Central banks’ attempts to push investors into riskier parts of the market have failed to stimulate growth and encouraged irrational investment decisions, according to Bill Gross.
In his latest Investment Outlook, the bond market veteran continued his long-standing criticism of quantitative easing in developed economies and likened it to a ‘desperate gamble’ by policymakers.
He said this has led many investors to show ‘more desperation than logical thinking’ as they seek to stay ahead of policy movements.
‘Investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth,’ he said.
‘The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets.’
Gross, who runs the world’s second largest mutual fund, the PIMCO Total Return Bond fund, said there was no sign of these expansive monetary policies having a meaningful effect in global economies despite central bank efforts.
He said: ‘You have no other choice,” their policies insinuate. “Get used to negative real interest rates, move out on the risk spectrum and in the process help heal the real economy,” they seem to command.’
‘Yet this now near 5-year migration across the global asset plains in search of taller grass and deeper water has had limits, both in price and real growth space.’
Looking ahead, Gross said central banks must be extremely worried about what will happen when the ultra-accommodative policies currently in action fail to create a lasting positive effect.
‘Deep in the bowels of central banks research staff must lay the unmodelable fear that zero-bound interest rates supporting Dow 16,000 stock prices will slowly lose momentum after the real economy fails to reach orbit, even with zero-bound yields and QE.’
Bond wars scenario
Referencing a previous outlook, Gross said, given the Federal Reserve’s efforts to artificially lower yields and elevate bond prices, should lead fixed income investors to underweight duration and perhaps overweight other carry alternatives.
He said this strategy will help to weather any volatility created when, as he predicts, QE comes to an end over the next year under the watch of new Federal Reserve chair Janet Yellen.
‘The taper will lead to the elimination of QE at some point in 2014, but the 25 basis point policy rate will continue until 6.5% unemployment and 2.0% inflation at a minimum have been achieved.’
‘If so, front-end treasury, corporate and mortgage positions should provide low but attractively defensive returns. We have positioned our bond wars portfolio – heavily front-end maturity loaded along with credit, volatility and curve steepening positions.’
To read the whole of Bill Gross’s latest Investment Outlook, entitled On the Wings of an Eagle, please click here.