Bill Gross: ‘Low policy rates represent an immediate threat to investment portfolios’
Bill Gross’ monthly newsletter is out. He outlines his three main points as follows.
- Low policy rates and the increasing negative real yields that they engender as inflation accelerates represent an immediate threat to investment portfolios.
- Bond prices don’t necessarily have to go down for savers to get skunked during a process of "debt liquidation."
- PIMCO advocates a renewed vigilance, stressing bond market "safe spread" alternatives available globally, including developing/emerging market debt at higher yields denominated in non-dollar currencies.
These are familiar themes from Gross from the past few months. Clearly, the Fed’s low policy rates and negative real yields are hurting fixed income investors. And ultimately that hurts retirees and pensioners who are dependent upon fixed income for a disproportionate amount of their income. Moving up the risk curve might work for someone in mid-career with a thirty-year investment horizon. But when you are retired, you need fixed income and right now central bank are robbing you of it. When I discussed strategies to get around this easy money policy just last week, I said this about Gross:
Strategy number two is to move abroad. This is part of what Bill Gross and PIMCO have been doing. They are shunning Treasuries in order to get yield at a reasonable price in other markets that have good macro fundamentals. You first saw this early in 2010 with Bill Gross and the deficit ring of fire talk. At first, Gross was talking about performance divergence in developed markets, but made the inconsistent argument that American-style capitalism has reached a dead end but buy T-bills anyway. Soon he moved on to emerging markets. And by last month you heard Bill Gross on fiscal profligacy and dumping the negative real yields of treasuries. But, inflation is rising across the emerging markets and a number of markets have building external imbalances. Of course, with the dollar plummeting, that might be a good bet since you can get some extra return on the unhedged portion of the currency appreciation. Caveat emptor.
And so that’s where I have a problem with Gross’ "safe spread" idea. Look at India for example. The central bank raised rates 50 basis points from 6.75% to 7.25% today. That was more hawkish than expected. The problem is inflation is almost nine percent. So, you are talking about negative two percent real yields. Investors there are being robbed just as much as they are in the United States. And this is true throughout much of the emerging markets.
Instead Gross suggests Canada and Australia:
If AAA quality is your requirement, then Canadian or Australian bonds may also fit your horizon. Join us, along with Carmen Reinhart, in shouting “constant bearing/decreasing range!” The Treasury market is on a collision course with financial repression and it is time to adjust your rudder to starboard to get home safely.
Obviously, these markets are good ones only because they have not had housing bubbles that have popped, creating a large increase in public sector debt and the low yields we see in the US and the UK. With the housing market coming off the boil in Australia, we will see whether this remains a good bet.
Source: The Caine Mutiny (Part 2) – Bill Gross, Investment Newsletter, April 2011
For three years I have been critical of the zero interest rate policy, for the impact it was having on retirees who need high interest fixed income stocks to cope. If not these people will be forced back to work as they exhaust their capital. Insurance and pension industry have the same problem. Since pensions are generally provided with fixed interest bonds this means that the industry are unable to offer decent retirement income to customers. This will have a long term impact that people will be discouraged from pension saving as the returns are inadequate. This will ultimately lead to a necessity for the state to come in and provide, even means tested benefits. This will be a serious problem in the UK and Europe. In the US people will probably just work until they die on the job. With many peoples retirement pots producing a fraction of the returns a few years ago these people will need to rely on state handouts to survive. Also younger generations may be put off saving altogether if they see that decades of savings still means poverty, they will rightly come to the conclusion why save for a pension? The UK is making the right changes like raising retirement age but they need higher interest rates to make it worthwhile.
For three years I have been critical of the zero interest rate policy, for the impact it was having on retirees who need high interest fixed income stocks to cope. If not these people will be forced back to work as they exhaust their capital. Insurance and pension industry have the same problem. Since pensions are generally provided with fixed interest bonds this means that the industry are unable to offer decent retirement income to customers. This will have a long term impact that people will be discouraged from pension saving as the returns are inadequate. This will ultimately lead to a necessity for the state to come in and provide, even means tested benefits. This will be a serious problem in the UK and Europe. In the US people will probably just work until they die on the job. With many peoples retirement pots producing a fraction of the returns a few years ago these people will need to rely on state handouts to survive. Also younger generations may be put off saving altogether if they see that decades of savings still means poverty, they will rightly come to the conclusion why save for a pension? The UK is making the right changes like raising retirement age but they need higher interest rates to make it worthwhile.