Tags: Carr | exit | strategy | returns

No Exit Strategy for Low-Return World

By Michael Carr   |   Wednesday, 29 Aug 2012 09:38 AM

Since 2008, quantitative easing has prevented the collapse of the global economy and helped the economy grow at a slow but steady pace. Because economic growth has been so slow, there has been little inflation in the world and interest rates have remained low. If inflation were to move higher, then rates would rise.

Without any pressure on rates from growth, the world’s central bankers remain addicted to easy money, as the head of Germany’s central bank recently pointed out.

Slow growth and low yields are part of the “new normal” economic state, and as bond guru Bill Gross, founder and co-chief investment officer of Pimco, has explained, low yields are a sign of low investment returns in the future. Gross, who is responsible for managing over $1 trillion worth of investments, believes that investors are accepting low rates on bonds because stocks are also offering low returns.

If investors believed stock markets would provide double-digit gains in the long run, they would take money out of bonds and buy stocks. That would cause rates to rise and would be a sign that economic growth was possible in the future.

Despite the trillions of dollars that central banks around the world have created, there is little sign of economic life anywhere in the world. However, there is no way to quickly remove all those trillions from the economy if the economy does improve.

Central banks have not explained how they intend to reverse their current policies. Until they start discussing an exit strategy from their easing, there is no reason to expect that conditions will improve, and investors seem destined for at least another few years of low returns.

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