Bond fund manager Bill Gross has a message for all those investors and advisors hoping to reap investment gains this year: Don’t expect much, and be prepared for losses.
“At best [there’s] a ceiling on risk asset prices (stocks, high-yield bonds, private equity, real estate) and at worst, minus signs at year’s end…,” writes Gross in his latest Investment Outlook at Janus Capital, where he manages the Janus Global Unconstrained Bond Fund (JUCIX). “Worry for now about the return ‘of’ your money, not the return ‘on’ it.”
As of mid-afternoon Wednesday, the S&P 500 was up 2.45% year to date, and the iShares iBoxxx High Yield Corporate Bond ETF (HYG) was ahead 7.54%.
Underlying Gross’ bearishness is the slowdown in credit growth, which he writes is running at less than half the rate that prevailed since the beginning of this century – averaging 4% annual growth versus 9%.
“Credit is the oil that lubes the system, the straw that stirs the drink, and when the private system (not the central bank) fails to generate sufficient credit growth, then real economic growth stalls and even goes in reverse,” writes Gross.
It’s not as if there wasn’t a lot of credit in the system – Gross writes that credit and debt from households, businesses, government and finance-based sources now totals $62 trillion. It’s the fact that credit isn’t growing enough to fuel growth, according to Gross.
“A highly levered economic system is dependent on credit creation for its stability and longevity, and now it is growing suboptimally,” writes Gross.
He blames private banks, not central banks, for the lack of credit growth. Central banks “have lots and lots of money available but only if the private system – the economy’s real bankers — decide to use it and expand ‘credit.’ If banks don’t lend, either because of risk to them or an unwillingness of corporations and individuals to borrow money, then credit growth doesn’t increase,” writes Gross.