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.
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.”
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.”
PIMCO’s Bill Gross says the “New Normal” should continue in 2013, and he expects both stocks and bonds to return less than 5% for the year. Gross also sees unemployment staying at 7.5% or higher during the year, and thinks gold will rise. He also discusses the fiscal cliff bill, and says that the drawn-out, contentious process of creating it “reaffirmed [members of Congress'] ineptitude”.
PIMCO’s Bill Gross says that if the U.S. doesn’t reverse its big deficits and rising debt, it “could resemble Greece within a decade.”
In an interview with U.S. News & World Report, Gross also says he doesn’t think the “New Normal” will end anytime soon. “Don’t think that anytime soon we’re going back to the ‘old normal’ because these cycles of de-levering are biblical in nature,” he says. “An investor probably has to look forward to higher inflation. Slower growth and higher inflation — that’s not a positive, by any means. Individuals would want it to be just the reverse. The de-levering and the check-writing on the part of central banks, that’s really what produces the situation.”
Gross reiterates his belief that, in this climate, investment returns won’t match those we’ve seen in previous times. He is finding opportunities in higher-growth countries like China, Brazil, and Mexico. He says that when looking for stocks, he personally targets those with dividend yields of 3% or 4%. He says that an investor who is 30 years old should have about 80% of their portfolio in dividend-paying stocks and the other 20% in bonds; the percentage of bonds should rise as you get older, he adds.
PIMCO bond guru Bill Gross says that both stocks and bonds are a bit “bubbled” because of the Federal Reserve’s policies, but that high-quality dividend-paying stocks should perform better than bonds over the long haul. Gross tells CNBC’s Futures Now that he also thinks gold and real assets are offering good long-term protection against inflation, which he sees ahead for the U.S.
PIMCO bond guru Bill Gross says the U.S. needs to close its “fiscal gap” quickly, or risk a Greece-like debt crisis.
In his latest investment commentary, Gross says that he doesn’t think “Armageddon is … around the corner. I don’t believe in the imminent demise of the U.S. economy and its financial markets.” But, he says, he’s afraid. He points to reports from the International Monetary Fund, Congressional Budget Office, and Bank of International Settlements that all paint a dark picture for the U.S. debt situation. “What they’re saying is that when it comes to debt and to the prospects for future debt, the U.S. is no ‘clean dirty shirt'”, Gross asys. “The U.S., in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth. Uncle Sam’s habit, say these respected agencies, will be a hard (and dangerous) one to break.”
On average, Gross says, the three studies suggest the U.S. must cut its fiscal gap — which unlike the “deficit” includes future estimated entitlements like Medicare and Social Security — by 11% of GDP over the next five to 10 years. That means spending cuts and taxes of $1.6 trillion per year — about four times what the failed Congressional Super Committee was considering.
Gross says that if the U.S. doesn’t get things under control, it risks losing its status as the top destination for global capital and could undergo irreparable harm. “Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline,” he says. “Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive.”