Gross, Seeing Stocks Plunging 10%, Urges Flight to Cash

  • Manager: 'Investors need cold water splashed on their face'
  • U.S. equities to enter 'bear market' in next 12 months

Bill Gross, who in January predicted that many asset classes would end the year lower, said U.S. equities have another 10 percent to fall and investors should sit out the current volatility in cash.

The whipsaw market reaction to the lackluster U.S. jobs report last week shows that markets, especially stocks, high-yield bonds and some emerging market debt, are trading like a casino, Gross said in an interview on Friday. He was speaking from a cruise ship which had taken shelter near New York City amid stormy weather over the Atlantic.

Gross, who earlier made prescient calls on German bunds and Chinese equities, said U.S. stocks will drop another 10 percent because economic conditions don’t support a rally like in 2013, when corporate profits were going up. Today they are flat-lining and low commodity prices are hurting energy companies, said the manager of the $1.4 billion Janus Global Unconstrained Bond Fund.

“More negative numbers lie ahead and if you define a bear market by a 20 percent correction, at some point -- that’s six to 12 months -- we’ll have a classic definition of a bear market, meaning another 10 percent downside,” he said.

Just as New York City was the safe harbor for Hurricane Joaquin, Gross said, cash is the best bet until investors get a better view at what the Federal Reserve and the economy are going to do.

“Cash doesn’t yield anything but it doesn’t lose anything,’’ so sitting it out and making 25 to 50 basis points in commercial paper compared to 4 percent to 5 percent in risk assets is not that much of a penalty, he said. “Investors need cold water splashed on their face and sit out the dance.”

Fed Liftoff

The odds of a Fed liftoff this month fell to about 10 percent, according to futures traders, after U.S. reports showed the pace of hiring slowed in September and wage growth stalled. Low wages and slowing employment puts a drag on retail sales and the economy, said Gross. While the Fed needs to lift rates from zero to fix distortions in the market that policy has created, it is now constrained from doing so, he said.

Gross has been betting that Treasuries will trade within a certain range, capped by deflationary forces, such as debt, demographics or commodities, and supported on the lower side by central banks and money creation, he said. He’s recommended this strategy before, and now he’s widening the outer bounds of his targeted range. Additionally, he recommends buying a chunk of volatility within that range.

“The execution, like we saw with the China trade and the bund trade, is the critical component, and when you buy those straddles obviously you’ve got to know when to take them off too,” he said. “It gets tricky. And there’s no doubt the market is very illiquid.’’

China, Germany

Gross recommended shorting the Shenzhen Composite Index in June, right before it plunged, but he didn’t directly do the trade. Instead he put on Standard & Poor’s 500 Index shorts and other indirect bets.

In April, he recommended the “short of a lifetime” against the German bund; he later said his forecast was “well-timed but not necessarily well-executed,” as he’d bet on a trading range and volatility pushed prices outside of those levels.

Now, Gross said, stocks may rally despite his read of the market.

"That’s not to say that stock markets don’t defy logic -- they do," he said. "But I wouldn’t be on that train, put it that way. ”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE