Central bankers have turned investing into a casino game with an unpleasant outcome likely, bond king Bill Gross said in his latest letter to investors.
The Janus Capital fund manager stepped up his criticism of institutions like the Federal Reserve, the European Central Bank and Bank of Japan, charging that the trillions in negative-yielding debt are presenting investors with unpleasant choices.
Recalling his days many years ago as a blackjack counter in Las Vegas, Gross reasons that "central bankers cannot continue to double down bets without risking a 'black' or perhaps 'grey' swan moment in global financial markets."
"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," he added.
Among those potential choices: Gold, which has been a favorite option for Gross in recent months, and even digital currencies like bitcoin. He does not openly advocate that kind of choice but said it's the type of option investors might consider with central bankers suppressing financial conditions.
Doubling down, and losing
His comments come as global central bankers step up their actions to stimulate growth, particularly inflation. For instance, the BOJ recently announced an unconventional plan for "yield curve control," which aims to keep its benchmark 10-year note yield at zero.
Estimates put the total of negative-yielding debt upwards of $11 trillion, though Gross figures it's closer to $15 trillion, posing a looming specter to markets.
"Ultimately though, in broader, more subjective terms, it is capitalism itself that is threatened by the ongoing Martingale strategies of central banks," Gross said, referencing the bettor strategy of doubling down bets in blackjack with the idea that ultimately a winning hand will come along.
"As central bank purchases grow, and negative/zero interest rate policies persist, they will increasingly inhibit capitalism from carrying out its primary function — the effective allocation of resources based upon return relative to risk," he said.
Gross' $1.5 billion Janus Global Unconstrained Fund has gained just shy of 5 percent this year, putting it in the top third of its peers but slightly behind the 5.8 percent S&P 500 return, according to Morningstar.
His most recent comments are a carryover of recent admonitions for investors to ditch most stocks and bonds and instead focus on gold and real assets.
"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," Gross wrote. "Investors/savers are now scrappin' like mongrel dogs for tidbits of return at the zero bound. This cannot end well."