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Bill Gross: Growth Remains Anaemic, Cash Is King
Aspire, Thought Leaders | 07 September 2015
By: Vance Wong
Articles (74) Profile

"Too little, too late."

“Too little, too late,” wrote Legendary bond guru and Janus Capital’s Bond Fund Manager, Bill Gross in his recent economic outlook for September, to address concerns about the impending rates hike.

“Too late” because the Fed should have raised rates earlier this year; “too little” because the Fed can only raise rates bit by bit and gradually, if not they might need to cut rates again if it does not work out.

In his previous outlook, Gross mentioned that near-to-zero interest rates did more harm than good to the economy. In such a climate, he advises investors to hold more cash or “near cash”, such as bonds that mature in one to two years.

On Recent Market Rout

Huge market movements late last month point towards the fact that the global economy is experiencing issues that cannot be solved overnight. Gross thinks that China is not the only cause.

The fact that the Fed allowed near-to-zero interest rates to persist for about six years has compromised capitalism and its best business practices. The need to save had been diminished as well, and this had also crippled investments.

Furthermore, the ultra-low interest rates had artificially driven financial markets with low yields, ever since the financial crisis in 2009. Bubbles have been formed as a result and now they are here to bite the markets back.

On Interest Rates Hike

In Gross’ opinion, the global economy is in a financial state where it is in serious need of a rebalancing. However, a Fed rate hike alone would not be enough to rebalance it due to the asset bubbles and persistent anaemic growth for the past few years.

Additionally, Gross feels that the Fed is finding it hard to raise rates to a nominal two percent without causing a market-wide panic. An increase of 0.25 to 0.5 percent would be tactful but its impact would still be negligible.

Nevertheless, this is an indication that the Fed is recognising how ultra-low interest rates had affected the economy and caused many problems. Demand has to rise to address all the supply glut in areas like oil – this would definitely help the recovery alongside with a rates hike.

Investors’ Takeaway

Gross mentioned that global bond markets are currently offering too little return for the amount of durational risk that bondholders will be exposed to. As such, corporate bonds that mature within one to two years would be ideal, despite low returns.

Gross quoted Will Rogers’ line about the Great Depression, “I’m not so much concerned about the return on my money as the return of my money.” To Gross, a diversified portfolio is still king, where cash should make up a sizeable portion, considering the current climate.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

Please click here for more information about this author.

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