Bill Gross expressed his discontent with central banks Tuesday, saying the Federal Reserve's employment-dominated models are outdated — something he thinks spells bad news for stocks.
"The Fed rebates the interest on their $2.5 trillion portfolio to the Treasury every year, and so, in effect, the Treasury issues debt, the Fed buys it and the Treasury doesn't have to pay interest on it," Gross said, on CNBC's "Power Lunch." "It is sort of a shell game that investors aren't really aware of."
He also said the Fed and Treasury are not working independently enough, calling their balance sheets "commingled."
The Janus Global portfolio manager added that central banks are becoming wary of turning to negative interest rates as a solution to market woes.
"Can they lower interest rates even further in order to prop up their bond and equity markets? Perhaps. But at some point when an interest rate goes so negative ... then investors and everyday citizens basically say, 'I'd prefer to own cash as opposed to invest my money in an overnight security that takes 1 or 1.5 percent from me,'" Gross said. "So, there are limitations in terms of what central banks can do, and I think investors have basically begun to sense that."
One other concern Gross pointed out is the divide between the financial economy and the real economy.
"What is going on is the financial economy is divorced from the real economy," Gross said. "You see the markets cave based on the opinion of the financial economy that is still highly levered."
Moreover, in his January investment outlook, Gross said he was worried about the aging U.S. population and how that would impact the market.
Gross wrote that the baby-boomer generation will need to sell their assets to "someone or some country" to pay their bills. And because interest rates in developed countries are closer to 0 percent, these asset returns will be historically low.
Gross reiterated his preference for Precision Castparts, BlackRock Build America, and even U.S. Treasurys as top safety picks amid current market conditions. However, earlier this month, Gross had noted that these securities do pull in low returns.
Gross said another fund that he would recommend in the closed-in space would be one called First Trust Intermediate Duration Preferred and Income.
"That's a preferred stock closed in fund that yields close to 8 or 9 percent and invests in high quality bank preferred stocks," he said.