Bill Gross, it seems, has never met a central banker who gets it right.
In his latest investment outlook, the famed bond fund manager continues his critique of the Federal Reserve and other central banks, this time focusing on the failure of their low rate policies to invigorate their respective economies.
“They seem to believe that there is an interest rate SO LOW that the resultant financial market wealth will ultimately spill over in the real economy,” writes Gross, lead portfolio manager of the Janus Global Unconstrained Bond Fund (JUCTX) and related strategies.
“Why after several decades of 0% rates has the Japanese economy failed to respond?” writes Gross. “Why has the U.S. only averaged 2% real growth since the end of the Great Recession?… The fact is that global markets and individual economies are increasingly ‘addled’ and distorted.”
Gross goes on to list some of those distortions:
- Venezuela teetering on bankruptcy due to low prices and policy management
- Puerto Rico in default because of government overspending and overpromising of retirement benefits coupled with inadequate investment returns due to low global rates
- Brazil in deep recession caused by low commodity prices, a government scandal and ultra-high real interest rates to boost its currency and combat the impact of low global rates. “No country over time can issue debt at 6%-7% real interest rates with negative growth,” writes Gross. “It is a death sentence.” At the same time, he notes, Brazil’s government has issued, then rolled over more than $100 billion worth of currency swaps instead of selling dollar reserves, making it appear that the government has $300 billion worth of reserves but effectively cutting 2% from annual GDP and creating a 9% fiscal deficit.
- Japan issuing government debt at nearly three times (260%) the level of its GDP. (Last Friday the Bank of Japan adopted a negative interest rate for the first time, setting a key short-term interest rate at -0.1%.) Gross expects the Japanese government will eventually convert its debt to zero interest 50-year bonds that effectively never mature, technically avoiding default but repelling private investors.
- European governments maintaining negative government interest rates, including Germany, where negative rates extend as far as seven years out on the yield curve. “Who will invest in these markets once the ECB hits an effective negative limit that might be marked by the withdrawal of 0% yielding cash from the banking system?” writes Gross.
- China, with a total debt-to-GDP ratio as high as 300%, spending $1 trillion of government reserves to support an “overvalued currency.” Its “distorted economic model relies on “empty airports, Potemkin village housing investment … [and] somehow never seems to transition to a consumer-led future,” writes Gross.
- A U.S. economic growth model that relies on consumption, which is fed by job growth and higher wages. Even the Fed seems to be having doubts about that model, writes Gross. Its latest policymaking statement, for the first time in 15 years, noted an inability “to assess ‘the balance of risks,’” writes Gross.
“ ‘How’s it workin’ for ya?’ would be a curt, logical summary of the impotency of low interest rates to generate acceptable economic growth worldwide,” writes Gross.