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Gross: Economy Can't Survive Much Higher Rates

Bill Gross: I'd put these [sunglasses] on this morning. Actually when you're 70 years old, you need things. You need props. Even guys need a little makeup and stuff. And so I put these on, as I was getting dressed, and I said, man, that's a pretty cool-looking dude.

I said, I need at least one moment to see myself on the big screen. So, there I sort of am. I can't see my notes, and I'm not really Hollywood so. But there you go.

I'm 70 and been moving on as they say.

Well thanks for having me. Thanks for being here. Boy, it's impressive from this vantage point, a lot of people and a lot of listeners. I appreciate the chance to talk to you about a few things, about investing and about movies, which I'll mention in just a second. And thank you, [Morningstar's Don Phillips] for the kind introduction. I wasn't really sure what Don would say about me. According to the recent buzz, it could've been something about General George Patton maybe berating a wounded soldier. Or a Wall Street version of Justin Bieber. Or maybe just a Kim Kardashian impersonator, if you wanted to hear about my feminine side, which I'm sure you don't.

In any case, if you really wanted to know about me, just ask [Morningstar's] Eric Jacobson here at the front table because I've told him a hundred times over the last few months exactly what a great guy I am, and he should be able to tell you, as well. It should've sunk in by now. It sort of reminds me of a movie. It is a movie called "The Manchurian Candidate," and there've been two, most recently with Denzel Washington, but the first one with Frank Sinatra and Laurence Harvey. You guys are too young to probably remember this movie, but it was a movie about hypnotizing American soldiers in North Korea during the Korean War. The North Korean's capture eight American soldiers, and they hypnotized them into repeating to the public when they got home to America, that their autocratic Captain Shaw as he was called--played by Laurence Harvey--as the kindest, warmest, most wonderful human being they'd ever known in their lives. And they would repeat that for hours and hours when they went back to the American public and because of this, the public eventually grew to love Captain Shaw, someone whose image resembled, I guess, like the future Ronald Reagan or somebody similar I guess. A real nice guy.

And Captain Shaw eventually ran for the vice presidency and things went on, you don't need to know the rest of the story, you probably know what happened. But I remember The Manchurian Candidate, and we're talking about image here, and who am I and who do you think I am. And so as a goodwill gesture, I'd thought that I'd invite reporters from The Wall Street Journal, Bloomberg, The Financial Times, The New York Times, and Reuters--and not to leave any of you out--but I'd invite you to Newport Beach, California, for a round of Texas Hold 'Em. And we'll flop the cards and hopefully there'll be a pair of red queens on the flop just like there was with "The Manchurian Candidate," and I'll say to the reporters, "Now repeat after me, 'Bill Gross is the kindest, bravest, warmest most wonderful human being you've ever met in your life.'"

Hopefully that'll work, maybe not, but I thought to be fair, I should take, and I've already taken some self-help courses in hypnotism and I've trained myself. So that when I see a red queen, just like they did in "The Manchurian Candidate," and when I play Solitaire, I repeat the same phrase, but with a twist. I say, "Reporters are the kindest, bravest, warmest most wonderful human beings, I've ever met in my life." So, playing cards, it seems, can be a great therapy, and I've never been happier at work.

Now, we have a new deputy chief investment officer structure, with six of them. That's working fabulously. We've got a new CEO and president, Doug Hodge and Jay Jacobs, exceeding expectations, and we just moved into a new building three weeks ago. If there's a happier kingdom on earth, it may be 15 miles up the Santa Monica Freeway at Disneyland, but that's a fantasy. And I'm talking real time here. We're having a good time and we're a happy kingdom at Newport Beach.

Let me move on, and for those of you that would like to have a memento of those red queens, I've got a surprise in my pocket, perhaps some of you after this speech can come up and I'll give you one of them. But let me now move to more critical investment-related topics, not cards.

