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March 03, 2016 at 10:11 AM
The credit-powered global economy is running out of fuel and will eventually stall out if economic and monetary policies don’t change, according to legendary bond fund manager Bill Gross.
“This expansion appears to be reaching an ending of sorts, at least in its current form,” writes Gross about the global economy. “The ever expanding supply of available credit has facilitated economic prosperity much like the sun has been the supply center for energy/food and life’s sustenance,” writes Gross. But now “finance itself is burning out like our future sun.”
In his latest economic outlook for Janus Capital Group, where he manages the Janus Global Unconstrained Bond Fund (JUCTX), Gross laments the explosion of credit in the global economy – including a 58-fold increase in the U.S. since the early 1970s. And, as he’s done before, Gross blames the quantitative easing policies of central banks and negative interest rates for the credit explosion and slowdown of the global economy.
“With quantitative easing and negative interest rates, the concept of nurturing credit seems to have morphed into something destructive as opposed to growth enhancing,” writes Gross. “Our global, credit-based economic system appears to be in the process of devolving from a production-oriented model to one which recycles finance for the benefit of financiers.”
Not benefiting from the those policies are the households that can’t save enough to pay for college, retirement or medical bills; insurance companies that have trouble covering claims because they can’t earn enough returns on bond and stock portfolios; and pension funds, which similarly can’t earn enough to cover their liabilities, writes Gross. But he singles out the banking sector — the sector that employs some of those financiers – as among the most damaged because their “profit margins are threatened as the yield curve flattens and net interest rate margins narrow.”
The yield curve measures the difference between short- and long-term rates, and the net interest rate margin is the spread between the rate a bank charges on loans and the rate it pays out in deposits. Both limit the rate that banks can charge on loans, which hurts their profit margins and, in turn, bank stocks.
