Bill Gross has started with analogies of crows and bugs, but the reality is that Gross sees the latest Federal Reserve and market actions as having now answers. This pertains to the Fed tapering or lack thereof, why the Fed changed its mind, and where things will go.
Gross said, “The Fed will have to taper, cease and then desist someday. They can’t just keep adding one trillion dollars to their balance sheet every year without something negative happening – either accelerating inflation, a tanking dollar or a continued unwillingness on the part of corporations to invest because of the resultant low and unacceptable returns on investment. QE (quantitative easing) has to die sometime.”
Gross also maintained that the policy rate matters the most to bond and other investors, more so than the timing and what a neutral policy stance is. He argues that the policy rate of the spot and forward markets which drive prices and investment decisions. He said, “QEs were simply a necessary medicine for rather uncertain and illiquid times. Now that more certainty and more liquidity have been restored, it’s time for the policy rate and forward guidance to assume control.”
Another point backing this up is that the increase of over 125 basis points in a 30-year mortgage seems to have already stopped housing starts and refinancings in its tracks. Gross also thinks you can bet against 1% fed funds rates out in 2015 and 2016. He even thinks that investors globally may have to deal with a financially repressive low policy rate for decades to come.
Bill Gross ends with the notion that investors should focus on front-end yields, because the Fed can’t raise policy rates in a levered economy. PIMCO believes that a modeled portfolio could likely return 4% in future years.
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