Yes, this is my time to sort of commercialize, so bear with me, but I think, hopefully I can give you a sense of who we are and what makes sense in the investment markets and what has made sense for the past 20, 30 or 40 years. I hope there's some information to be gleaned from this so you just won't think I'm doing PIMCO bragging. But let me start out and talk about the Total Return fund, and why I think it's been successful over such a long time because that really speaks to PIMCO.

To me, the Total Return fund has been a Mercedes, not a Model T, not a Cadillac. It's a Mercedes. You ride in comfort, you ride with style, and you ride with the expectation that you'll get to your destination in the future. And maybe even the Total Return in the future, we like to think of it as the new Google car, I guess, in which, yes, you know, you're still going to drive it, you're still going to actively manage it. But it'll be well-engineered; it'll be safe. It'll give you exactly what you want. The Total Return fund will never be a compact car. It hasn't been for the last 20 years for sure. It's $230 billion and was, as we know, $280 billion, just a short 12 months ago. It's the world's largest bond mutual fund, and maybe depending upon where the Vanguard Equity Index fund is, [Total Return is] maybe the biggest [fund of any kind in the world]. But it's a big one. So, it's not a compact car, but it does what a customer wants it to do and that's to outperform with less risk on a consistent basis.

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Let me try to give you an explanation as to why, and this is where I hope you won't think I'm journalizing. Some of the information that I'm going to give, can be very useful going forward. In effect, I think I'll be handing you the keys to the PIMCO Mercedes or the PIMCO Google car of the future or even the PIMCO happy kingdom that I just described a few minutes ago.

So at PIMCO, I and others at PIMCO have long been a believer in investment structures or templates. I'm sure Morningstar views that as a critical and important element. In managing money, for us, it's critical. A template, it's critical. And I've seen them and you've seen them, too, work for brilliant investors. There's Ray Dalio and Bob Prince at Bridgewater, just really smart people. Whenever I read something that they print, I'm totally flabbergasted and have to take it home and read it over and over and over again. Just brilliant people, but Dalio's got a template. He's got a long-term view of how economies work and how investment markets fit into that puzzle. And sometimes it doesn't work for them, but usually it does. It's the structural template that I think that's important for them.

GMO, Jeremy Grantham; they have a template. It's a different template. It basically speaks to mean reversion, and Dalio's does to a certain extent, but it's not the same. But it's a template; it's a structure that they follow.

Of course, Warren Buffett at Berkshire has a template. A safe and secure, basically closed-end fund, that can't be disrupted by financial flows going forward. There are lots of others, too, but I think it's important to have a structural template.

At PIMCO, we've got a template, and the foundation has always been based on three structural elements. And this is where I might be giving away the keys, but I think it's pretty well-known. Consider, at least, how it might work for you or for your company that you represent.

We've got first of all, a world-class bottom-up credit analysis team that I think every successful stock and bond manager must have, and so that's the fundamental, necessary element. But in addition, our structural template is as follows, and it comes in three parts.

First of all, we do what we call bonds-plus. We sell a product called StocksPLUS, but bonds plus, basically is the strategy. It was the first. And actually, this is one of the things I'm most proud of. In the 1980s, Chris Dialynas had joined us from the University of Chicago, and we were in touch with Myron Scholes and so on. But we devised this concept that Peter Bernstein--the late Peter Bernstein and Peter should know because he knew about capital market structures and wrote two great books about it--but we devised a product called bonds plus where you would join interest-rate futures, and as ultimately as swaps came into the market, vehicles that didn't require very much cash, we would join that bonds plus with short-term six- to 12-month corporates notes and floating-rate notes. In effect, we turned our Treasuries into corporate bonds.

That's why it's a little misleading when--not to keep harping on the press--but the Total Return Fund monthly numbers come out and [the press says] "PIMCO increases Treasuries" or "PIMCO decreases Treasuries." Actually our Treasuries aren't Treasuries. They're corporate bonds in disguise.

One of the reasons that we've been so successful is that, it adds about 30 or 40 basis points a year with relatively little volatility surrounding it. It's not your typical corporate product with a five-year maturity or a seven-year maturity, where spreads can make a difference. Basically, it just sort of trickles down in terms of mist, as opposed to heavy rain; so that's the first structural element.

