Noted bond investor Bill Gross of Janus Capital Group Inc (NYSE:JNS) said Wednesday that with yields at near zero and negative on $10 trillion of global government credit, the contribution of money velocity to GDP growth is coming to an end and may even be creating negative growth.
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"Our credit-based financial system is sputtering, and risk assets are reflecting that reality even if most players (including central banks) have little clue as to how the game is played," Grosssaid in his latest Investment Outlook.
Gross, who runs the Janus Global Unconstrained Bond Fund, had been one of the first advocates for hiking interest rates closer to historic norms. Likening the global financial system to a twisted game of monopoly, he lambasted Federal Reserve officials for relying too heavily on historical models such as the Taylor rule and the Phillips Curve, remarking Fed officials "worship false idols."
Gross complained that fiscal stimulus has been nonexistent as governments focused on austerity, which has cut economic growth.
"Until governments can spend money and replace the animal spirits lacking in the private sector, then the Monopoly board and meager credit growth shrinks as a future deflationary weapon," Gross said.
Overall, investors should not hope unrealistically for deficit spending any time soon, Grosssaid. "To me, that means at best, a ceiling on risk asset prices (stocks, high yield bonds, private equity, real estate) and at worst, minus signs at year’s end that force investors to abandon hope for future returns compared to historic examples."
Gross said investors should worry, for now, about the return of one's money, not the return on it.
"Our Monopoly-based economy requires credit creation and if it stays low, the future losers will grow in number," Gross said.
By Jennifer Ablan