Bill Gross: Low-Rate Policy ‘Destroys Capitalistic Model at the Margin’

As market volatility continues and investors search for yield, bond guru Bill Gross is clear on the true negatives resulting from zero percent interest rates — and they aren’t pretty.

“You know, [this Fed policy] keeps zombie corporations alive, because they can borrow at 3% and 4%, as opposed to the 8% or 9%,” explained the ex-PIMCO chief investment officer on Bloomberg TV Monday.”It — it destroys business models. It’s destroying the pension industry and in the insurance industry because, you know, basically, their liabilities can’t be — they can’t be provided for by very low interest rates.”

And yes, there’s more.

“I think it destroys, you know, the capitalistic model at the margin,” Gross explained. “You talk about stocks and cheap money, they’re basically corporations, instead of investing in the real economy, can now simply borrow at, you know, close to 0% and buy their own stocks, which yield 2% or 3% on a dividend basis and, you know, provide a return of 6% or 7% on an earnings to price ratio basis.”

Given such negatives, the Federal Reserve is likely to move “gradually” to raise rates, says the Janus Capital portfolio manager.

“What has been promoted, you know, [are] potential bubbles in stock markets and in bond markets,” Gross explained.

Still, the fixed income expert believes, the Fed “is willing” to at least acknowledge that, by raising interest rates 25 basis points in June.  But don’t expect it to go higher.

The market is anticipating a 2% Fed funds rate in late 2018, according to Gross. “I think the reason that they can’t [anticipate it going higher] … is that the U.S. economy and the global economy to which the U.S. dollar and the U.S. interest rate basically serves, is — is too levered, too highly levered. There’s too much debt, and ultimately 2% is probably the top in terms of this Fed cycle.”

But won’t a hike in rates further strengthen the already strong U.S. dollar?