Post-global financial crisis, central banks have needed to step up to the plate and snap up greater quantities of stocks and bonds, to keep the global system afloat. The result has been higher asset prices, a modicum of real growth and bulging central bank balance sheets, he noted.
In this way, “these ongoing policy panaceas” have had their desired effect, Gross said, but they have also led to a “distorted” capitalism in which debt has continued to rise relative to GDP, yields are unable to match historic productivity gains and “disequilibrium has replaced equilibrium.”
But since 2003, the monetary stimulus provided by central banks has become what Gross terms a “financial methadone.”
“Even 0% policy rates are like methadone – cancelling the craving but not overcoming the addiction,” he explained.
But without these monetary injections from the central banks, “stock and bond markets worldwide would sink and produce a tantrum of significant proportions,” said Gross. So, the very survival of these financial markets has become predicated on this “QE-forever cycle.”
He added: “I would venture a guess that without QE from the ECB and BOJ that 10-year U.S. Treasuries would rather quickly rise to 3.5% and the U.S. economy would sink into recession.”
Though in the short-term, continuing down the path of QE is not problematic, there will come a time when investors will have to deal with the fact the government finances its own spending, as well as the long-term solvency of savers, pension funds and insurance companies.
“While a methadone habit is far better than a heroin fix, it has created and will continue to create an unhealthy capitalistic equilibrium that one day must be reckoned with,” cautioned Gross.
“Yields will likely gradually rise (watch 2.60% on the 10-year Treasury), yet they will stay artificially low due to the kindness of foreign central bank quantitative easing policies. But that is not a good thing. Happiness runs…Happiness runs, and so one day, will asset markets, artificially supported by quantitative easing.”
