Eric Jacobson: Let's shift gears for a second to the conversation about Quantitative Easing II rolling off this summer. I had a brief conversation with your colleague, Mohamed El-Erian. We talked a little bit about the bifurcation in the marketplace between what the economists of the system are worrying about and thinking about with regard to the overall stock of bonds in the marketplace versus what I gather PIMCO is looking at and thinking a lot about, in terms of what are flows in and out of bonds going to be. That's a little opaque perhaps, but maybe you can help straighten out and explain to our subscribers what you are thinking about?
Bill Gross: I am going put it simply, because I am a simple guy and I look at the simple metaphors--hopefully this one makes some sense. The flow argument is basically a question as to who will buy them? Now the stock argument is an argument that the Fed endorses and looks at in these terms. The Fed basically says: Listen we've been buying Treasuries for the past two years. And its sort of like at home if you had cupboard of cereals, let's call it Rice Crispies. The Fed basically says, "Hey we've bought all the Rice Crispies for the past two years. So your stock, Mr. and Mrs. Bond Manager, must be low on Rice Crispies. You've eaten through your Rice Crispies over the past two years, because we've bought all the new ones." So they basically say, so when QE2 ends from a stock standpoint from what's in their cupboard ...
Jacobson: ... The stock of Treasury bonds ...
Gross: ... the stock of Treasuries, you've got to go buy some more Rice Crispies. So [the Fed believes] it won't be a problem after June 30, because investors don't have enough of what they should have.
PIMCO basically says that's probably correct from a standpoint of a metaphor if indeed that's your metaphor, Mr. Bernanke, but we don't necessarily have to restock with Rice Crispies. We could buy some Frosted Flakes or we could buy some Raisin Bran, and that metaphor basically says we can buy mortgages, corporates, we can buy German bunds. We don't have to buy overvalued U.S. Treasuries and stock up with what you consider to be a necessary portion of Rice Crispies. Did that help?
Jacobson: Absolutely, and the follow-on I think to that--and tell me if I am misunderstanding--is that even though you are not pounding the table today trying to say, I am not buying Treasuries because they are going to default. I am not saying that the U.S. government is on the brink of disaster, but in talking to you and Mohamed, I do have the sense that you, as a group, PIMCO feels that the world at large is starting to at least think in terms of credit quality for U.S. debt, and that part of that argument about buying other kinds of cereal in the metaphor, is that hey, Canada, Australia, there are other places we can go where we are more comfortable with the credit as well.
Gross: There are, in terms, there are cleaner dirty shirts. Canada has half the debt that we have relative to GDP. Germany has less debt to GDP and stronger growth prospects. So there are countries that have better prospects from the standpoint of future debt to GDP.
I'm going to start out the conference in a few minutes with a headline from USA Today yesterday--you probably saw it. It basically said $65 trillion worth of debt for the United States--and, by the way, that's an understatement.
So sooner or later of course, that becomes the problem for investing, whether it's in bonds or stocks or real estate or commodities, whether it's sooner or later, but certainly later, the United States has a significant problem in terms of debt and deficits. And it has to be corrected immediately, though, in terms of a debt ceiling and debt limits and the progress that hopefully will be made towards those goals.
We don't see it as a problem of default certainly. Moody's or Standard & Poor's might downgrade the prospects, but this is not a credit problem in the immediate future for the United States, but certainly on a longer-term basis