‘Goldilocks’ Yellen Faces Tightrope With Record Debt: Gross

  • Beware ‘Trump mirage’ of higher growth, lower taxes, he says
  • Global debt levels are ‘like a truckload of nitroglycerin’

Billionaire bond investor Bill Gross, a fund manager at Janus Capital, discusses the state of U.S. financial markets and Fed monetary policy with Bloomberg's Erik Schatzker on 'Bloomberg Markets.' (Source: Bloomberg)

Billionaire bond manager Bill Gross says central bankers must walk a tightrope to balance the cost of credit and the need to generate growth as debt levels reach records.

“Janet Yellen is a modern day Goldilocks,” Gross writes about the Federal Reserve chair in his monthly investment outlook issued Thursday. “How is she doing? So far, so good, I suppose. But our highly levered financial system is like a truckload of nitroglycerin on a bumpy road.”

Gross, who manages the $1.9 billion Janus Global Unconstrained Bond Fund, warned that the U.S. economy is so debt-laden that a misstep can cause the equivalent of a run on the central bank. Globally, there’s more credit relative to gross domestic product than at the beginning of the 2008 financial crisis, he said.

“One mistake can set off a credit implosion where holders of stocks, high-yield bonds, and, yes, subprime mortgages all rush to the bank,” he said. “Today, central bank flexibility is not what it was back then,” he wrote, referring to 2008.

Stocks, which climbed to record levels after President Donald Trump’s election, are on a “sugar high” amid expectations of unrealistic growth rates, Gross said Thursday on Bloomberg Television. He doesn’t foresee “a 10 percent decline” but said he is expecting low returns going forward.

Yields on 10-year Treasuries moved above 2.6 percent Thursday for the first time since December, a milestone that Gross said in January would mark the beginning of a bond bear market if it holds. Such a turning point would reverse decades of central-bank engineered falling rates and lower inflation amid slow economic growth, Gross said.

“If we break 2.6 on the upside, it would suggest, yes, a return of some extent to the old usual as opposed to the New Normal,” he said on Bloomberg TV.

U.S. public debt to GDP was 104.8 percent as of July, the most recent month available, compared with 67.5 percent in the period ending July 31, 2008, before the onset of the Wall Street financial crisis, according to data compiled by Bloomberg.

Fed Hike

In his letter, Gross said U.S. credit of $65 trillion is roughly 350 percent of annual GDP. Gross, a long-time critic of low- and negative-interest central bank policies, includes bank loans, mortgages and stocks in his unofficial definition of global debt that could fuel a new financial crisis.
The probability of a Fed rate hike when central bankers meet March 14 and 15 is 100 percent, according to data compiled by Bloomberg. Yellen signaled last week that subsequent hikes will follow if the economy continues to improve.

Gross also said investors should be wary of overly optimistic promises for economic growth under Trump.

“Don’t be allured by the Trump mirage of 3%-4% growth and the magical benefits of tax cuts and deregulation,” he writes, going on to paraphrase cowboy humorist Will Rogers. “Be more concerned about the return OF your money than the return ON your money in 2017 and beyond.”

Gross’s fund returned 5.1 percent in 12 months through March 8 and 4.9 percent since he took over in October 2014 after his exit from Pacific Investment Management Co.

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