Bill Gross: Central banks have gone 'too far'

Bill Gross
Bill Gross

Ultra-easy central bank monetary policies are about to come back to bite the global economy, bond guru Bill Gross said in his latest letter to investors.

Institutions including the U.S. Federal Reserve fired the first shot in global competitive currency devaluation at the height of the financial crisis as a means to increase liquidity and push investors toward taking more risk.

Others followed suit but have only recently matched the Fed's aggressiveness. The European Central Bank, Bank of Japan and multiple others across foreign markets have gone to near-zero or negative interest rates as global growth has slowed.

Gross, who runs an unconstrained fund for Janus Capital, worries that the financial repression that goes along with easy-money policies is doing harm.

"Investors and bondholders who have cheered every instance of lower and now sub-zero yields in developed countries because of near-term capital gains that accompany them, must now beware of the potential negative consequences going forward," Gross said in his monthly letter. "Central banks have gone and continue to go too far in their misguided efforts to support future economic growth."

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The upside of central bank easing has been a surge in risk assets such as stocks, with the S&P 500 up 215 percent since its March 2009 crisis lows. However, gains in the broader economy have been lackluster, with the U.S. able to muster just a 2.4 percent annualized gross domestic product increase for 2014.

Gross believes policymakers are deluding themselves into thinking that currency devaluation and negative interest rates are paving the way toward lasting economic riches.

"Lower yields make sovereign and corporate debt burdens more tolerable and their exports more competitive," he said. "But common sense would argue that the global economy cannot devalue against itself."

"A more serious concern however, might be that low interest rates globally destroy financial business models that are critical to the functioning of modern day economies. Pension funds and insurance companies are perhaps the most important examples of financial sectors that are threatened by low to negative interest rates," he added.

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The Fed actually is expected to begin gradually increasing rates in the years ahead, with the first tightening expected to happen later this year.

The damage, though, appears already to have been done, Gross said.

"The financial system has become increasingly vulnerable only six years after its last collapse in 2009," he said.

In his typical fashion, Gross compared investing to choosing a dog and asserted that most people select breeds with which they can identify. He encouraged investors to look for "best of show" types when opting where to put their money.

" 'Home bred' monetary policies earn 'blue ribbon' rewards in the short term, but in the long run may undermine the entire show and send the dogs towards the exits," he wrote. "Stay conservative in your investment portfolio. Own high-quality bonds and low P/E, high-quality stocks if you want to stay out of the doghouse."