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

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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?

Indeed, he admits. A stronger dollar “does promote, you know, some negatives,” Gross stated. “It promotes not only lower exports and — and lower growth in terms of manufacturing, but it promotes a — an infusion of deflation as opposed to inflation, which is exactly opposite the — what the Fed wants to do.”

He points to the Personal Consumption Index, which stands at 1.1% on a year-over-year basis, “and going lower, and their target is 2%.”

“Ultimately, that’s again, one of the reasons why, you know, if they get off the dime in June or if they get off the dime in September, that they basically have to go very slowly [raising rates], because ultimately, a stronger dollar promotes lower growth in the United States as opposed to higher growth,” Gross said.

As for his own professional objectives, he was forthright on why, after being pushed out of PIMCO, he didn’t retire.

“I wanted to show clients and to show the world, to the extent that they’re interested, that I can continue to produce a track record like I did at PIMCO,” Gross explained.

And the pressure is on, he admits: “I won’t have five to 10 to 15 years of leeway like I had at PIMCO in terms of proving that. But certainly for the next two, three or four years. I’m a very competitive person, and I like to post numbers that are better than the market and better than the competition.”

Just like Janet Yellen, Gross is in the hot seat. 

— Check out Bill Gross: Hunker Down for Global Currency War on ThinkAdvisor.


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