The second has been an emphasis on intermediate maturities and rolling down a positive yield curve. Not a great strategy in the first five months in this year and one of the ways that a strategy like this can come back and bite you. But historical studies have shown--there's a great book by three British authors called Triumph of the Optimists. If you ever have a long weekend or have nothing to do, which of course, we always have something to do now, but you can get into this book like I did with the Bible when I was a kid. You could just read and read it, and go over it and go over it. There's so much information in Triumph of the Optimists that it's an education in and of itself.

Anyway there's that book. There's Ibbotson and Sinquefield. There's lots of studies on the 100-year history of maturities and how they perform. What they show is that over a long period of time that a five-year Treasury or a five-year Gilt basically has equaled the performance of a 30-year Treasury or a 30-year Gilt. We're talking 100 years. And right away, you must wonder well, how can a five-year that yields 100 or 150 basis points less than a 30-year equal the performance of a long-term Treasury bond or a long-term Gilt? You must be making a durational play in which interest rates went up and the five-year did better because it has less duration. Well, not so.

The reason that it outperforms basically is that it rolls down a curve, a positive yield curve, which is the essence of capitalism, and the five-year becomes a four year, you get a capital gain. It adds to the total return and it equals over a long period of time, the 30-year return.

Now there is a lot of noise in a five-year Treasury. We saw that yesterday. We're seeing that today. We saw that this year. We see it all of the time, in which curves are in motion. There's a lot of noise there, in the five-year, in the belly of the curve. Nut PIMCO thrives on noise, and that's basically what I'm saying. It's our second structural element. The secret there is patience, just like with Dalio and with GMO in terms of reversion to the mean and those types of things. You don't want to overemphasize it when the curve is flattening, but a five-year versus a 30-year on a long-term basis with a lot less volatility is a great structural bet and a structural template.

And third of all, in terms of our templates, we employ volatility sales. Sounds dangerous and is sometimes. Not necessarily involving derivatives. I mean, we use 30-year mortgages, of course, and they have lots of volatility embedded within them. That's why they yield 60, 70, 80, 100 basis points or more than Treasuries; the inherent volatility with prepayments.

So, selling volatility by owning a mortgage isn't necessarily something super-risky, but PIMCO as well sells volatility these days at respectable tails, I guess, in the marketplace and collects premiums. And when markets are volatile, then PIMCO doesn't do so well; that's 2011, and that's 2013 with the taper tantrum.

But otherwise, it's a good business. It's what Buffett does. Buffett, in addition to being a brilliant investor, has an inherent insurance company where he underwrites risk. And hopefully, they make underwriting profits. A lot of the times they don't, and they just use the cash flow to make money with riskier assets.

But in any case, selling insurance is a viable business for fire, flood, automobiles, and so on. And people are willing to pay for that. And you would say, "Well, why would they be willing to pay for that?" Well, why are people willing to pay for insurance? They want to sleep at night. And so at PIMCO, we're willing to sell that insurance; we're willing to sleep less, I guess, which is the follow-on element to it all. We're willing to sleep less, but perform better.

Obviously, the volatility has to be underwritten properly and priced appropriately. It doesn't pay the write insurance, flood insurance, before a flood, but over time, it's been a very respectable structural template alpha generator.

Those are the three PIMCO structural tilts that add about 75 basis points of structural alpha per year. And it's not hard to win a race if you're starting with a 75-yard lead; it depends on the length of the race, I guess, and depends on the horses in the race. And I guess, like in the last five years, if they are high-yield horses, it doesn't necessarily work too well on a comparative basis. But over time, the Total Return fund can and has competed with those high-yield horses with a lot of less volatility because of this structural template.

