Gross: Central Banks are Robbing Bond Holders and Fuelling Inflation

In this segment on Bloomberg with Tom Keene just after the jobs report was released yesterday morning, Bill Gross continues hammering away at the central banks’ easy money monetary policies, the main point of his last newsletter. His contention is that government has four ways to rob bondholders of return:

  1. Outright default, something he says unlikely in the U.S.
  2. Currency depreciation: Gross contends this is a problem for the U.S. currency
  3. Unanticipated inflation: Gross believes the core vs. headline inflation numbers highlight this issue
  4. Negative real interest rates: His newsletter was very much about this point.
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Gross recommends investing outside of areas with negative real interest rates and low policy rates like in the euro zone, Britain and the United States.

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Gross also believes that the Fed is on hold for at least twelve months due to a still weak jobs market and a fragile economy. In his view, all three main central banks are promoting asset price appreciation with their easy money policies – and that this is helping fuel a rise in commodity prices, leading to inflation around the world. He voiced his concerns on this on CNBC. Video below.

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3 Comments
  1. DavidLazarusUK says

    There is already unanticipated inflation, as a result of QE. It is pushing up food prices. On top of the high unemployment it is causing the middle east to explode in revolt. If this hit Saudi oil production then the oil price will easily and quickly hit $150 a barrel. That will cause another world recession and unravel the Feds policy overnight.

    If the public desperate to get a decent return in stocks are burned in the fallout of stocks in the Fed inflated bubble then it will mean monetary policy will be dead. Savings rates will rocket to replenish losses and corporate profits will plummet. No amount of cost cutting by corporations will be able to offset the renewed savings. The Depression will be back on and only fiscal policy will save the US. Unlikely until while Tea Party hold the balance of power.

    The UK are already doomed because of the austerity program. Yet the majority do not realise it. The only factor that could save the UK is a complete change in policy. Unlikely because the coalition will try stimulating the economy with tax cuts first. Condemning millions to a further drop in living standards. My only thought is how quickly they will be downgraded by the ratings agencies or the Coalition completely change policies.

    If there is a continued re-capitalisation of the banks via zero interest rates then savers will abandon conventional banks. I can see online peer to peer lending which will offer both savers and borrowers better rates taking more and more business from the banks. This will harm their long term prospects, and mean central bank policies become less and less effective.

    1. Susijumala says

      I agree most parts of your post. However, I think it’s vital to emphasise it was QE2 that took the commodities’ markets through the roof. I have tried to follow mr. Ben S. Bernanke’s perspective this all and what I’ve found so far isn’t very encouraging. There are tons of Western economies trying to hold up the pretty scenes before liabilities, mainly pension funds. These funds have had lots of assets tied into stock markets. As there can be several “mr. Bernankes” who know how to operate printing presses the only way M3 gets out of circulation (and thus eliminates the overblown inflation) is the complete stock market crash. We almost saw that happening until May 2009. So, to keep stock markets’ indecies nearly at “used to” levels he needs to print equivalent amount of money to maintain the previous balance.

      There is always good to ask why on Earth investors would put their money in commodities, like wheat? History teaches us the price is plunging slowly but steadily long-term. What are their alternatives? Keeping cash while mr. Bernanke’s machinery runs almost red? No, not a good option. Maybe investing in government bonds? Hmm… they have put the interest rates nearly non-existent over this episode and can I really trust inflationary rate would be less than 3.5% compared to the 10-year-Treasury I can buy? No, I cannot. How about the stock markets, then? Comparing the graphs of The Great Depression I see a crash, bounce-up and then the really deep crash. Is it a bubble this time too we’re ballooning? What could cause it, maybe QE’s? So, stock markets are overvalued. What do I have got left then? That’s right, I’ve got only commodities there. So, big players like pension funds have been fuelling it. “Buy and keep – because there is not anything else reliable” is most likely the strategy. It skyrockets food prices and cause uprisings.

