Forget the Great Rotation, the New Normal, and the T Junction, PIMCO founder Bill Gross’ latest euphemism for the future of the economy is the wings of an eagle – and not in the sense that it’s about to take flight. Bill Gross is worried, not about a sudden unraveling as tapering sets in or some shock hits the financial system, but that investors will drift away from riskier investments, undermining price support for many asset classes.
Bill Gross on monetary and fiscal policies
“If monetary and fiscal policies cannot produce the real growth that markets are priced for (and they have not), then investors at the margin – astute active investors like PIMCO, Bridgewater and GMO – will begin to prefer the comforts of a less risk-oriented migration,” he writes.
This slow decline, as opposed to a sharp T-shaped break, is what Bill Gross has started calling the eagle’s wing shape of the economy.
Bill Gross’ expectations for the end of QE
Bill Gross expects QE to end in 2014, but says that Federal Reserve chair appointee Janet Yellen won’t increase rates until unemployment is down to 6.5% alongside 2.0% inflation, which means at least another two years, and he expects to see the “gradual as opposed to sudden disillusionment of investors worldwide” as the long-term result of QE and similar extraordinary measures being undertaken by the Fed, the ECB, the Bank of England, and the Bank of Japan. He points out that while bond investors have already been forced to come to grips with historic low interest rates over the summer, “stock investors, however, were only mildly discouraged and continued their faith-based, capital gain dependent investments despite what should be the obvious conclusion that QE and low interest rates were as critical to their market as they were to bonds.”
Although his argument is slightly different, Bill Gross’s concerns about the effects of QE are similar to other major financial analysts like Nomura chief economist Richard Koo, who worries about the damage done by the “QE Trap”, and CLSA’s Christopher Wood, who has compared QE to financial heroin. Neither think the Fed has any creditable QE exit strategy, or that markets have yet to seriously take this into account.
“Overlevered economies and their financial markets must at some point pay a price, experience a haircut, and flush confident investors from the comfort of this Great Moderation,” writes Bill Gross.