Bill Gross offers a dire outlook if negative interest rates become the norm

Janus’s Monthly Investment Outlook from Bill Gross for January was published on Thursday. Gross uses the board game Monopoly as an analogy for the global economy, and points out that near zero or negative interest rates violate a fundamental rule of capitalism. He even goes so far as to suggest that if this deflationary condition persists too long, it could lead to investors losing the hope of making money, and thus refusing to invest, and the eventual collapse capitalist economic system.

The danger of negative interest rates

Gross highlights that negative or even zero percent interest rates cannot become “a permanent rule on Monopoly’s new board.” He points out that rational investors do not give money away; it makes more sense to just hold on to the money and do nothing. Gross extends his argument to say near-zero interest rates lead to low to no economic growth because “the markets and the financial sector are ultimately the servants of the real economy.”

He notes: “In a new world, returns on real investment – ROI’s and ROE’s – become so low that the risk of a new project or the purchase of green hotels offer too little return for too much risk.” Instead, cash accumulates in corporate coffers or is used to repurchase stock in the financial economy. Important investments in plants, equipment and infrastructure is put off. Structural headwinds such as aging demographics and high debt to GDP ratios just make the problem worse, and ultimately “hope is challenged.”

The Bond King closes his argument by saying there is no better system than capitalism, but that “policymakers to promote a future condition which offers hope as opposed to despair.”  He emphasizes that capitalism depends on hope, the reasonable expectation that an investor gets his money back with a decent return kind of hope. Without this kind of hope, capitalism ultimately breaks down.

Warning from Bill Gross

Gross ends his monthly missive with an apocalyptic warning: “In the final analysis, an investor – a player – must be cognizant of future low and in some cases negative total returns in 2015 and beyond. Capitalism’s distortion, with its near term deflation, poses a small but not insignificant risk to what my mother warned was the final destination for all games – entertainment or real. “In the end,” she said, “all of the tokens, all of the hotels, all of the properties – they all go back in the box.” The strong odds are that 2015’s distorted capitalism continues with anemic growth, but the box rests on the family room coffee table, waiting, waiting, for its turn.”

See the full letter from Bill Gross here.

 

Pimco Bill Gross Janus Capital
Bill Gross at the Morningstar conference in Chicago – June 19th 2014