      After the TBAC suggested along with JP Morgan and Goldman Sachs the US auctioning century bonds to lock down the low interest rates I can see a very grim future for savers. This ideology suggests we really should live our lives like there was no tomorrow. And how self-fulfilling prophecy that will become…

      1. DavidLazarusUK says

        I have commented elsewhere about hidden problems in pension funds. Yes they are generally over invested in stocks and are ultra dependant on high returns to maintain the performance of their funds. These have been poor for the last decade as the S&P is little better than it was more than a decade ago. Much of the money printed under QE has gone in to high risk investments, stocks and commodities. This will back fire big time if there is another collapse, which I like you I suspect is just waiting for a trigger.

        I actually think that one benefit of the increase in commodities is that it encourages future supply. Though if the market is over supplied then the problem could be increased volatility for commodity prices and fewer farmers willing to supply.

        As to where to invest? I am no expert, but cash might be best of all. Commodities could collapse fast wiping out any profits. Government bonds could collapse when rates start to climb. At the moment that is unlikely. But the capital losses will easily outweigh the interest received. Stock markets could also suffer. Price to earnings are ludicrously high, regardless of what is said about the “quality of earnings”, much of which came through one off cost cutting. Yes I also think that we are repeating the depression but government intervention has been very different but the end results could be the same but delayed because of intervention. Many bad investments are still out there but have not been exposed, so could come out to bite the investors. The only ones that might do well are the volatility traders who barely hold any positions, simply profiting from volatility.

        So my suggestion is simple de-leveraging, to clear any debts, which have become more expensive as banks have swollen their margins to rebuild capital. Once debt free, then simply hold cash. While you might only get a return of 0.1% and that is losing value at a couple of percent a year because of inflation but if stock-markets fall 60% then it will look like a great move, if deflation returns then it will look like a spectacular move. So chasing even slightly higher returns could be foolish because of the substantially higher risk.

        I fear that the coming stock market crash will be devastating, and mean some companies could end up being worth less than their cash piles. Property has at least 20% more to fall in the US, 40% to 50% in the UK and even more in Australia, so that looks like a bad move, plus it is very illiquid. Bonds could fall substantially as interest rates rise, which will not be immediately but will have to come, at some point in the future. There could even be a bond strike which will drive interest rates up. Commodities are too vulnerable to end user demand, and are clearly a bubble.

        If the government decide to punish savers with a century of low interest rates then the problem is that the currency will suffer, and imported inflation will turn even those rates negative. It will devastate pension funds and mean that either governments have to increase pension payments because private savings will be so low that people will not be able to retire, meaning a big increase in unemployment, or that the pension contributions will need to climb so much that they alone have a substantial negative impact on growth. It is a sign that the brightest and best are really morons. As you say live like there is no tomorrow.

  2. Anonymous says

    There is already unanticipated inflation, as a result of QE. It is pushing up food prices. On top of the high unemployment it is causing the middle east to explode in revolt. If this hit Saudi oil production then the oil price will easily and quickly hit $150 a barrel. That will cause another world recession and unravel the Feds policy overnight.

    If the public desperate to get a decent return in stocks are burned in the fallout of stocks in the Fed inflated bubble then it will mean monetary policy will be dead. Savings rates will rocket to replenish losses and corporate profits will plummet. No amount of cost cutting by corporations will be able to offset the renewed savings. The Depression will be back on and only fiscal policy will save the US. Unlikely until while Tea Party hold the balance of power.

    The UK are already doomed because of the austerity program. Yet the majority do not realise it. The only factor that could save the UK is a complete change in policy. Unlikely because the coalition will try stimulating the economy with tax cuts first. Condemning millions to a further drop in living standards. My only thought is how quickly they will be downgraded by the ratings agencies or the Coalition completely change policies.

    If there is a continued re-capitalisation of the banks via zero interest rates then savers will abandon conventional banks. I can see online peer to peer lending which will offer both savers and borrowers better rates taking more and more business from the banks. This will harm their long term prospects, and mean central bank policies become less and less effective.

