Bill Gross, one of the most well-known bond fund managers, is known for his regular pronouncements on the state of financial markets and the economy. In his latest missive, “Saved by Zero”, he has once again given us a smorgasbord of economic history, asset price theory and some plain common sense.
He says there is a price the US will pay for having zero interest rates and as zero rates become normal, “model-driven central banks seem not to notice” and that price will be higher the longer rates stay close to zero. This is “because zero bound interest rates destroy the savings function of capitalism, which is a necessary…component of investment.” He has two main areas of concern. The first regards companies which borrowed money at close to zero and then bought back their own shares rather than invest in the real economy, thereby defeating the central bank’s reason for having a low interest rate (ie: lend to business for productive purposes). The second is the effect on insurance companies and pension (superannuation) funds. Assumptions of 7%-8% investment returns which have held over the long term are not possible at the industry level with zero interest rates and both these industries depend on investment returns to fund insurance claimants and retirees.
So he has some advice for the Federal Reserve. “My advice to them is this: get off zero and get off quick.”
He says corporate America will suffer some pain in the short term but the benefit will in the form of rejuvenated private investment.