Bill Gross of PIMCO: Reduce Risk, Carry Returns Way Too Low

global economy
global economy

It is a new month and we have yet another investment outlook from the de facto bond king Bill Gross of PIMCO. In this monthly appearance, "Wounded Heart" refers to capitalism's overall quest for profits, which is actually a discussion on the "carry" return. Gross's main concern is that never before have investors received such little return in the carry for the risk they are taking.

24/7 Wall St. finds the summary of the observation a bit troubling, even after the anemia and other references to a wounded heart. Gross warned about the death of real returns before in his "The Death of the Cult of Equity" controversial outlook. Now it feels as though he is encouraging investors to almost eliminate risk entirely, effectively taking no returns for a while. One obvious issue is that Gross points out the junk bond bubble without referring to it by name. His point is that never before have B-rated and BB-rated companies been able to issue debt for under 5% like they can now.

Another issue Gross points out is the one that is developing now but that will be decided as good or bad by the history books. He said that central banks seem to believe that higher asset prices made by endless QE check writing inevitably will stimulate real economic growth via the spillover wealth effect, but Gross believes that this theory "requires challenge if only because it doesn't seem to be working very well."

A few more key points are made: Zero-bound yields are depriving savers of their ability to generate income, which in turn limits consumption and economic growth. He also said that the reduced carry actually destroys business models and real economic growth. Two conclusions should stand out, particularly for those who have been spooked out of dividends as the risk of rising interest rates is becoming higher and higher: "Low yields, low carry, future low expected returns have increasingly negative effects on the real economy… Perhaps zero-bound interest rates and quantitative easing programs are becoming as much of the problem as the solution."

In summary, Gross worries that the carry is very compressed and the theory behind endless quantitative easing does not seem to be working. His message: reduce the risk and carry-related assets.

Unfortunately, there is one thing missing here, which is not said but certainly feels almost implied. If you reduce the risk to this extent right now, there is no return at all. It seems that Gross is telling the entire investment community to take some time off and revisit things if expected returns become worth the risk.


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