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October 31, 2011 at 10:37 AM
PIMCO bond manager Bill Gross is warning that U.S. and European economic policies are stifling portfolio returns with policies that fail to deliver growth.
His comments, in his November letter to PIMCO clients, comes as the OECD projected weak to negative growth in the U.S. and Europe, with the OECD calling on leaders to “promptly and forcefully” implement last week’s Euro summit agreement and warning of a “gloomier” outlook if that were not to occur.
Gross, who runs the world’s largest bond fund, says the “the investment question du jour should be ‘can you solve a debt crisis with more debt?…’ Policymakers have been striving to answer it in the affirmative ever since Lehman 2008 with an assorted array of bazookas and popguns: 0% interest rates, sequential QEs with a twist, and of course now the EU grand plan with its various initiatives involving debt write-offs for Greece, bank recapitalizations for Euroland depositories and the leveraging of their rather unique ‘EFSF’ which requires 17 separate votes each and every time an amendment is required.”
Gross’ answer is that none of this can work absent economic growth, which has gone missing for structural rather than economic reasons. This is a problem that is “relatively immune to interest rate or consumption stimulative fiscal policies. Citing economic research by Ken Rogoff and Carmen Reinhart, Gross says high debt levels and government spending, which used to restart a stalled capitalism, now act as a barrier to growth, leading to a vicious cycle akin to “Japan’s lost decades.”
Gross offers three structural reasons blocking businesses from responding to stimulative monetary and fiscal policies:
“If (1) globalization is precluding the hiring of domestic labor due to cheaper alternatives in developing countries, then rock-bottom yields can do little to change the minds of corporate decision makers. If (2) technological innovation is destroying retail book and record stores, as well as theaters and retail shopping centers nationwide due to online retailers, then what do low cap rates matter to Macy’s or Walmart in terms of future store expansion? If (3) U.S. and Euroland boomers are beginning to retire or at least plan more seriously for retirement, why will lower interest rates cause them to spend more?”
