In a highly personal and at times emotional February Investment Outlook, PIMCO Chief Bill Gross examines life, death, personal loss and Virginia Woolf. Peppered with a significant number of literary and cultural references (even for Gross), the meandering post takes its time in getting to his point–namely, the global economy and financial marketplace are still functioning under the assumption that cheap and abundant credit “is always a positive dynamic.”
Reflecting on the recent birth of his granddaughter and the death of his “beloved” brother-in-law, Gross (left) writes, “Having now matured to trust reason more than faith I offer not so much a resolution, but an alternative to the unanswerable question of Virginia Woolf and the departed souls of Jeff Stubban and billions of others. If we don’t meet again–up there–then perhaps we’ll meet once more–down here. After all, the one thing I know for sure is that we got here once–and because we did, we could do it again. Rest easy, dear Jeff, and welcome to this world, dear Caroline. We’ll all just have to make it up as we go along.”
“Make it up as we go along,” is what he accuses Fed Chairman Ben Bernanke of doing through” a plethora of disparate policy solutions.”
“Letting your pet retriever roam the woods might do wonders for his ‘animal spirits,’” he writes. “But he could come back infested with fleas, ticks, leeches or worse. Fed Chairman Ben Bernanke, dog-lover or not, preannounced an awareness of the deleterious side effects of quantitative easing several years ago in a significant speech at Jackson Hole. Ever since, he has been open and honest about the drawbacks of a zero interest rate policy, but has plowed ahead and unleashed his ‘QE bowser’ into the wild with the understanding that the negative consequences of not doing so would be far worse.”
His intent is not to pick a “doggie bone” with the chairman, but rather to alert the reader to the costs ahead for the aforementioned economy and marketplace that still believe cheap and abundant credit is always a positive.
“When interest rates approach the zero bound they may transition from historically stimulative to potentially destimulative/regressive influences. Much like the laws of physics change from the world of Newtonian large objects to the world of quantum Einsteinian dynamics, so too might low interest rates at the zero-bound reorient previously held models that justified the stimulative effects of lower and lower yields on asset prices and the real economy.”
Gross makes three predictions as a result:
- Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside.
- Most short to intermediate Treasury yields are dangerously close to the zero-bound which imply limited potential room, if any, for price appreciation.
- [Investors] can’t put $100 trillion of credit in a system-wide mattress, but [they] can move in that direction by delevering and refusing to extend maturities and duration.
In a related story, a report from Bloomberg on Thursday appears to back his first assertion. The news service notes six of the 10 most expensive bond closed-end funds are managed by Bill Gross or his colleagues at Pacific Investment Management Co. The reason, it argues, is that investors are starved for yield and are bidding up prices of funds with high payouts run by brand name managers.
“Gross’s $1.55 billion PIMCO High Income Fund, which is trading at a 66 percent premium, above its three-year average of 49 percent, offers investors distributions of 11.5 percent,” according to the story. The PIMCO Global StocksPlus & Income Fund, which is run by PIMCO manager Dan Ivascyn and has a 10% payout, trades 76% above its net asset value as of Feb. 14.