And many of you would be amazed because we don't see that in the press at the moment, but as of this very day, as of June 19, the Total Return fund--long lambasted as underperforming--is outperforming its index by a decent margin. Yeah, before fees, but outperforming its index. And yet to complain and to whine, we're $50 billion poorer over the last 13 months. It makes you wonder why that would be. And perhaps we haven't been using enough red queens, I guess.

In any case, this is end of the PIMCO commercial, which I thought would be helpful to all of you. It might be your own experience, and actually I hope you haven't been listening. But I thought at least that you deserve to know because you're here and that says something.

In the minutes that follow, however, let me focus on the markets; on value and timing and decisions that make headlines and a good portion of additional alpha for good and excellent investment managers, whether they be in bond, stocks, or any other asset category. And today and yesterday the focus was and is on central banks and their policies, and what we at PIMCO call the "new neutral."

And we thought we were usurped by Bloomberg on this because they had a report two months ago and it was headlined with "The New Neutral'. But a Bloomberg reporter this morning was gracious enough to say, "No, you actually thought it up." The PIMCO Australian team first introduced the new neutral. So this one's our baby for better or for worse, I guess.

It's sort of like the "new normal." It's nice to have something to be known by as long as it works. The new normal worked pretty well and has. We've had a 2% economy for five years now, and that's certainly a new normal.

What PIMCO didn't do, to be fair and honest, was to translate the new normal into the fact that stocks might double and that monetization might flow into financial assets as opposed to the slower real economy. So, we sort of missed the most important part, but we got the new normal.

And hopefully we've got the new neutral, which I think is a critical idea, thought piece for all of you as investors and certainly for central bankers around the world. We would say, to mimic the movie again, that the new neutral is simply the biggest, the most critical, the most significant, the most important element in asset pricing today or in the past. The problem is that we have very few red queens to convince you that that's the case.

The policy rate though, along with forward expectations and volatility, corporate and equity risk premiums, has always provided the fundamental foundation for asset prices. It is the foundation--the short-term rate and the expectation for it going forward. That leads the prices for 10-year Treasuries and 30-year Treasuries, and stocks and P/Es and risk premiums and all that. And it all starts with the policy rate.

And so if you can get the policy rate right and if you can formulate a structural template around the new neutral and get it right, then you've got some money in the bank for your clients.

But the new neutral policy rate in real and certainly nominal terms changes over time, and that's the problem.

The idea of a neutral policy rate was created by a gentleman by the name of Irving Fisher in the 1930s. And Fisher went on to become famous by speaking to a permanently higher plateau of stock prices; you all have seen that.

And so people remember him mostly by that, too bad, because he was the guy that came up with the idea that there was a neutral policy rate. In other words, he thought the real rate would be constant. He thought inflation would go up and down and that policies and the federal-funds rate would change because of it, but he thought real rates would be relatively constant. It's there where history proved him wrong. Fisher was wrong. The real rate is not constant, and that's the critical element to this new neutral that we've got going.

In the nearly 80 years since his original theory was introduced in the '30s, real policy rates have fluctuated between zero and 8% during periods of positive inflation. And importantly, and here's the critical thing--you may not care about the policy rate and, hopefully, you don't leave here thinking, how do I understand all this?

The critical link is that bonds and stock prices over this 80-year period of time have been critically influenced by what the real policy rate was. Do you wonder why stocks in 1981 sold at P/Es of 6 to 7 times? And you could say, there was a recession and corporate profits weren't doing very well. But it was really because federal funds, nominal funds, were trading at 20% yields, thanks to [former Fed chair] Paul Volcker. And real federal funds, we've got to distinguish now between nominal and real; I don't want to get confusing here, but it's the real policy rate that is important.

In 1981, the real policy rate was 7% to 8%, so equity risk premiums in order to match that 7% to 8% had to go up substantially. And therefore P/Es, price/earnings ratios, had to go down substantially. And so we had P/Es of 6 to 7 times with a real policy rate at 7% to 8%. It was critical for stocks. And if you'd only known what Volcker was going to do, go to 20% in terms of nominal, go to 8% in terms of real, obviously, you can make a fortune by not owning stocks or not owning bonds.

It was the same thing with long-term Treasuries, 30-year Treasuries, 15% yield nominally. Why? Of course, there was inflation, but the real interest rate, the forward interest rate which investors didn't expect to continue at 7% to 8%, but the forward curve was high in real space. So long-term Treasuries traded at 15%. And it set the foundation for the 30-year bull market that bond investors have experienced and the 30-year-plus bull market that equity investors have experienced.

And the next 30 years since 1981, that real policy rate came down, down, down and finally in the past few years, real fed funds have been negative. We have a 25-basis-point federal-funds rate. We've got 1.5% plus or minus inflation. We've got a negative 1.25%, 1.5% real policy rate at the moment. It's been a long journey from 7% to 8% real to minus 1.25%, 1.5%.

So the point here is that the real policy rate changes. It changes. Fisher was wrong. And as [Fed chair] Janet Yellen recently agreed, not yesterday, but agreed in prior speeches, she's agreed that, yeah, there is an evolving policy rate. Not only nominally, but real.Janet Yellen is a very academic, measured, well-informed, careful--except for her "six months" comment--careful person.

But she described the real interest rate in goldilocks terms, that she said, what they were trying to do is find something that was not too hot, not too cold, just right. And the just-right policy rate, whatever it is, the new neutral, was going to be the rate that would produce 2% inflation and hopefully 3% growth, although they would take 2.5% or maybe 2% [growth]. So, something like 4% to 5% nominal GDP was their target and is their target for this new neutral rate, whatever it's going to be.

And I might add third, and critically, people tend to forget this. The Fed really has a third charge these days, and that's financial conditions. The problem of the Lehman Brothers collapse in 2008, the papers of Jeremy Stein two years ago have all informed us, informed them that financial conditions matter.

And so while Yellen may dismiss to a certain extent in press conferences the current level of financial conditions, there's no doubt that there's three targets that the Fed has these days: that's growth/unemployment, inflation, and financial conditions. That's what the new neutral hopefully will perfect going forward.

So what is this real policy rate? And is it really different and changing and newer than what we've seen over the past 25 years? Or is it just something PIMCO thought would be cool to follow the new normal and to solicit interest?

Well, it's not [something PIMCO thought of]. It is changing. The Fed acknowledges much yesterday when they changed the green dots, the blue dots, the dots. In terms of their forward expectations, they've brought down the nominal policy rate and the real policy rate in effect by 25 basis points. And it's going lower and lower and lower. So, it is important to try and find out where it's going because it will influence stock prices and high yield prices and spreads and all of that in consideration.

One thing that PIMCO thinks it knows, one thing that the Fed thinks it knows, is that the real new neutral is not minus 1.25%, which is where we are now. Although, to be fair and to stimulate discussion perhaps, the 1.25% negative policy rate, real policy rate, over the past five years has not even allowed the U.S. economy to reach the goals of 5% nominal GDP. And we've been stuck in a new normal world of 4% to 3.5% nominal GDP. And so a negative rate for a long period of time hasn't really done much.

The problem is, is that what it has done is stimulate investment work, and that's where the financial conditions come in. That's the real reason, we think, why the Fed at some point will move and try to move the real interest rate higher from 1.25% negative. It's too much of an incentive for hedgers and funds and leveraged structures to make money, so they have to raise it at some point to prevent bubble-popping.

So it's not minus 1.25%, but is it 2%? And I'm talking real here. Again, forgive me, just add or subtract 2% inflation whenever I'm talking about the real rate. So, at 2% real rate means 4% fed funds at the end of the journey.

Is it 2%? Because that's what the Fed currently expects it to be close to where their destination is, and that was embedded in what they call the Taylor Rule. You all know that. You know John Taylor from Stanford. 1991; the Taylor rule. The Fed and other central banks glommed on to it because it made a lot of sense, and it did make a lot of sense for a long time. And it worked until it didn't work. And it didn't work in 2006 and 2007, and we had a real rate that was so high, not mathematically, but so high that it broke the U.S. economy, the housing market and the global economy.

