- Central banks are acting like casinos, Janus manager writes
- Investors should focus on capital preservation, not gains
Bill Gross says investors should move to protect their money in 2016 rather than reach for higher returns as central bank efforts to stimulate the global economy set the stage for markets to ultimately fall.
Gross, the former manager of the world’s largest bond fund who joined Janus Capital Group Inc. last year, said central bankers have been doing the equivalent of printing money and acting like gamblers who keep doubling bets to recoup losses.
“One day the negative feedback loop on the real economy will halt the ascent of stock and bond prices and investors will look around like Wile E. Coyote wondering how far is down,” Gross wrote in an investment outlook Thursday for Denver-based Janus. Wile E. Coyote is a cartoon character who unsuccessfully hunts the fleet bird Road Runner, injuring and humiliating himself through his ineptitude.
Gross used his previous two monthly letters to urge the U.S. Federal Reserve to raise interest rates. Now, with the Fed expected this month to make the first such increase since 2006, Gross has targeted policies by the European Central Bank and the Bank of Japan keeping interest rates low to revive their lagging economies. Those policies could unleash inflation, as once happened in Germany’s Weimar Republic and more recently in Venezuela, Argentina and Zimbabwe, he warned.
The Frankfurt-based ECB will extend its quantitative easing program by six months until at least March 2017 at the current rate of buying 60 billion euros ($65.6 billion) of bonds a month, President Mario Draghi said Thursday.
Central banks are like casinos that “print money as if they were manufacturing endless numbers of chips that they’ll never have to redeem,” he wrote. “If investors lose faith in a reasonable range for a country’s currency, then inflation will quickly hit targets and then some.”
Gross, 71, was ousted as chief investment officer of Pacific Investment Management Co. in September 2014. While at the Newport Beach, California-based firm, he managed the Pimco Total Return Fund to become the world’s largest bond fund, with $293 billion at its peak in April 2013. The fund has shrunk to $91.9 billion in November, after 31 consecutive months of redemptions, Pimco reported Wednesday.
Gross’s record at Janus has been uneven this year. His $1.39 billion Janus Global Unconstrained Bond Fund lost 1.3 percent in 2015, trailing 66 percent of unconstrained funds, according to data compiled by Bloomberg.
He made prescient calls on German bunds and Chinese equities. In an October interview, he urged investors to move to cash while predicting U.S. stocks would fall 10 percent within six to 12 months as corporate profits weaken. The Standard & Poor’s 500 Index gained 4.7 percent from Oct. 5, when Bloomberg reported his comments.
Gross has wagered in his fund that sovereign debt from countries including Mexico and Brazil, as well as corporate bonds, would outperform, using derivatives to make bets that haven’t paid off yet. Last month, it was disclosed that billionaire George Soros’s investment firm pulled $490 million from a separately managed account that followed the same strategy as the Janus unconstrained fund.
In today’s commentary, Gross said he can’t say when markets will fall, only that it’s inevitable.
“The faster and faster central bankers press the monetary button, the greater and greater the relative risk of owning financial assets,” he wrote.
“I would gradually de-risk portfolios as we move into 2016,” Gross wrote. “Less credit risk, reduced equity exposure, placing more emphasis on the return of your money than a double digit return on your money.”