In his latest monthly letter, dated February 6, Bill Gross of Janus Capital Group Inc. (JNS) focuses on the massive expansion of worldwide central bank balance sheets, from about $2 trillion in 2003 to a "gargantuan" $12 trillion at the end of 2016. In their efforts to raise asset prices and induce "a modicum of real growth" by pushing interest rates down to zero (or even into negative territory), central bankers have distorted capitalism, Gross says.
According to Gross, savings and investment have been discouraged by yields or returns that are below historic productivity gains. "Zombie corporations" have been kept alive. Debt continues to rise as a percentage of GDP. The financial system has imbalances of risk and reward. Disequilibrium has replaced equilibrium, though this is masked by low volatility.
QE For All Eternity
In their concern for propping up a "finance-based economy," controlling volatility and keeping a floor under asset prices, Gross is concerned that "central bankers may be trapped in a QE-forever cycle." He believes that, worldwide, central banks will never be able to sell their assets back to the public, and that a global balance of $12 trillion will be permanent. Even as the U.S. Federal Reserve has started to withdraw stimulus, the global balance is growing by about $1 trillion per year, mostly due to continuing bond buying by the European Central Bank (ECB) and the Bank of Japan (BoJ).
Financial Armageddon Postponed
Gross says that the markets have become addicted to 0% policy rates, which he compares to methadone, in that it aids in "cancelling the craving but not overcoming the addiction." However, individuals, pension funds and insurance companies now cannot earn enough to ensure their long-term solvency. "Financial Armageddon" is postponed as consumption is pushed forward, savings are reduced or delayed, and corporations find it more economic to buy back shares than to invest in the real economy.
Impact of Foreign QE on the U.S.
Gross expects U.S. bond yields to rise slowly while still staying artificially low due to continued QE by foreign central banks. As the ECB and the BoJ buy up their own bonds yielding 10 to 45 basis points, foreign investors' money is flowing into 10-year U.S. Treasury Notes yielding 2.45%, keeping its price (and yield) stable. Without that dynamic, Gross says that the yield on the 10-year note would soon hit 3.5%, and the U.S. economy would slide into recession. Watch for the yield to reach 2.60%, he says.