Despite the strength of the U.S. dollar, it was actually the U.S. that fired the first shot in an undeclared currency war whose risks investors need to mitigate through conservative investments, Janus Capital’s Bill Gross warns.
Writing in his March investment outlook, the bond manager reaches beyond today’s headlines about the Swiss franc-euro peg back to the Federal Reserve’s near-zero rate reduction immediately following the Great Recession six years ago.
That rate cut effectively devalued the dollar by 15%, a move that Gross says, in a novel explanation “seldom” addressed by other analysts, is the reason the U.S. has led the world in global growth since the financial crisis.
Likening the current period to that of the competitive currency devaluations of the 1930s, when the countries first to abandon the gold standard were the first to escape the clutches of the Great Depression, Gross says the Fed’s 2008-2009 policies gained the U.S. a first-mover advantage in global trade.
But the U.S. must today compete against “currencies with their own QE’s and promises to hold interest rates lower and longer than the U.S.,” such as Japan, whose own QE program, he says, is 2 to 3 times greater in relative GDP terms.
Competing with America’s zero rates has introduced global investors to a previously unimagined world of negative rates; the value of negative-yielding notes and bonds in the eurozone already total close to $2 trillion.
As Gross colorfully describes it: “Not even ‘thin gruel’ is being offered to our modern day Oliver Twist investors. You have to pay to come to the dinner table and then sit there staring at an empty plate.”
The novelty of this situation is such that “no textbook or central bank research paper even mentioned” negative interest rates prior to last year.
Gross cites as an example former Fed Chairman Ben Bernanke’s famous 2002 paper on deflation, which mentions dropping money out of helicopters to ward off the threat of deflation but makes no mention of the possibility of negative rates.