Tags: pimco | gross | fed | easing

Pimco's Gross: 'Inflationary Dragons' Lurk in Quantitative Easing Cave

Thursday, 03 Jan 2013 08:25 AM

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said investors should be alert to the longer-term inflationary risks of stimulus programs such as quantitative easing.

Gross argues that the quantitative easing and near zero interest rate strategies employed by central banks around the world have the potential to permanently distort financial markets and create significant long-term inflation risks.

“Ultimately government financing schemes such as today’s QE’s or England’s early 1700s South Seas Bubble end badly,” Gross wrote in his monthly investment outlook released on the Newport Beach, California-based company’s website.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The risk of the combined $6 trillion expansion of the balance sheets of the world’s six largest central banks through debt-buying programs since the beginning of 2009, or "essentially free" money, “comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold,” Gross said.

"While they are not likely to breathe fire in 2013, the inflationary dragons lurk ... in cave of quantitative easing" and essentially costless money printing, Gross wrote.

Such tactic "destroy financial business models and stunt investment decisions."

Investors should avoid longer-maturity debt and focus on short to intermediate securities that are supported by Federal Reserve policies, he said.

Central banks’ debt purchases though initially supportive of higher-risk assets, such as stocks, may ultimately harm them as quantitative easing proves “increasingly ineffective” with regards to bolstering the real economy, he wrote.

The Fed this month added $45 billion of Treasury securities to the $40 billion in mortgage debt it has been buying it its third round of quantitative easing. The central bank also last month for the first time linked the outlook for its main interest rate to unemployment and inflation targets.

The concern that Fed Chairman Ben Bernanke’s policies threaten price stability has led some Republicans over the last year to seek a change in the Federal Reserve Act that would restrict the Fed’s focus solely to that goal, stripping the central bank of its jobs mandate.

The Fed has kept its benchmark interest rate close to zero since December 2008. The central bank said last month the rate would stay low “at least as long” as unemployment remains above 6.5 percent and inflation projections are for no more than 2.5 percent.

Growth “now is to be measured each and every employment Friday via an unemployment rate thermostat set at 6.5 percent,” Gross wrote in the note.

“We at Pimco would not argue with that objective. Yet we would caution as Bernanke himself has cautioned, that there are negative consequences.”

The firm’s $286 billion Total Return Fund has gained 10.2 percent over one year, beating 94 percent of its peers, according to data compiled by Bloomberg. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.92 trillion as of Sept. 30.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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