Bill Gross: You can’t solve a debt crisis with more debt

You cannot solve a debt crisis by creating more debt as it does not address the need to create growth, Pimco’s veteran bond manager Bill Gross has said.

In his latest market outlook, Gross, who manages the world’s largest bond fund the Pimco Total Return Bond fund, said attempts to create a more attractive environment through rate cuts and discounted future cash flows can only go so far.

‘Growth is the elixir that seems to make every ache, pain or serious ailment go away. Sovereign debt too high? Just grow your way out of it. Unemployment rates hitting historical peaks? Growth produces jobs. Stock markets depressed? Nothing a lot of growth wouldn’t cure'.

The trouble with this however is that growth is currently ‘the commodity that the world is short of at the moment,' says Gross.

The world is instead, brimming with debt.

That debt – low yielding as it is - is not creating growth, says Gross. In its place, we are seeing: 'minimal job creation, historically low investment, consumption turning into savings and GDP growth at less than New Normal levels.'

Extend this globally and there is reluctance among creditors to be sucked into the ‘vicious cycle’ of reinvesting money into a slowing economy - thereby further exacerbating the problem and leading Gross to believe that structural growth problems in developed economies 'cannot be solved by a magic penny or a magic trillion dollar bill, for that matter.’

So what does this view work its way into an investment case? When it comes bonds, Gross suggests avoiding longer-dated issues where inflation premiums will dominate performance.

He said, while the Fed’s Operation Twist has absorbed almost all the 20-30 year duration supply over the next six months, future quantitative easing programmes could push long-term yields higher in order to achieve a 2% or higher inflation objective.

‘Investors should consider migrating to the relatively safe haven of 1-10 year maturities offering ‘rolldown’ total returns of 2-3% with far less duration risk. In addition, Agency mortgages are back on the Fed’s menu and may be a featured ‘special’ in months to come.’

The comment regarding Agency mortgages could be viewed as a nod to the most recent manoeuvring of his Total Return fund portfolio, which saw him pile into mortgage-backed securities.

‘In sum, with both earnings and bond yields near historic lows as a result of a lack of real growth in developed economies, investors will need to find lots of pennies to produce asset returns much above 5% in bonds or equities,’ concluded Gross.

To read the entirety of Bill Gross' latest outlook, entitled 'Pennies from Heaven', please click here.