Monthly Investment Outlook from Bill Gross
I’m not what you would call a “prayerful” type of guy. Even at 30,000 feet, when the air gets rough, I never invoke the “God” word, settling instead for promising myself that if I ever get back to terra firma, I will never fly again, which I promptly forget days or even hours later. It’s not that I’m a non-believer in prayer’s ultimate destination, but more of a cynical take on why the Lord would hand out party favors to everyone that asked, or to those that asked most intently.
Funny, too I think, about how I learned two different versions of the Lord’s Prayer: one – the Protestant litany – spoke to “forgiving our debts as we forgive our debtors”; the other – maybe a more traditional Catholic influenced version – substituted “forgive our trespasses as we forgive those who trespass against us.” The differences never much bothered me as I prayed less and sinned more into my teenage years, but later I got to thinking about it as I entered the bond market and began to contemplate the odds of paying and being paid, or trespassing and being trespassed against with other people’s money. Given a chance, I thought I would infinitely prefer forgiving a trespasser as opposed to a debtor.
But, because it is the finance system’s global locomotive, it is the United States where this debate seems to be most critical, and where it subtly seems to be changing. It is not the fiscal stance that appears to be morphing, however. Republican “tax cut” orthodoxy will likely dominate for at least another few years. It’s monetary policy where the battleground for evolutionary ideas is taking place, as the Fed begins to recognize that zero percent interest rates increasingly have negative, as well as positive consequences. Historically, the Fed and almost all other central banks have comfortably relied on a model which assumes that lower and lower yields will stimulate not only asset prices but investment spending in the real economy. With financial assets, the logic is straightforward: higher bond prices and stock P/E’s almost axiomatically elevate markets, although the assumed trickle-down effect leading to higher real wages has not followed suit. In the real economy, it seemed almost straightforward as well: if a central bank could lower the cost of debt and equity closer and closer to zero, then inevitably the private sector would take the bait – investing in cheap plant + equipment, technology, innovation – you name it. “Money for nothing – get your clicks for free”, I suppose. But no. Not so.
But perhaps the recent annual report from the BIS – the Bank for International Settlements – says it best. The BIS is after all the central banks’ central banker, and if there be a shift in the “feed a fever” zero interest rate policy of the Fed and other central banks, perhaps it would be logically introduced here first. The BIS emphatically avers that there are substantial medium term costs of “persistent ultra-low interest rates”. Such rates they claim, “sap banks’ interest margins…cause pervasive mispricing in financial markets…threaten the solvency of insurance companies and pension funds…and as a result test technical, economic, legal and even political boundaries.” Greece is not specifically mentioned, nor the roller coaster ride of Chinese equity markets, nor the rising illiquidity of global high yield bond markets, nor the…well a reader should get the point. Low interest rates may not cure a fever – they may in fact raise a patient’s temperature to life threatening status. Yellen, Fisher, Dudley and company may not be in total agreement, but they assuredly are listening as this week’s Fed meeting will likely attest.
There is no statistical reason per se for the Fed to raise interest rates, yet absent a major global catastrophe we are likely to get one in September. But the reason will not be the risk of rising inflation, nor the continued downward push of unemployment to 5%. The reason will be that the central bankers that are charged with leading the global financial markets – the Fed and the BOE for now – are wising up; that the Taylor rule and any other standard signal of monetary policy must now be discarded into the trash bin of history. Low interest rates are not the cure – they are part of the problem. Say a little prayer that the BIS, yours truly, and a growing cast of contrarians, such as Jim Bianco and CNBC’s Rick Santelli, can convince the establishment that their world has changed.
-William H. Gross
Full article: Say A Little Prayer (Bill Gross | Janus Capital Group)