your point, nobody knows for sure I think is exactly the case. So that the Saudis I think will always, you know, basically step up and suggest that they're going to fill the gap. Whether or not the have the capacity to do it or the will to do it is another question. Whether or not those on quotas, you know, will stick to their quotas or will, you know, avoid future quotas is another question, as well. I think simply that oil at 101 bucks or so, you know, basically is fairly priced and that the US in terms of its real economy probably couldn't stand for much more. So, no, oil is basically a commodity that will be inflation based, not inflation directing. But it's a 100 buck type of commodity in my opinion.
KUDLOW: When the Feds stop QE2, Bill, as they are going to, I guess, the end of June, Bernanke yesterday basically reaffirmed there isn't going to be a QE3. So one could surmise there's going to be some less money creating. Does the US dollar possibly go up? And might that bring oil and other commodity prices down a lot more than people think?
Mr. GROSS: Well, it could to that extent--to the extent that the Fed stops buying as many of them perhaps. I simply think, though, Larry, that it's a real interest rate question. To the extent that the Fed stays at 25 basis points and in their language--and I think this is coming. I think over the next several months and the next several quarters, the next several years that the Fed is basically going to say we're in an extended, extended period of time of low interest rates. That doesn't mean 25 basis points forever, but it basically means low, low interest rates. And to the extent that the dollar and the currency and those that own it on a global basis recognize that they're going to receive in interest terms a level lower than inflation, and a substantially lower than inflation relative to other countries. That the forecast for the dollar, it's not a positive one. It's a negative one over time.
KUDLOW: So I want to get to Washington and the debt ceiling in a second, Bill, but just last one. And it's, do you think there's more money to be made investing overseas in stocks in bonds or just in stocks? Is that your basic take now?
Mr. GROSS: You want to go where the growth is, not just in equity space but in bond space, as well. And that's a surprising conclusion because typically growth is correlated to inflation. But going overseas, going into developing markets, such as Brazil, where real interest rates of 6 and 7 percent as opposed to a negative .5 percent are offered, you know, makes all the sense in the world to me. It does involve some currency risk. It involves buying the real vs. the dollar. But in any case, it's a less repressive atmosphere in terms of interest rate space, and it's a higher growth environment in terms of developing markets.
KUDLOW: Last one, Bill. I know you've been very, very concerned about the fiscal story and the debt ceiling. I appreciate that very much. So far the treasury market has not blown up because of the debt ceiling. First of all, do you think Congress is going to meet the August 2nd deadline on the debt ceiling?
Mr. GROSS: Oh, I think plus or minus they will. You know, I was staggered--not staggered but I was stunned at least for the headline yesterday in USA Today that basically said `US owes $62 trillion.' In addition I would add another 35 trillion or so in terms of Medicaid expenditures going forward. This country owes a debt discounted to present value of $100 trillion, not the 10 or $12 trillion that's advertised. And so the problem is staggering. You know, the problem has to be addressed fiscally. It has to be addressed monetarily via low interest rates. And in combination, it basically means that growth will be slower in the United States and that investments will yield less of a return. Now a price has to be paid in some form or fashion for addressing, you know, this tremendous debt overload, and the problem will be paid to a substantial extent by savers in future years.
KUDLOW: All right. Bill Gross, we'll leave it there. From PIMCO, thank you ever so much for visiting with us. Good luck, sir.
Mr. GROSS: Thank you.
With CNBC in the U.S., CNBC in Asia Pacific, CNBC in Europe, Middle East and Africa, CNBC World and CNBC HD+, CNBC is the recognized world leader in business news providing real-time data, analysis and information to more than 390 million homes worldwide. The network's 16 live hours a day of business programming in North America (weekdays from 4:00 a.m.- 8:00 p.m.) is produced at CNBC's global headquarters in Englewood Cliffs, N.J., and includes reports from CNBC News bureaus worldwide. CNBC.com and CNBC Mobile Web (mobile.cnbc.com) offer real-time stock quotes, charts, analysis and both on-demand and live streaming video.
Members of the media can receive more information about CNBC and its programming on the NBC Universal Media Village Web site at http://www.nbcumv.com/mediavillage/networks/cnbc/