Now is not the time to be greedy according to Pimco’s Bill Gross as slowing credit growth and the Fed’s QE tapering will likely hinder developed economies’ ability to increase their GDP levels.
In his latest monthly Investment Outlook the world’s biggest bond manager, who runs the $237 billion Pimco Total Return fund, warns investors to be watchful of the important and fragile role credit plays in global markets.
The world of investing, he said, is ‘full of little piggies feeding at the trough, scaredy “cats” afraid of their own shadow, and ostriches sticking their heads in the sand.’
‘And too, history will record that capitalism and its markets are a dog-eat-dog world.’
His advice to investors is to remain careful and keep a close eye on the progress, or lack thereof, of credit, adding that high quality bonds will continue to be well bid and risk assets may lose some lustre.
‘Bull markets are either caused by or accompanied by credit expansion. With credit growth slowing due in part to lower government deficits and QE now tapering which will slow velocity, the US and other similarly credit-based economies may find that future growth is not as robust as the IMF and other model-driven forecasters might assume. ‘
‘In any case, don’t be a pig in today’s or any day’s future asset markets. The days of getting rich quickly are over, and the days of getting rich slowly may be as well. Most medieval, perhaps.’
Credit's critical role
Turning to his main point, the loquacious Gross said that in today’s financial-based economies credit dominates the playing field.
‘Asset prices are dependent on credit expansion or in some cases credit contraction, and as credit goes, so go the markets, one might legitimately say, and I do most emphatically say that!’
In his eyes, credit is anything that can be used to buy things, from cash, bonds to stocks.
‘In our modern financial economy, credit is anything that can be transferred on a wire or a computer from one account to another and ultimately be used as the basis for spending money on things such as groceries or airplane tickets.’
‘Credit creation or credit destruction is really the fundamental force that changes P/Es, risk premiums, natural interest rates, etc. ‘
‘The amount of credit and its growth rate are critical to asset prices, and of course asset prices in our modern economy are critical to growth and job creation and future prospects for investment.’
In pre-Lehman times credit used to grow at 8-10% a year, he said, but now only grows at 3-4%. Part of that growth is due to the government itself with recent deficit spending, he added, and a 3–4% credit expansion in the US may not be enough to maintain 3% growth, especially if asset prices go down and velocity, the circulation and trading of credit, is affected.
To read the full version of Bill Gross's February 2014 Investment Outlook click here.