Tags: bill gross | federal reserve | interest rates | economy

Bill Gross Sees Fed Increasing Rates This Year to End Distortions

Friday, 30 January 2015 08:00 AM

Bill Gross, the former manager of the world’s largest bond fund, said the U.S. Federal Reserve will raise interest rates this year to end distortions that six years of near-zero borrowing costs have brought to financial markets.

Any increase by the Fed will be slow to avoid startling markets that have gotten used to cheap money, and caution will prevail for a long time, Gross wrote in an investment outlook for Janus Capital Group Inc., where he runs the $1.4 billion Janus Global Unconstrained Bond Fund.

The former chief investment officer of Pacific Investment Management Co., who left that firm in September to join Janus, likened financial markets to the board game Monopoly, in which a bank, much like the Fed, supplies money to players who invest it in properties.

Gross said the Fed realizes that for the game to function, players need incentives to invest.

“Capitalism depends on hope rational hope that an investor gets his or her money back with an attractive return,” he wrote. “Without it, capitalism morphs and breaks down at the margin. The global economy in January of 2015 is at just that point with its zero percent interest rates.”

Downplaying Inflation

Gross, 70, has previously said that falling oil prices and a strong dollar constrain the Fed from raising rates until late this year, “if at all.”

A decline in oil prices will boost economic growth in the first two quarters of 2015 as American consumers have more money for discretionary spending, Gross said in a telephone interview on Thursday. The U.S. will grow 3 percent in each of the first and second quarters, Gross said, on an annualized quarter-on-quarter basis.

In the second half of the year, low energy prices will become a drag as companies cut back spending and the strengthening dollar makes U.S. exports less competitive, Gross said. Gross domestic product will probably slow to 2 percent in the third quarter and to 1 percent in the final period this year, according to Gross.

Gross earned his reputation by building Pimco into a $2 trillion money manager at its peak with some of the industry’s highest returns. He left the firm he co-founded in 1971 to join Denver-based Janus after losing a power struggle with management and some of his deputies.

The Janus Global Unconstrained Bond Fund, run by Gross since Oct. 6, has lost 0.02 percent since then, beating 66 percent of comparable funds, according to data from Chicago-based research firm Morningstar Inc.

Gross, in an interview on Bloomberg Television, said the Fed may move by “25 basis points in July or August.” He said in his outlook that the Fed “will move up the Monopoly board’s interest rates in late 2015.”

‘Heyday Over’

The Fed “will be very slow. The curve suggests in February 2019, they will finally reach 2 percent in terms of the Fed funds rate,” Gross said in the interview with Erik Schatzker and Stephanie Ruhle. “And I think that’s about right, but it will take up to three or four years to get there.”

Even as the Fed boosted its assessment of the U.S. economy and downplayed low inflation, tumbling oil prices and concerns that Greece could exit the euro have sent American equities lower this year.

In his previous outlook, Gross forecast negative returns for many assets this year as record-low rates fail to restore economic growth. Investors should hold high-quality assets with stable cash flows, such as Treasuries, high-grade corporate bonds, and stocks of companies with little debt and attractive dividends, he wrote.

While domestic and global stocks will be supported as rates rise, “their heyday is over,” he wrote.

Game Change

Instead of getting invested in projects, cash has accumulated on corporate balance sheets or was used in share repurchases, “like the endgame in Monopoly where cash becomes king at the game’s conclusion,” and “those without cash and the ability to get it go bankrupt,” according to Gross. With an aging population and high debt ratios, he wrote, “hope is challenged.”

The “final destination” for all games is being put away, he wrote, and players will start a new game.

“Some of the tokens and some of the hotels have already gone back in the box, but the board’s still on the family room coffee table and tokens are still moving around the board,” he said in the telephone interview.

“If it fails to generate real growth, then the game again will probably change. I don’t know how it will change, but it means that probably the board will go back in the box.”

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Bill Gross, the former manager of the world's largest bond fund, said the U.S. Federal Reserve will raise interest rates this year to end distortions that six years of near-zero borrowing costs have brought to financial markets.
bill gross, federal reserve, interest rates, economy
Friday, 30 January 2015 08:00 AM
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