So, it was this combination of a real rate and the leveraged structure globally, financially, housing, shadow banks, all dependent upon a low real rate. It was a real rate of only 1% in 2007 that broke the global financial markets that led to the great recession, a 1% real rate. Because the federal-funds rate went to 5.25%; inflation was 4% and 4.5%. It was only 1% real, and they cracked, they cracked the economy.

So, that alone, I guess, tells me that to return to a 2% real policy rate, which is what Taylor embeds and what the Fed believes in terms of their models would be to dice with another Lehman-like disaster. This economy is still 350% of debt-to-GDP. It still has leveraged, though to be fair, the leverage has shifted from households to the government, and it's safer there than on household balance sheets. But we're still a highly leveraged economy, and so are other global economies. And this 1% rate in 2007 actually broke the economy.

You told me to wrap up. I thought I was short. Let me continue.

What other evidence do we have as to what the real rate would be? Well, there's a study by the San Francisco Fed in 2001, when Janet Yellen was president there, by two gentlemen by the name of Thomas Laubach and John Williams, and they did research on the real rate and how it changes and so on. And they have updated their model all the way until the end of 2013. Their information that comes from the Fed says that the real interest rate should be a minus 25 basis points, not 2%, which is what the market and Fed participants expect it to be.

And other research, as well. You know Kenneth Rogoff and Carmen Reinhart. I love Rogoff and Reinhart. Talk about research; you can get lost there for weeks at a time. And not necessarily that it's right, but it's good research. And sometimes it's criticized and sometimes it's wrong.

But basically what they showed was that since the last Great Depression in the 1935, that real interest rates in the U.S. and the U.K. up until Volcker in '79 were a minus 25 basis points in the U.S. at a minus 1% for the U.K. And so, all of these examples say that in a leveraged economy--which is the critical element, which is what the Fed in my mind can't build into their model. This is a subjective red-queen-type of situation in which you don't know, you can't model, and so the Fed doesn't want to go there. They want to gradually think that maybe things might change gradually. But a 2% real rate is far too high in a leveraged economy.

I get a few more minutes. I guess my point is that, if the new neutral is closer to zero, the real one, which is what PIMCO expects as opposed to 2%, then asset prices--remember the connection to asset prices--the asset prices are less bubbly, that stocks at 16 times to 17 times P/Es can survive a mild bubble atmosphere with a zero percent real rate. They can't survive at 2% real rate; we saw what happened in 2007.

Same thing with credit spreads. Narrow, very narrow, artificially priced, very artificially priced. Avoid, only if you think the real rate, the new neutral real rate is going to be 2% or close to 2% as opposed to zero. At zero, things make sense, and it just depends upon whether the Fed and other central banks proceed along the expected path, or whether they stop short based upon what PIMCO thinks is their ultimate destination.

So, the new neutral is critical. Think about it yourselves. Is it 2%, is it zero? What should it be? And you can get into bonds with forward prices and forward yields and you can get into stocks with P/Es and all of that based upon what exactly that rate is going to be. And it influences volatility, too. You know, the lower the rate, the less volatile markets and the VIX stays at 12% and Treasury volatility stays at 60% normalized, et cetera, et cetera. At 2%, you've got bear markets ahead. So, hopefully, the Fed knows what it's doing as it proceeds along.

Is this a pollyannaish argument for a bull market? Not really. Because we know yields are low. We know P/Es are high. We know growth has been contained. So, most of the jazz has already been enjoyed.

We expect, for instance, in the bond market, 3% to 4% returns going forward. We expect in the stock market, 4% to 5% returns going forward, but we expect them to be relatively stable, not that there won't be ups and downs and 10% corrections and all of those types of things. But if the Fed and other central banks stay low, and the new neutral is closer to zero than 2%, then we've got a market in which you can at least take some measured risk and earn obviously, not a decent return, but a return that is positive and relatively less volatile. And just to extend this quickly to the global marketplaces, we learned last week, you know other central banks have other new neutrals that they are trying to find.