    1. Susijumala says

      I agree most parts of your post. However, I think it’s vital to emphasise it was QE2 that took the commodities’ markets through the roof. I have tried to follow mr. Ben S. Bernanke’s perspective this all and what I’ve found so far isn’t very encouraging. There are tons of Western economies trying to hold up the pretty scenes before liabilities, mainly pension funds. These funds have had lots of assets tied into stock markets. As there can be several “mr. Bernankes” who know how to operate printing presses the only way M3 gets out of circulation (and thus eliminates the overblown inflation) is the complete stock market crash. We almost saw that happening until May 2009. So, to keep stock markets’ indecies nearly at “used to” levels he needs to print equivalent amount of money to maintain the previous balance.

      There is always good to ask why on Earth investors would put their money in commodities, like wheat? History teaches us the price is plunging slowly but steadily long-term. What are their alternatives? Keeping cash while mr. Bernanke’s machinery runs almost red? No, not a good option. Maybe investing in government bonds? Hmm… they have put the interest rates nearly non-existent over this episode and can I really trust inflationary rate would be less than 3.5% compared to the 10-year-Treasury I can buy? No, I cannot. How about the stock markets, then? Comparing the graphs of The Great Depression I see a crash, bounce-up and then the really deep crash. Is it a bubble this time too we’re ballooning? What could cause it, maybe QE’s? So, stock markets are overvalued. What do I have got left then? That’s right, I’ve got only commodities there. So, big players like pension funds have been fuelling it. “Buy and keep – because there is not anything else reliable” is most likely the strategy. It skyrockets food prices and cause uprisings.

      After the TBAC suggested along with JP Morgan and Goldman Sachs the US auctioning century bonds to lock down the low interest rates I can see a very grim future for savers. This ideology suggests we really should live our lives like there was no tomorrow. And how self-fulfilling prophecy that will become…

      1. Anonymous says

        I have commented elsewhere about hidden problems in pension funds. Yes they are generally over invested in stocks and are ultra dependant on high returns to maintain the performance of their funds. These have been poor for the last decade as the S&P is little better than it was more than a decade ago. Much of the money printed under QE has gone in to high risk investments, stocks and commodities. This will back fire big time if there is another collapse, which I like you I suspect is just waiting for a trigger.

        I actually think that one benefit of the increase in commodities is that it encourages future supply. Though if the market is over supplied then the problem could be increased volatility for commodity prices and fewer farmers willing to supply.

        As to where to invest? I am no expert, but cash might be best of all. Commodities could collapse fast wiping out any profits. Government bonds could collapse when rates start to climb. At the moment that is unlikely. But the capital losses will easily outweigh the interest received. Stock markets could also suffer. Price to earnings are ludicrously high, regardless of what is said about the “quality of earnings”, much of which came through one off cost cutting. Yes I also think that we are repeating the depression but government intervention has been very different but the end results could be the same but delayed because of intervention. Many bad investments are still out there but have not been exposed, so could come out to bite the investors. The only ones that might do well are the volatility traders who barely hold any positions, simply profiting from volatility.

        So my suggestion is simple de-leveraging, to clear any debts, which have become more expensive as banks have swollen their margins to rebuild capital. Once debt free, then simply hold cash. While you might only get a return of 0.1% and that is losing value at a couple of percent a year because of inflation but if stock-markets fall 60% then it will look like a great move, if deflation returns then it will look like a spectacular move. So chasing even slightly higher returns could be foolish because of the substantially higher risk.

        I fear that the coming stock market crash will be devastating, and mean some companies could end up being worth less than their cash piles. Property has at least 20% more to fall in the US, 40% to 50% in the UK and even more in Australia, so that looks like a bad move, plus it is very illiquid. Bonds could fall substantially as interest rates rise, which will not be immediately but will have to come, at some point in the future. There could even be a bond strike which will drive interest rates up. Commodities are too vulnerable to end user demand, and are clearly a bubble.

        If the government decide to punish savers with a century of low interest rates then the problem is that the currency will suffer, and imported inflation will turn even those rates negative. It will devastate pension funds and mean that either governments have to increase pension payments because private savings will be so low that people will not be able to retire, meaning a big increase in unemployment, or that the pension contributions will need to climb so much that they alone have a substantial negative impact on growth. It is a sign that the brightest and best are really morons. As you say live like there is no tomorrow.

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