Bill Gross: Negative Rates Are Finance Economy’s Last, Dying Gasp – Wall Street Journal (blog)

8 months ago Comments Off on Bill Gross: Negative Rates Are Finance Economy’s Last, Dying Gasp – Wall Street Journal (blog)


Much like the sun, the financialization of the economy has provided an endless stream of fuel for growth, Janus CapitalBill Gross said in his latest outlook letter. Unlike the sun, though, which has a good five billion years left in it, the finance economy’s fuel is just about spent. The move into the black hole of negative rates might just be the final act, Mr. Gross added

Instead of historically generating economic growth via a wealth effect and its trickle-down effect on the real economy, negative investment rates and the expansion of central bank balance sheets via quantitative easing are creating negative effects,” he wrote. Negative rates threaten bank profits as well as any business models that depend upon 7-8% annual returns on assets. He’s talking mainly about insurance companies and pension funds, a topic he’s hit on a number of times. “And the damage extends to all savers; households worldwide that saved/invested money for college, retirement or for medical bills. They have been damaged, and only now are becoming aware of it.”

Negative rates are “an enigma to almost all global investors,” he says, that undermine the basic architecture of the financial markets. “But central bankers seem ever intent on going lower, ignorant in my view of the harm being done to a classical economic model that has driven prosperity – until it reached a negative interest rate dead end and could drive no more.”

Mr. Gross takes note of the “somewhat suspicious uniform attack on high denomination bills,” the sudden crop of arguments against the $100 U.S. bill or the €500 euro. Why might that be? “ It appears that the one remaining escape hatch for ordinary citizens is being closed,” he wrote. “The cashless society which appears over the horizon may come sooner than the demise of the penny.” If actually banning cash doesn’t do the trick, the central bankers might be forced into literal “helicopter” drops of money (or perhaps, in the parlance of the times, that should be drone drops).

“Can any/all of these policy alternatives save the system?” he asked. “We shall find out, but current evidence of the past seven years’ experience would support only a D+ report card grade. Barely passing. As an investor though – and as a citizen in this election year – you should be aware that our finance based economic system which like the sun has provided life and productive growth for a long, long time – is running out of fuel and that its remaining time span is something less than 5 billion years.”

The investment implications are rough. He cautions against reaching for yield, or buying the “momentum-driven higher prices” of government bonds. “A 30-year Treasury at 2.5% can wipe out your annual income in one day with a 10 basis point increase,” he writes. Instead, he advocates searching out bonds with shorter maturities with attractive yields “in a mildly levered form.” That should provide a 5-6% return with some cover on the downside.

“No guarantees,” he says.

Bill Gross: Negative Rates Are Finance Economy’s Last, Dying Gasp – Wall Street Journal (blog)}