PIMCO bond manager Bill Gross expects 2014 to be a positive year for investors — but quite possibly the last positive year during the era of quantitative easing.
Writing in his new monthly investment outlook, the bond manager chose a literary metaphor from William Butler Yeats’ 1919 poem “The Second Coming” to describe a market uniquely dependent on central banks’ artificial monetary stimulus:
“Turning and turning in the widening gyre The falcon cannot hear the falconer; Things fall apart; the centre cannot hold.”
In Gross’ analysis, investors are the falcon, the Fed and other central banks the falconer, and turning and turning in the widening gyre is the investor’s search for higher investment return across the risk-return spectrum.
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Gross pictures asset categories as a series of concentric circles with the fed funds rate, overnight repo and T-bills in the center, then moving further out in the widening gyre to various higher risk assets such as bonds, stocks and real estate.
As long as the falcon (investor) can hear its master’s message, it will go out in search of investment alpha.
But it is not just the central bank’s policy rate, which has been set at an artificially low price, that has resulted in investors’ asset binge. It is also “investor expectations and confidence” in central bank policies that has kept things from falling apart and the center holding, Gross writes.