View From the Street: Bill Gross' Latest Investment Outlook
In his latest Investment Outlook, Bill Gross paints a rather bleak view of financial markets and the economy. Speaking in such beautiful metaphors that he is known for, he once again discusses the state of the financial markets through his "Plankton Theory," a theory in which the large central banks and their member banks are the whales, the haves, and small investors are the plankton, the have-nots.
Gross is severely concerned about the future consequences of crisis-policies of launched by central banks the world around. He is extremely worried about the risk of deleveraging and the effects it will have on the global monetary system. He says, “The global monetary system which has evolved and morphed over the past century but always in the direction of easier, cheaper and more abundant credit, may have reached a point at which it can no longer operate efficiently and equitably to promote economic growth and the fair distribution of its benefits. Future changes, which lie on a visible horizon, may not be so beneficial for our ocean's oversized creatures.”
It is well known and documented that, over the last 40 years, economies around the world have shifted away from some commodity-based currency system to fiat currency systems. In the US, he notes that first we went from the Bretton-Woods arrangement in 1945, which fixed the dollar at $35 per ounce, to a much looser system ushered in by Reagan in the 1960's due to ballooning deficits and dollar printing, which led us to where we are today. “The global monetary system seemed to be working smoothly, and instead of Shamu, it was labeled the ‘great moderation.' The laws of natural selection and modern day finance seemed to be functioning as anticipated, and the whales were ascendant.”
Another major concern of Gross' is the increasing risk of previously-rated AAA debt securities, as he says that “low cost funding is increasingly a function of central banks as opposed to private market investors.” He is truly worried that the willingness of creditors to support the existing system may soon descend and he sees a shift in power to the emerging, creditor markets, as indebted developed markets attempt to delever and potentially even renegotiate large swaths of debt.
Gross sees higher global inflation as the only solution to the over-extended, debt-laden balance sheets. He says that, “Bond investors therefore should favor quality and “clean dirty shirt” sovereigns (U.S., Mexico and Brazil), for example, as well as emphasize intermediate maturities that gradually shorten over the next few years. Equity investors should likewise favor stable cash flow global companies and ones exposed to high growth markets. Investors in general, however, will be hard pressed to repeat the rather right-tailed performance of the past 30 years, a whale rather than plankton-dominated era based on excessive credit expansion. Deleveraging economies and financial markets present a different and lower returning kettle of fish than did recent credit-dominated decades.”
On the European Debt Crisis, he admits that it is a problem, but it is really only a symptom of the global debt cancer. He writes, “ Euroland is just a localized tumor however. The developing credit cancer may be metastasized, and the global monetary system fatally flawed by increasingly risky and unacceptably low yields, produced by the debt crisis and policy responses to it.”
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