Bill Gross on Today’s Markets: “This Cannot End Well”

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October 5, 2016 7:01am NYSE:DIA NYSE:SPY

Bill GrossBill Gross of Janus Capital published his monthly investment outlook yesterday, and once again the famous “Bond King” put out a scathing review of central banking policy.


Gross, who has overseen hundreds of billions in assets over his over four decades as a fund manager, writes that the Federal Reserve and other central banks have reduced the capital markets to nothing more than gambling:

Our financial markets have become a Vegas/Macau/Monte Carlo casino, wagering that an unlimited supply of credit generated by central banks can successfully reflate global economies and reinvigorate nominal GDP growth to lower but acceptable norms in today’s highly levered world.

Instead of the economic growth that central bankers envision, Gross notes that he and many other observers view the current accommodative measures as ultimately counterproductive for the economy and markets. He says these policies “will lead to capital destruction as opposed to capital creation”:

[A] commonsensical observation made by yours truly and increasing numbers of economists, Fed members, and corporate CEOs (Jamie Dimon amongst them) would be that low/negative yields erode and in some cases destroy historical business models which foster savings/investment and ultimately economic growth.

Gross feels especially bad for savers, who depend upon low-risk investment income to live on. Meanwhile, the Fed and others are forcing savers to take on greater and greater risks, while pushing the potential for a catastrophic event to higher and higher levels:

Central bankers counter with the cavalier attitude of “let them (savers) eat cake” (buy stocks). “Our job”, they claim “is to promote economic growth in the short term and restore stability via ever ascending asset markets that eventually trickle down to the masses.” They claim that normalization will have to wait, and even then, the “new, new Normal” in terms of yields will be much lower than historical averages. I think that the latter contention is true, but central bankers cannot continue to double down bets without risking a “black” or perhaps “grey” swan moment in global financial markets.

The former PIMCO head sees a growing backlash against the current system, which investors will inevitably rail against and take back control of their money:

At some point investors — leery and indeed weary of receiving negative or near zero returns on their money, may at the margin desert the standard financial complex, for higher returning or better yet, less risky alternatives. Bitcoin and privately agreed upon blockchain technologies amongst a small set of global banks, are just a few examples of attempts to stabilize the value of their current assets in future purchasing power terms. Gold would be another example — historic relic that it is. In any case, the current system is beginning to be challenged.

Gross concludes his note with a dire warning that “Capitalism itself that is threatened” by central bankers, and that “This cannot end well.”

DIA-2016-10-05

The SPDR Dow Jones Industrial Average ETF (NYSE:DIA) was mostly flat in premarket trading Wednesday at $181.50 per share. Year-to-date, the only exchange traded fund that tracks the DJIA has risen 4.3%.


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