Janus Capital Group Inc. (NYSE: JNS) has been home to Bill Gross for over a year now. Gross has been referred to as “The Bond King” for years. So what happens when the king of bonds warns investors that long-term bonds, banks and credit are all getting too risky? Is it possible that there is now no place to hide — maybe not even in cash?
This was the case laid out in the March 2016 monthly investment outlook. Gross’s monthly commentary has had similar warnings in the past, and the references here to the endless sun = credit was easier to follow than some of his more complex analogies and story-weaving efforts. While Gross went on to talk about the sun being the nourishment for the earth, it eventually will consume the earth.
Gross points out that among the things that deserve our attention in the here and now, one is finance-based capitalism and the assumption that the risk/reward historically inherent in it will be sufficient to drive economic growth forward.
With quantitative easing and negative interest rates, the concept of nurturing credit seems to have morphed into something destructive, as opposed to growth enhancing. Gross said:
Our global, credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers. Making money on money seems to be the system’s flickering objective. Our global financed-based economy is becoming increasingly dormant, not because people don’t want to work or technology isn’t producing better things, but because finance itself is burning out like our future Sun.
Gross pointed out that the global economy has been powered by credit, with its expansion being 58-fold since the early 1970s in the United States alone. He points out that we now have $58 trillion of official credit outstanding, versus only $1 trillion in 1970.
Gross believes that this credit expansion appears to be reaching an ending of sorts. He said:
Private sector savers are growing leery of debt piled upon debt and government regulators have begun to build fences against further rampant creation. In addition, the return offered on savings/investment whether it be on deposit at a bank, in Treasuries/ Bunds, or at extremely low equity risk premiums, is inadequate relative to historical as well as mathematically defined durational risk.
Gross also talked about negative interest rates and the problems coming from them:
The negative interest rates dominating 40% of the Euroland bond market and now migrating to Japan like a Zika like contagion, are an enigma to almost all global investors. Why would someone lend money to a borrower with the certainty of getting less money back at a future date?
And on the banking sector, Gross is betting against them. He said:
Banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of write-offs, tighter regulation and significantly lower future margins. I’ll vote for the latter.