PIMCO’s Gross: Fed Playing a ‘Dangerous Game’

Bond manager Bill Gross explains PIMCO’s outperformance through an approach that doesn’t fight the Fed, but rather deflects its easy-money approach through a retreat from risk.

In his new December investment outlook, the manager of the world’s biggest bond fund argues that the Fed, the Bank of Japan, the European Central Bank and the Bank of England are jointly telling the world’s investors “you have no other choice” but to move out on the risk spectrum.

The central banks’ policy of keeping interest rates at the zero bound has kept rates artificially low, thus creating a “dangerous game…in a desperate gamble to promote growth,” Gross writes.

But because the gambit has not worked — “monetary and fiscal policies cannot produce the real growth that markets are priced for” — Gross says the more astute investors at the margin (he includes Bridgewater and GMO along with PIMCO) are finding ways to steer away from risk.

“Deep in the bowels of central banks’ research staffs must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE,” he writes.

Gross cites, and modifies, his colleague Mohamed El-Erian’s concept of a “T-junction” investment future “where markets approach a time-uncertain inflection point, and then head either bubbly right or bubble-popping left due to the negative aspects of fiscal and monetary policies in a highly levered world.”