PIMCO’s Bill Gross believes that as the end of QE looms and central banks like the Fed set up their ‘forward guidance’ plans the safest bets in town are front-end positions in Treasuries or credit.
In his latest investor note, the manager of the $268 billion PIMCO Total Return Bond fund, said that in this unstable environment, investors can survive by seeking out the most stable of assets.
‘At the extreme, that would be cash in the world’s most stable currency. But whether dollars, euros or pounds be your first choice (ours being dollars), cash or overnight deposits yield next to nothing.’
‘The safest pitch to swing at may not be stocks but the asset that will soon be the nearly sole focus of central banks. Instead of QE, central bankers are shifting to “forward guidance” which, if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns.’
‘If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark.’
Given the widespread use of ‘forward guidance’ by central banks, which allows greater long-term investment planning, he suggests short-term positions in Treasuries and the credit sector would be beneficial picks for investors.
‘While low, they can at least form the basis for curve rolldown and volatility strategies that have higher return/risk ratios than alternative carry options such as duration, credit or currency.’
The blockbuster bond manager also said quantitative easing has turned investors into their own ‘buyers’ of last resort’ as global markets face a liquidity crunch when stimulus finally ends.
Gross, who has not shied away from criticising accommodative monetary policy, used his latest Investment Outlook to launch another attack on the long-term impact of QE.
Gross,centred his latest baseball-heavy commentary on the growth of the Big Investor.
This being reference to famed economist Hyman Minsky, who discussed the use of Big Government and Big Bank to stabilise an unbalanced economy.
In a world of increasingly available liquidity, Gross said the Big Investor is now being led by technical rather than fundamental considerations.
‘Big Investors is now influenced not just by sovereign entities but by an enormously expanded private market with liquid alternatives and choices,’ he said.
‘The problem is that as Big Government, Big Bank and Big Regulation begin to tighten their purse strings and the risk budgets of their constituent vassals, then the liquidity to choose amongst a varied menu of assets becomes more limited.’
In this scenario where QE-driven liquidity evaporates, Gross said, small-scale investors become dependent on other small-scale investors for market-making in a way they have not done so before.
‘At the extreme, the new game is played in a Pogo ballpark, where the enemy, the opponent, the buyer of last resort being “us” as opposed to “them”.’
Returning to Minsky’s market views, Gross said the idea of Big Government or Big Bank coming to the rescue would now be virtually unworkable.
‘Minsky’s hoped for stability, if only temporary, falls short because Big Government and Big Bank are much smaller than historical proportions in an economy dominated by private funds or individual country flows.’
To read the latest Investment Outlook, entitled Seventh Inning Stretch¸ please click here.