[Prime Minister Shinzo] Abe in Japan is trying to find their new neutral situation, though the policy rate doesn't change, inflation does, so the real rate changes. [Bank of England governor Mark] Carney and the U.K probably will be the first central banker to sort of like Christopher Columbus not to sale west like Columbus did in order to find the East, but to sail up in order to find the measured returns of the new neutral. We think the U.K. will go first, but ultimately, they had the same problem. "What is the policy rate and what prices in terms of equities and spreads, should reflect that ultimate destination?"

For now however, and just to wrap this up, investors, you got to make choices, right. You can't wait around, go home on a weekend, read Triumph of the Optimists, and start thinking about what the new neutral should be. You have a portfolio, and you have to do something. And I think investors certainly have to be aware of certain things. They have got to be aware of quantitative easing and the end of quantitative easing in the United States; that disappears in November as a policy choice. Long-term Treasury bonds have feasted on almost 100% purchasing from the Fed over the past three or four years.

It is hard to understand that every time the Treasury issues a 30-year bond, basically the next day figuratively, the Fed buys it. And so when they stop that and they are starting to, what happen to a 30-year Treasury bond when its buyer, first and last resort basically disappears, that will be an interesting situation and certainly influence the curve as well as the new neutral going forward.

Take it back to the new neutral again as it closed. To us it's the dominant policy, the most important, the most wonderful, the biggest, The Manchurian Candidate type of question for all investors going forward. And so it pays to at least have a sense as to where it might be. We think it's closer to zero, real than 2%. We think that means that interest-rate spreads that credit, that volatility are probably better choices than duration, though duration isn't a bad choice, but would probably be third of fourth.

And that that a portfolio should be designed around expectations, informed by the Fed, of course, by question-and-answer sessions that we saw [June 18] which Janet Yellen; but as well informed by your own subjective opinion as to why it would be low as opposed to high.

For us, I cited the historical research, I cite again the commonsensical thought: In a highly leveraged economy, the new neutral has to be lower than it was historically. Taylor cannot be right. Sorry professor Taylor. I'll take this on as a challenge. Hopefully, we'll both be around five years from now to pay each other off. But Taylor too is wrong, and PIMCO and Bloomberg at zero percent, although I think Bloomberg didn't really say zero, they said new neutral, so I won't throw them into the pot. But in any case that's the critical thing. I think ultimately a portfolio, that this is a perfect portfolio for a PIMCO template just to finish it off.

Our template again, remember, based upon bonds plus based upon volatility sales, based upon rolling down the curve with intermediate structures. If the new neutral behaves itself and is closer to zero than 2, then the PIMCO template is in business. If it doesn't, then markets are more volatile. Curves flatten, as inflation goes up, and duration is not a good bet. Again in the bond space, that's the bet so to speak in terms of what the new neutral is.

I know we got questions and answers. Before I want to thank, Don. Thanks for putting up with my discussion of stamps at lunch. Thank you Eric for putting up with me for the past few months in terms of telling you how wonderful PIMCO is with a little bit of the twist to so to speak on a bias, which is normal, right, the new normal.

And hopefully, with my sunglasses and my story about "The Manchurian Candidate," I haven't put off too many of you. Maybe I'm not General George Patton, maybe I'm just a 70-year-old version of Justin Bieber. I don't know. Thanks for listening to my late-in-life saga.

You know we will follow the new neutral as we go forward. PIMCO will continue to employ its structural templates. This company is thriving in 2014. The Total Return fund maybe just a little above its index, but everything else Global, Diversified Income, Hedge, boy, you would want to own them, and of course I do.

So, thanks very much. I'll leave you and after the session again my calling cards have an interesting twist that you may enjoy if I meet you upfront, but have we got time Don for, no we've got no time. I timed this to 30 minutes. Did you know that? And it's probably 45 or 50. That's the way it goes.

Anyway, so that's my sign, do the Patton sign-off and thank you very much.