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August 31, 2016 at 11:38 AM
As is his wont in his monthly ‘Investment Outlook’ for Janus, Bill Gross gets personal in his September letter.
He starts off with a tongue-in-cheek complaint about his wife’s superior golf prowess and how he’s regained his golfing expertise (“practice, man, practice”) before criticizing Federal Reserve Board Chair Janet Yellen and her central bank colleagues around the world for their zero/negative interest rate policies that “destroy capitalism’s business models.” Not only that, he writes, those policies also fall short in attaining their stated goals, since they “fail to provide an ‘easing cushion’ should recession come knocking at the door.”
Gross says that Yellen and other central bank governors past and present have “mastered the art of market manipulation,” a charge they would “plead guilty to over a cocktail at Jackson Hole or any other get together of Ph.D. economists who have lost their way.”
Yellen et al. espouse, he says, “decades of old orthodoxy that follows the tarnished golden rule of lowering interest rates to elevate asset prices, which in turn could (should) trickle down to the real economy.”
Then Gross relates the story of ex-Fed District President Kevin Warsh, who he calls a “lone Fed wolf in wolf’s clothing,” who argued in a monograph called “The Federal Reserve Needs New Thinking” that a “numeric change in the inflation target isn’t real reform.” Rather, Warsh wrote, “It serves as subterfuge to distract from monetary, regulatory and fiscal errors.”
Warsh doesn’t stop there, Gross points out, saying he “questioned the Fed’s sincerity in speaking to income inequality while refusing to acknowledge that their polices have unfairly increased asset inequality,” In addition, Gross says Warsh took the Fed to task for its “mantra of data dependence and its refusal to acknowledge the Yellen/Bernanke/Greenspan ‘put’ in financial markets,” and worries that the Fed can’t possibly accomplish its three goals of trying to “maintain that ‘put” while at the same time “subordinating inflation targeting and output-gap modeling to it.” One possible consequence of the public “growing increasingly suspicious” of the Fed — again, Gross quoting Warsh — is that the Fed may be forced to give up its very independence.
With that description of what the Fed and other central bankers have done wrong, Gross then puts his finger on the big issue. The “primary problem lies with zero/negative interest rates; that not only do they fail to provide an ‘easing cushion’ should recession come knocking at the door, but they destroy capitalism’s business models — those dependent on a yield curve spread or an interest rate that permits a legitimate return on saving, as opposed to an incentive for spending.”
