Bill Gross: Tariff Talk Is All Bluff

The jobs report was released on Friday. Bill Gross, the famous bond guru, appeared on Bloomberg to offer his take. I’ll quickly summarize the report before discussing Gross' views.

Hiring slowed down from February's robust pace. The unemployment rate did stick to a 17-year low of 4.1%, however. A very strong report indicating a heated labor market could have been taken badly as it signals inflation.

Throughout the first quarter, companies added 202,000 workers to payrolls a month, on average, ahead of 2017's monthly average of 182,000. This is now the longest jobs expansion streak on record in the U.S. 

Average hourly earnings for the private sector increased 2.7% year over year. A longer average work week increased weekly wages to the highest level since 2011.

Gross viewed it as a weakish report. He expects it will make the Federal Reserve more cautious about rate hikes. He has been expecting only one or two hikes for 2018 for some time. As I have chronicled on GuruFocus, however, he is tilting his fund completely away from duration risk, which is the vulnerability of bonds to rate hikes. He is definitely taking Fed policy into consideration.

Durning the interview, Gross argued that since 1980, wages have flatlined. Real output has doubled. Where has that gone? According to Gross, it went to corporations.

I checked into the wage development and it’s sort of true, although wages peaked in the 1980s after a giant bull run from the early 60s.

Gross also observed high yield is doing OK. I have previously discussed his short on high yield, which he still has. Other investors are waiting to see the direction high yield takes. So far, they appear to be benign.

Gross explained his bet in more depth:

He shorted high yield, but actually sold calls and puts on the benchmark of the high-yield index. He expects the high-yield index to gradually move higher in most circumstances, but it is structured in such a way that it pays off big time if the spread between high yield and treasuries sharply increases.

The trade situation has made it work out so far. This forced spreads wider, which is what his bet is about.

On trade, Gross believes President Trump has it wrong. Tariffs will not do much to fix the trade deficit. He clarified that this doesn’t mean the U.S. isn’t being played by some countries. However, there is little good in imposing tariffs to fix it.

According to Gross, markets now have to determine whether Trump is bluffing with his $100 billion in additional tariffs. The tariffs increase the equity premium by about 0.5%, which should result in lower prices, i.e., a selloff of 3% to 4%.

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