If you can skim through the beginnng of Bill Gross’ latest investor outlook, “Sizing Up the Global Economy,” you’ll get to the heart of what is on his mind these days: Fed tightening.
Gross, portfolio manager of the Janus Global Unconstrained Bond Fund, sees the Fed’s tightening cycle as “too little, too late.”
The Federal Reserve may have missed its “window of opportunity” in early 2015, he says. Plus, the bond big wants “a new neutral policy rate which should be closer to 2% nominal, but now cannot be approached without spooking markets further and creating self-inflicted ‘financial instability.’ ”
While the Fed seems focused on raising the Fed funds rate “if only to prove that they can begin the journey to ‘normalization,’ ” the group must careful, he adds: This is because “ ‘one and done’ represents an increasing possibility – at least for the next six months.”
The problems with the Fed’s six-year period of zero-bound interest rates are numerous, according to Gross. First, it means the destruction of “historical business models essential to capitalism such as pension funds, insurance companies, and the willingness to save money itself,” he explains.
Without savings, there’s little investment and weak long-term productivity – “the decline of which we have seen not just in the U.S. but worldwide,” Gross states.
And there’s more. The imbalance between savings/investment and consumption, Gross explains, “is not the only Frankenstein creation” of zero percent yields.
Artificially low yields “have propelled financial markets and have impacted the real economy in numerous ways,” which he lists as follows:
- Global growth – commodity-based versus non-commodity based countries
- Policy rates and forward yield curves
- Monetary and fiscal policies
- Balance of payments/trade balances
- Debt levels
- Demographics in individual countries
- Equity and debt risk spreads – financial bubbles
Call the Doctor?
“The global economy’s finance-based spine is so out of whack that it is in need of a major readjustment,” said Gross. However, even the best chiropractor “could not even attempt it.”
In addition, a “one-off” Fed fund increase is not going to straighten it out, he adds.
“Major global policy shifts – all in the same direction – are required that emphasize government spending as opposed to austerity and that recognize that competitive devaluations do nothing but allow temporary respite from the overreaching global problem of ‘too little aggregate demand’ vs. ‘too much aggregate supply,’ ” he explained.
Just as there have been calls over the past few decades for Japan to embrace consumerism, it’s now China’s turn. “China must move more quickly to a consumer-based economy,” Gross stated.