Bill Gross, former co-founder of PIMCO, who now works at Janus. (Photo: Jim Tweedy)

Bill Gross is not a fan of quantitative easing and low, zero or negative interest rates in their U.S., European and Japanese iterations, and in his monthly investment outlook—“Double Down”—he tells readers why. Those central bankers’ policies, he charges, are leading to “capital destruction as opposed to capital creation.”

The world’s financial markets, the Janus bond manager writes, “have become a Vegas/Macau/Monte Carlo casino, wagering that an unlimited supply of credit generated by central banks can successfully reflate global economies and reinvigorate nominal GDP growth to lower but acceptable norms in today’s highly levered world.”

The bankers, he says, are suffering from the same delusion as those devotees of the Martingale System, which Gross defines as the claim that for gamblers, “it is mathematically impossible to lose, given enough money and the willingness of the casino to take the increasing bet.”

Yellen, Draghi, Carney [Mark, of the Bank of England] and Kuroda are using the Martingale System in their policy decisions, which “have led to over $15 trillion of negative yielding developed economy sovereign bonds.” Gross points out that the difference between an individual gambler and a central banker is that the latter has an “unlimited bankroll” and have, and can, continue to place interest rate bets “on the 31st, 32nd, or “whatever it takes” roll of the dice. After all, their cumulative balance sheets have increased by $15 trillion+ since the Great Recession. Why not $16 trillion more and then 20 or 30? They print for free, do they not?” 

Gross cites a growing body of opinion—including that of Jamie DImon—that contrary to central bank policies “low/negative yields erode and in some cases destroy historical business models which foster savings/investment and ultimately economic growth.” The policies have affected banks, yes, but also threatens the solvency of “insurance companies and pension funds with long dated and underfunded liabilities.”

The bankers’ counter-argument is that they are moving to restore short-term stability and economic growth, and that savers should buy stocks so that the benefits of “ever-ascending asset markets” will “trickle down to the masses.”

However, Gross warns that if central bankers “continue to double down” their bets they risk a “‘black’ or perhaps ‘grey’ swan moment in global financial markets” that will come in the form of returns-starved investors at the margin deserting “the standard financial complex for higher returning or better yet, less risky alternatives.” That’s why alternative assets like “bitcoin and privately agreed upon block chain technologies” are already appealing to banks and some investors who wish to “stabilize the value of their current assets in future purchasing power terms.”

As it is, Gross concludes, “Investors/savers are now scrappin’ like mongrel dogs for tidbits of return at the zero bound. This cannot end well.”

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