Investing

Bill Gross Thinks Markets Now Acting Like Casinos Under Central Banks

Jon C. Ogg

Published: October 4, 2016 3:10 pm

Last Updated: January 13, 2020 2:48 am

Bill Gross is often called the Bond King. Despite a high-profile departure from PIMCO and move over to Janus, Mr. Gross is still widely followed for his monthly investment outlook reports. These are generally witty reports that have views on risk and reward among multiple asset classes and views. For October of 2016, Mr. Gross is effectively referring to the current markets as having the same odds as a casino.

His report, titled Doubling Down, shows that the central banks have effectively been using a doubling-down strategy. This is with negative rates in Europe and Japan.

As far as if Mr. Gross is really calling the markets a casino, here’s his pitch:

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.

Mr. Gross added:

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.

Things might be looking worse rather than looking better if the views of Mr. Gross come to be true. Gross points out that there is a strategy where normalization (on interest rates) will have to wait — and even then that a new-normal will be with much lower yields than historical averages. There is a warning that the current system is beginning to be challenged. October’s investment outlook warns that capitalism itself could ultimately be threatened by the ongoing strategies of central banks.

Gross concluded in his October outlook:

Central bankers have fostered a casino like atmosphere where savers/investors are presented with a Hobson’s Choice, or perhaps a more damaging Sophie’s Choice of participating (or not) in markets previously beyond prior imagination. Investors/savers are now scrappin’ like mongrel dogs for tidbits of return at the zero bound. This cannot end well.

Investors have known about the risk of loss forever. Unfortunately, much of the investing population has been told over and over that investing is really no different from gambling. This remains up for debate of course, but the reality is that we all know who statistically wins in gambling — that would be the casinos. They didn’t build those big beautiful buildings because they lose money.