Last week’s departure of Bill Gross from his role as Chief Investment Officer at PIMCO is likely to prove a turning point for interest rates in the West, and probably around the world.
Gross founded PIMCO (Pacific Investment Management Co) more than 40 years ago. During this time he built its assets under management to around $2tn. That is equal to annual GDP for Russia and Brazil, and more than India’s.
Clearly his nickname of the ‘Bond King’ was very well deserved.
He was a source of great wisdom for much of his time at PIMCO in his monthly newsletters. The blog first cited his thoughts back in July 2007, when he rightly argued that the US subprime problems would prove to be a far bigger issue than policymakers then imagined.
Gross’ concept of the New Normal was also, of course, a key influence on the blog when writing its highly successful eBook with John Richardson, and became part of its title, ‘Boom, Gloom and the New Normal’.
A key difference in approach, however, has been that the blog believes that demographics drives demand. Whereas Gross argues the conventional view that policymakers can create demand with the right blend of tax and stimulus:
- Thus the blog strongly disagreed with Gross when he argued UK bonds were sitting on “a bed of nitroglycerine“
- It argued instead that investors were seeking ‘return of capital’, and that bonds from the JUUGS (Japan, US, UK, Germany, Switzerland) would see extremely strong demand
- History shows that the blog was proved right in this debate
More recently, of course, a new debate has developed:
- Gross has argued that interest rates will settle at a new neutral rate of around 0% in real terms
- The blog certainly agrees with his analysis that Western growth rates will continue to disappoint
- But it worries that debt levels have now become unsustainable
Thus in an analysis published by Allianz Bank (PIMCO’s owners), “Ageing populations create repayment risk for government bonds” the blog argued that:
- Policy-makers continue to believe they can somehow kick-start growth by adding yet more debt
- Yet rising proportions of New Old inevitably create a deflationary rather than inflationary environment
- This combination, if policymakers don’t change course, will eventually mean the debt cannot be repaid
It is too early, of course, to know if the blog’s argument will prove correct. But Gross’ sudden departure certainly makes it more likely. Right or wrong, PIMCO has had $2tn of firepower to put behind its views. It has probably been the major source of support in recent years for government bond markets, as its investments have risen from $700bn in 2007, whilst those of other large bond-holders such as China and Japan have remained more stable.
Will this continue, now Gross is gone? Probably not. Few investors will lightly leave a manager who has a 40-year history of successful money-making. But now, they and their advisers may well decide that future returns at PIMCO are unlikely to be as good as in the past.
Time will tell. But it makes the blog feel more secure in its forecast last month that the Great Unwinding of policymaker stimulus creates interest rate risk.
And sadly, the blog would certainly no longer argue today that investing in the JUUGS would ensure ‘return of capital’. It fears the debt burden is now too great to ever be repaid, as central banks have created a debt-fuelled ‘ring of fire’.