A bond manager embracing inflation or — gasp — calling for more government spending, is about as far from the hard-money stereotype of a fixed-income portfolio manager as you can get.
Perhaps, though, when that manager is bond king Bill Gross, now of Janus Capital after more than 40 years at PIMCO, investors are not likely to miss the fact that he has changed his corporate home.
Whereas his cross-town emeritus bond manager Bob Rodriguez has taken to racing cars in his retirement — when he’s not denouncing government spending — Bill Gross has grown philosophical, and in his November investment outlook, grasps for meaning in a world of “relative” values in which man is “insecurely grounded.”
So too does the 70-year-old money manager view the global economy and financial markets as “insecurely grounded” to such a great extent that it is unclear as to whether inflation or deflation “is just around the corner.”
But the philosopher-bond manager focuses his argument on what he perceives as a new reality that inflation is essential to today’s modern financial economy, despite the harm it does in eroding hard-earned wealth.
Gross likens the 2% level of inflation that the world’s central bankers are currently targeting to a firebreak aimed at arresting the “deflationary firestorm” that can be difficult to stop once inflation approaches zero.
“Best then to keep inflation at a reasonable 2% so that the zero hour never comes,” Gross writes, lamenting that the price of such a policy is an average 30-year-old’s retirement dollars worth half as much when he turns 65, or a third as much at 3% inflation, or worse, the 75% depreciation a 30-year-old Gross has experienced since he was that age in the ’70s.
Gross argues against the famously hard-money financial historian and newsletter writer Jim Grant, who pines for the days when “good deflation” proved compatible with economic growth while empowering consumers to spend more money.
While that could work in the 1880s, today’s economy simply cannot endure deflation, Gross argues.
“Stopping the printing press sounds like a great solution to the depreciation of our purchasing power, but today’s printing is simply something that the global finance-based economy cannot live without,” he says.
That is because of the massive debt today’s economies must service that did not exist in previous times.
“Having created outstanding official and shadow banking credit of nearly $100 trillion with an average imbedded interest rate of 4% to 5%, the Fed presses must crank out new credit (nominal growth) of approximately the same 4% to 5% just to pay the interest rate tab,” he writes.
Rather, “inflation is required to pay for prior inflation.”
And that is why the world’s central banks are cranking out printed money, and further, why the rich are getting richer while ordinary workers’ incomes are stagnating. Writes Gross:
“Such is the dilemma facing central bankers (and supposedly fiscal authorities) in 2014 and beyond: How to create inflation. They’ve made a damn fine attempt at it – have they not? Four trillion dollars in the U.S., two trillion U.S. dollar equivalents in Japan, and a trillion U.S. dollars coming from the ECB’s [President Mario] Draghi in the eurozone. Not working like it used to, the trillions seem to seep through the sandy loam of investment and innovation straight into the cement mixer of the marketplace. Prices go up, but not the right prices. Alibaba’s stock goes from $68 on opening day to $92 in the first minute, but wages simply sit there for years on end. One economy (the financial one) thrives while the other economy (the real one) withers.”
But this money-printing policy, while necessary, has profoundly worrisome limitations as well. In particular, easy money will not increase “wealth at a rate necessary to satisfy future liabilities associated with education, health care and a satisfactory retirement.
“The real economy needs money printing, yes, but money spending more so, and that must come from the fiscal side — from the dreaded government side — where deficits are anathema and balanced budgets are increasingly in vogue.”
Gross did not specify whether he thinks the government should simply go on a spending spree or whether he sees value in tax cuts that might induce the private economy to spend, though his diction seems to imply the former.
Bill Gross, call Bob Rodriguez. If the two fixed-income elders can’t agree on hard versus soft money, they might at least have an interesting philosophical discussion about the meaning of life.
— Check out Gross’ First Janus Outlook Addresses PIMCO Exit, Gloomy Financial Era on ThinkAdvisor.