Bond investor Bill Gross warned Tuesday that easy monetary policy has exacerbated a disconnect between the financial and the real economy, increasing risks for investors.
“Don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk,” Gross, portfolio manager at Janus Henderson, said in his June investment outlook.
Major central banks have bought trillions of assets in a measure known as quantitative easing, or QE, and kept rates near zero or just below in an effort to help regional economies recover from recession in the last decade. However, many worry that low rates have pushed financial markets to unsustainably high levels while real global economic growth remains sluggish.
The World Bank forecasts that global growth will stay below 3 percent through at least 2019, after slowing to 2.4 percent last year despite extraordinarily accommodative monetary policy. As a result, global central banks have increasingly called for stimulus, or direct economic investment, for growth to pick up.
In that environment, Gross, co-founder of Pimco, said, “Strategies involving risk reduction should ultimately outperform ‘faux’ surefire winners generated by central bank printing of money.”
“It’s the real economy that counts and global real economic growth is and should continue to be below par,” he said.
Economists and Wall Street strategists have noted for several years that lack of capital investment, low productivity and technological advances prevent economic growth from picking up. Meanwhile, U.S. stock indexes have marched deep into record high territory, and global equity value is now about 95 percent of world GDP — a record.
“Making money with money is an inherently acceptable ingredient in historical capitalistic models, but ultimately it must then be channeled into the real economy to keep the cycle going,” Gross said. “Capitalism’s arteries are now clogged or even blocked by secular forces which when combined with low/negative yielding ‘safe’ assets promise to stunt U.S. and global growth far below historical norms.”
Meanwhile, the Federal Reserve is moving away from easy monetary policy, which some on Wall Street worry could disturb markets if there are any surprises. The Federal Open Market Committee is expected to raise short-term interest rates on Wednesday for the fourth time in two years and begin reducing its $4.5 trillion balance sheet in coming months.