Pimco's Bill Gross: 'Be Afraid' as Global Economies Increasingly at Risk

Tuesday, 03 Dec 2013 09:21 AM

 

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Bill Gross, co-founder and co-chief investment officer of bond giant Pimco, said Tuesday that easy-money policies worldwide have put global economies and their capital markets increasingly at risk.

Gross, writing in his monthly letter to investors, said easy-money policies from central banks such as the U.S. Federal Reserve and the Bank of Japan have resulted in artificially priced assets and that markets could face peril once investors recognize the growing risk and sell traditional assets.

"Global economies and their artificially priced markets are increasingly at risk," Gross said, adding that investors "are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth."

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

Gross referred to the monetary stimulus policies of global central banks including the Fed, Bank of Japan, European Central Bank, and Bank of England in the December outlook entitled "On the Wings of an Eagle" posted on Pimco's website.

He said that stocks, investment-grade and high-yield junk bonds, alternative assets, hedge funds, and unconstrained products all reflected artificially priced markets and that investors will "gradually vacate" historical asset classes once they recognize that they are receiving too little reward for too much risk.

Gross' comments are important because Pimco manages roughly $1.97 trillion and is one of the world's largest bond managers. The views of Gross and co-chief investment officer and chief executive Mohamed El-Erian on global credit also influence other investors.

The Newport Beach, California-based Pacific Investment Management Co is a unit of European financial services company Allianz SE.

The Fed is buying $85 billion in Treasurys and agency mortgages monthly in an effort to spur hiring and keep borrowing costs low. The Fed's bond-buying has helped fuel record highs and a 26 percent rally in the Standard & Poor's 500 stock index this year.

Gross has warned of "bubbles" or overpriced financial markets in past television appearances and posts on social media platform Twitter.

On November 29 or "Black Friday," the biggest U.S. shopping day of the year, Gross wrote the following on Pimco's Twitter account, "Gross: We should call this 'Green Friday' - Be careful, though, of red numbers in 2014. All markets are bubbly."

In the letter, Gross reiterated that investors should anticipate stable policy rates until at least 2016 and focus on short-duration assets.

Gross said: "Look for constant policy rates until at least 2016. Front-end load portfolios. Don't fight central banks, but be afraid."

The U.S. central bank has kept the federal funds rate near zero since late 2008 to help the economy recover from recession and has promised to keep it there for a while longer, probably until 2015.

Pimco has not been immune to the volatility in the bond market this year.

Gross' flagship Pimco Total Return Fund had outflows of $3.7 billion in November, marking the seventh straight month of outflows from the fund and reducing the fund's assets to $244 billion, data from Morningstar showed on Tuesday.

Pimco had outflows of $7.1 billion across all of its U.S. mutual funds in November, marking the sixth straight month of outflows from the funds, according to Morningstar data.

Outflows in October stripped the Pimco Total Return Fund of its status of the world's largest mutual fund, a title which The Vanguard Total Stock Market Index now holds, according to Morningstar data reported last month by Reuters.

The fund has had outflows of about $36.9 billion this year, according to Morningstar. Gross' fund delivered a flat performance in November according to preliminary Morningstar figures, averting losses even as fears surrounding the Federal Reserve's next policy move hurt bond prices.

The fund is still down 1.24 percent this year, however, beating 57 percent of peers, according to Morningstar data.

Editor’s Note: Opinion: Retirees to Be Hit With Social Security Cuts

© 2014 Thomson/Reuters. All rights reserved.

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