The World Can’t Devalue Against Itself, Says Bill Gross

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Bill Gross has an important message for the world – but first he wants to let everyone know that if he could be a dog, it would be a Golden Retriever…..

The rationale for a country intentionally devaluing its currency during a recession is that it will give exports a boost and make locally denominated debt more tolerable, and if you ask Bill Gross that’s why the US has rebounded from the financial crisis faster than Europe – it was the first to get really aggressive with monetary policy. Now that Federal Reserve chair Janet Yellen is hinting that rate hikes are coming while other central banks are either continuing QE or just getting under way the same rationale might lead you to predict stronger growth worldwide. But Bill Gross warns that this misses a key point.

“All of this may seem positive for future global growth and in some cases it may be – lower yields make sovereign and corporate debt burdens more tolerable and their exports more competitive. But common sense would argue that the global economy cannot devalue against itself,” he writes in this month’s Investment Outlook.

QE may not work when everyone does it

Bill Gross says there are really two ways that widespread QE could pan out. The first is that the US dollar continues to rise against other currencies until it threatens the US recovery and “weakens the world’s current growth locomotive.” Even if the US takes a stronger dollar in stride, he thinks future attempts at QE could end up more like Japan, which has dramatically devalued the yen with mixed results, than the US. Either way, he’s not very optimistic as you probably know if you’ve been reading his monthly articles regularly.

Bill Gross says widespread QE could undermine growth

Bill Gross is also worried that globally falling interest rates threaten businesses that rely on long-term funding to survive such as pension funds and insurance companies. He thinks there is a good chance that the ECB’s QE program will send German 10 year bonds yields negative, meaning that a French life insurance company hoping to cover future liabilities, to cite just one example, doesn’t really have a good way to do that.

Households saving for the future face the same dilemma, which could ironically undermine Europe’s recovery by giving consumers a good reason not to spend. Someone saving for a major life event (college, a home, retirement) will have to make larger contributions to make up for lower interest rates, which leaves them less to spend now.

Bill Gross recommends that individual investors be conservative with their own portfolios, focusing on high quality bonds, and quality stocks with low PE.

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