The looming US presidential election is leading many to reflect on the past four years and Bill Gross' latest investment outlook does exactly that, as he gives a scathing appraisal of efforts to re-launch the US economy.
The PIMCO bond star addresses the major issue for many US investors.
‘The biggest bet being wagered in financial markets these days is the bet on “financial repression,” “quantitative easing,” and the ultimate effect of both on the real economy. Of course even a genie couldn’t come up with a simple answer to that complex question.’
But Gross gives it his best shot and says the ultimate desired effect of each strategy may have looked good in theory, but in practice failed to deliver on many fronts.
Using the progress of the US’ net national savings - the amount of government, household and corporate savings that is left over after the existing investment stock is depreciated - over the past three years, the bond manager, who runs the world's largest mutual fund the $260 billion PIMCO Total Return, pointed out the figure has been negative and lower than it has been in modern history.
‘The last time this occurred was in the Great Depression.’
‘Aside from a little squiggle back close to 0% over the last year or so, there is no evidence that investment is being incented by quantitative easing.’
‘All of the money being created and freed up is elevating asset prices, but those prices are not causing corporations to invest in future production.’
‘Admittedly, the chart shows this downward spiral has been underway for decades, but financial repression and quantitative easing were supposed to be the extraordinary monetary policies that kick-started the real economy in the other direction.’
‘They have not. We have been using the lower interest rates to consume as opposed to invest.’
While critical of the Fed’s policies, he does come to the defence of its chairman Ben Bernanke saying he has received little help from the political elite in terms of cooperative fiscal stimulation.
‘They have all focused on re-electing themselves as opposed to constructively plotting a way forward.’
‘If monetary policy has shown its impotent limits, can we now trust Washington to constructively reverse a downward slide in our net national savings rate?’
‘I suspect not. I doubt if either Obama, Romney, or many of their economic advisors even know what the definition is, let alone how to reverse it.’
How to prepare your portfolio
If real economic growth is stunted in the US and globally, said Gross, then portfolio strategies should acknowledge bite-sized future returns and the growing risk that the negative consequences of misguided monetary and fiscal policy might lead to disruptive financial markets at some future point.
‘Although PIMCO expects a middle ground fiscal compromise from Washington, when that is combined with the fading influence of QE monetary policies, it leads only temporarily to 2% real growth in the US at best – growth that is clearly not “Old Normal.”’
‘We are in a “New Normal” world where the negative effects of private sector deleveraging are only being weakly addressed by monetary and fiscal authorities.’
‘If so, then Treasury yields should stay low,’ he said, adding that money market funds will also continue to deliver historically low interest yields.
‘The “cult” of equity – or better yet the cult of “total return” – for both bonds and stocks – is over, if that definition presumes a resumption of historical patterns anywhere close to double digits.’
‘The era of financial repression continues.’
The full Bill Gross Investment Outlook can be read here.