PIMCO’s Bill Gross said global central banks’ actions are at a cost to savers and investors.
Pacific Investment Management Co’s Bill Gross, manager of the world’s biggest bond fund, said global central bank debt purchase programs and almost-zero interest rates are bolstering economic growth and asset prices at a cost to savers and investors.
PIMCO, a unit of the Munich-based insurer Allianz SE (OTCMKTS:AZSEY) (FRA:ALV) (ETR:ALV), managed $2.04 trillion in assets as of March 31.
The latest monthly newsletter from Bill Gross is titled “There Will Be Haircuts”. Haircuts have become a popular topic of discussion ever since Cyprus clipped the savings of large depositors in order to recap the banks. Bill Gross feels the haircuts do not represent an authentic store of value even if their bubbly prices never pop.
In his latest newsletter, Bill Gross argues that there is no way that the governments will ever be able to reduce total debt to GDP, unless they find creative ways to clip bondholders. He comes up with four main ways.
He feels negative real interest rates, inflation, currency devaluation, capital controls and outright default are among the costs, or haircuts from global central banks’ unprecedented monetary stimulus.
First he talks about the negative real interest rates. Central banks are doing with near zero-bond yields and effective caps on higher rates through quantitative easing. Bill Gross feels the Treasury’s average cost of money is steadily grinding lower than 2%. If current policies continue to be enforced in future years it will eventually be less than 1percent because of the inclusion of T-bill and short maturity financing. The government’s gain, however, is the saver’s loss. Investors are being haircutted by at least 200 basis points judged by historical standards, which in the past offered no QE and priced Fed Funds close to the level of inflation.
Next he feels inflation is a necessity for a modern-day levered economy to survive. Bill Gross notes that historical bouts of inflation or currency devaluation suggest that investor’s investment portfolio may not be “good as the money” he might be banking on.
Bill Gross feels today we have capital controls through currency pegging (China and many others), taxes on incoming capital (Brazil) and outright taxation / embargos of bank deposits (Cyprus). He feels Governments use these methods to keep money out or to keep money in, resulting in haircut on investor’s capital or his potential return on capital.
Finally he notes central banks are typically limited from purchasing bonds payable in machine guns or subprime mortgages. He observes that the modern-day developed economies are asset-price supported and cautions that unless prices can continuously be floated upward, defaults and debt deflation may emerge.
It is interesting to note that the world’s biggest manager of bond bonds cut mortgage holdings to 33 percent in March, the lowest level since August 2011, from 36 percent in February.