Gross Talks “New Neutral”

In the aftermath of the 2008 financial crisis, bond guru Bill Gross spoke of a “New Normal” for US economic growth. Now he’s talking about the “New Neutral” for interest rates, and the impact it will have on investors.
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Roundtable: Gross, Herro, Cohen And Others On What To Expect In 2015

A number of the world’s top investment strategists recently gathered for Barron’s annual roundtable to offer their thoughts on where the economy and markets are heading. David Herro, Abby Joseph Cohen, Bill Gross, and Marc Faber were among those who participated, and overall the mood was subdued. “On the whole, they expect interest rates to stay unnaturally low, and the U.S. to lead the world in economic growth,” writes Barron’s Lauren R. Rublin. “Yet, they doubt that will translate into robust gains for the stock market. Scott Black’s expectation that the Standard & Poor’s 500 will return 10% this year — an 8% price advance and a 2% dividend yield — was as rosy as it got. Marc Faber, we feel compelled to warn you, thinks the market already has made its high for 2015.”

Barron’s also included one-on-one interviews with many of the strategists. In the clip below, Gross talks about his outlook for how the current global debt overload will play out, and discusses where investors should be looking right now.

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Gross: The End Is Near

Bond guru Bill Gross says that the good times are over for investors, and is indicating that he believes the bull market will end sometime this year.
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Gross: Oil To Push Growth Into 2% Range — Or Lower

Bond guru Bill Gross says he thinks economic growth will fall to 2% for the US, thanks to tumbling oil prices.

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Gross: Bubbles? No. Lower Returns Ahead? Yes.

PIMCO bond guru Bill Gross says the Federal Reserve is confronted with a big challenge in trying to determine a “neutral” interest rate that will accomplish all its goals — and he says PIMCO and the market have very different estimates of what that neutral rate will be.

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Gross: Bond Bull Is Ending

PIMCO “bond king” Bill Gross says that the bull market in bonds is ending. Gross tells Bloomberg that, without additional quantitative easing, he thinks treasury bonds will decline in yield as the economy slows, which will push credit spreads higher. He sees a 12-month period ahead where combined treasury, corporate, and high yield bonds “don’t move much”. Gross also says the stock market has been rising in part because of economic improvement, and in part because of the “Bernanke put” — the belief that Ben Bernanke and the Federal Reserve will continue to bolster stocks over the long haul. Gross says there’s “a lot of money chasing a lot of risk, and in some cases it may be justified.”

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Gross on the “Credit Supernova”

In his latest Investment Outlook, PIMCO’s Bill Gross says that the U.S. is heading toward a “credit supernova”, with exponentially rising amounts of credit leading to an eventual implosion of deleveraging.

Gross says that over the years, the U.S. has used more and more credit to produce less and less growth. In the early 1970s, credit outstanding in the U.S. totaled $3 trillion, he says. “Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result.

The zero-bound interest rates of the past few years, Gross says, are making the “magic” of credit creation turn destructive. “Net interest margins at banks compress; liabilities at insurance companies threaten their levered equity; and underfunded pension plans require greater contributions from their corporate funders unless regulatory agencies intervene,” he says. “What has followed has been a gradual erosion of real growth as layoffs, bank branch closings and business consolidations create less of a need for labor and physical plant expansion.”

Gross acknowledges that his supernova analogy is “more instructive than literal. The end of the global monetary system is not nigh.” But the point, he says, is that more and more credit is being put into speculation instead of productive innovation. He says a time may well come when “investable assets pose too much risk for too little return”, which would lead to major credit contraction.

That doesn’t mean investors should throw in the towel, Gross says. But he thinks they should plan accordingly. His advice: “Seek inflation protection in credit market assets/ shorten durations; increase real assets/commodities/stable cash flow equities at the margin; accept lower future returns in portfolio planning.”