Register to get unlimited access to Citywire’s fund manager database. Registration is free and only takes a minute.

‘Be careful in 2018’: Bill Gross’s five themes to follow

Bond veteran’s monthly outlook returns with ominous overtones.

Bill is back

Outspoken fund manager Bill Gross has been relatively restrained in recent months. His regular Investment Outlooks have been on hiatus for almost six months.

However, the fixed income stalwart has now returned with his latest offering, which lays out five themes for investors to ponder.

The Janus Henderson manager urges investors to ‘be careful in 2018’.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

1. Protection is a rare commodity

Gross said that previous market tops were countered by investors buying treasury bonds as a defensive measure. However, with interest rates so low, the benefits of this have waned and it means there are fewer predictable elements at play in risk assets.

‘Should a crisis arise because of policy mistakes, geopolitical crises, or other currently unforeseen risks, the ability to protect principal will be impaired relative to history,' he said. 'That in turn argues for a more cautious and easier Fed than otherwise assumed.’

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

2. Leverage lessons not being learned

‘Credit creation begins at the central bank level, but in reality is predominantly expanded via fractional reserve banking and near zero reserved shadow banks,' Gross said. 'This model allows substantial leverage and can overprice AAA assets at the core then expand outward until it reaches the periphery of financial markets.'

Within this dynamic, credit usually leaks out into the real economy via purchases of real assets, plant and equipment, commodities and other factors of production, Gross explained. However, this is predicated on a heavy dependence on leverage in this system, which, Gross said, is no longer a fundamentally sound investment thesis.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

3. Carry on carrying on

Gross said the entire financial system is based upon carry and the ability to earn it. ‘When credit is priced such that carry can no longer be profitable – or at least grow profits – at an acceptable amount of leverage/risk, then the system will stall or perhaps even tip. Until that point, however, investors should stress an acceptable level of carry over and above their index bogies.’

While carry could be drawn from other areas – notably duration, curve, volatility or event currency – Gross said investors need to generate excess carry to outlast their target market. ‘Timing that exit is obviously difficult and perilous, but critical for surviving in a new epoch. We may be approaching such a turning point, so invest more cautiously.’

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

4. Don’t confuse cash with credit

Gross said there is a big difference between cash and credit – a definition which is lost in some areas of the market. ‘High-quality credit can at times take the place of money when its liquidity, perceived return and safety of principal allow for its substitution.

‘When the possibility of default increases and/or the real return on credit or liquidity decreases and persuades creditors to hold classical “money” (cash, gold, bitcoin), then the financial system as we know it can be at risk (insurance companies, banks, mutual funds, etc.) as credit shrinks and “money” increases, creating liquidity concerns.’

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

5. Fed refuses to pay

Working in extreme theoretical economics, Gross said he has been asked what would happen if the Federal Reserve simply told the Treasury it was ripping up $4 trillion worth of assets. Gross responded that the current situation is effectively just that.

‘“Just pay us the interest”, the Fed says, “and oh, by the way, we’ll remit all of that interest to you at the end of the year.” Money for nothing – the Treasury issuing debt for free. No need to pay down debt unless it creates inflation. For now, it is not. Probably later.’

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Related Fund Managers

William H Gross
William H Gross
136/275 in Bonds - US Dollar (Performance over 3 years) Average Total Return: 6.83%
Events
  • Citywire Alternative Ucits Retreat 2017

    Citywire Alternative Ucits Retreat 2017

  • Citywire Milan 2017

    Citywire Milan 2017

  • Citywire Paris 2017

    Citywire Paris 2017

  • Citywire Deutschland 2017

    Citywire Deutschland 2017

  • Citywire DACH 2017

    Citywire DACH 2017

  • Citywire Italy 2016

    Citywire Italy 2016

  • Citywire Milan 2016

    Citywire Milan 2016

  • Citywire Alt Ucits 2016

    Citywire Alt Ucits 2016

  • Citywire Berlin 2016

    Citywire Berlin 2016

  • Citywire Switzerland 2017

    Citywire Switzerland 2017

  • Citywire Amsterdam 2016

    Citywire Amsterdam 2016

  • Citywire Montreux 2016

    Citywire Montreux 2016

  • Citywire Deutschland 2016

    Citywire Deutschland 2016

  • Citywire Latin America 2016

    Citywire Latin America 2016

  • Citywire Milan 2016

    Citywire Milan 2016

  • Citywire Munich 2016

    Citywire Munich 2016

  • Citywire Paris Alt Ucits 2016

    Citywire Paris Alt Ucits 2016

  • Citywire Zurich Alt Ucits 2016

    Citywire Zurich Alt Ucits 2016