There’s plenty of talk about the impact President Donald Trump is having on the stock market, and not all of it is positive.
Some Wall Street executives, notably JPMorgan CEO Jamie Dimon, are jubilant about the bull run. Confidence has “skyrocketed because [the president’s] a growth agenda,” he said, in a recent interview with Bloomberg.
“If he gets it done, even part of it, it will be good for growth, good for jobs, good for Americans,” Dimon explained. “I’m really confident he will get that done.”
Janus fixed income fund manager Bill Gross has a different take.
“‘Don’t lose it’ is my first and most important conceptual lesson for [my children], despite the Trump bull market and the current ‘animal spirits’ that encourage risk, as opposed to the preservation of capital,” he said in his March investment outlook.
Gross goes on to explain why he sees the glass as more half empty than half full, as Dimon does.
Today’s global economy, he says, has way too much credit.
It has created more credit relative to GDP “than that at the beginning of 2008’s disaster,” he says.
“In the U.S., credit of $65 trillion is roughly 350% of annual GDP and the ratio is rising. In China, the ratio has more than doubled in the past decade to nearly 300%. Since 2007, China has added $24 trillion worth of debt to its collective balance sheet,” the Janus fund manager explained.
While credit keeps capitalism going – i.e., turning loans into “pizza stores, cell phones and a myriad of other products and business enterprises” – its creation does have limits, he argues. The cost of credit, meaning interest rates, “must be carefully monitored so that borrowers (think subprime) can pay back the monthly servicing costs.”
If rates move too high, along with credit as a percentage of GDP, “then potential Lehman black swans can occur,” Gross says. Yet if rates fall too much and credit as a percent of GDP dips, the system “breaks down, as savers, pension funds and insurance companies become unable to earn a rate of return high enough to match and service their liabilities,” he points out.
This is the fine line that central banks try to walk, so they can generate “mild credit growth” which is paired with nominal GDP growth, while at the same time making sure the cost of the credit at a yield “is not too high, nor too low, but just right,” says Gross.