Bill Gross is ushering in the New Year with some especially bad news, warning that the market will turn on the 15th of, well of one of the months of the year. While most investors are wondering when the Fed’s first rate hike will be announced, Gross is looking at much longer trends and doesn’t like what he sees.
“Beware the Ides of March, or the Ides of any month in 2015 for that matter. When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over,” writes Gross, who knows better than to make exact predictions for anything related to the market.
Gross worried about the end of the debt supercycle
If you’ve been following Gross over the last year, you know that he hasn’t exactly been bullish in a while, but he’s confident that 2015 will be the year when ever looser monetary standards and freer credit won’t be enough to drive growth, the end of what he calls the debt supercycle. The prevailing trend for the last few decades has been credit growth, falling interest rates, and tighter spreads, all of which makes it easier for people to gear up and invest. From Gross’s perspective QE is just the latest in a long series of accommodative moves stretching back into the 80s. The problem is that there’s nowhere to go once you’ve reached the zero bound.
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“As yields move closer and closer to zero, credit increasingly behaves like cash and loses its multiplicative power of monetary expansion for which the fractional reserve system was designed,” writes Gross.
In other words, if you can get credit for nothing but can’t find any investments with a decent risk/return profile, at some point you’d rather just have cash or real assets, a dreary state that Gross thinks we’re getting close to.
Gross recommends Treasuries, stock with low leverage
If you agree with Gross, then it’s a particularly bad time to invest in expensive, high-growth industries. He recommends high quality assets that produce stable cash flows, which includes Treasuries but also mature companies with healthy balance sheets and a history of paying decent dividends. If things go south as he expects, anyone reaching for more will find themselves at a loss by year’s end.