The venerable bond investor accused investors of being fixated on historical cyclical trends, and so failing to appreciate that “economies and their financial markets historically have taken several decades as opposed to several years” to normalise once debt wreaks havoc.
“The fact is that the current burden of global debt is only being lightly alleviated via zero-bound interest rates,” he said.
“None of it, other than Greek private sector involvement or minor amounts of private US mortgage debt has been extinguished over the post-Lehman era; it has only been transferred from one pocket to another.
“Banks, insurance companies and mutual funds have passed the peripheral Old Maid from their hands to that of the ECB, or to Spanish and Italian banks, and ultimately on to the German core.”
The solution for bond investors, for now at least, appears to be to allocate to lower-yielding “cleanest dirty shirt” countries, particularly US treasuries.
Gross does not argue with this choice: “Don’t underweight Uncle Sam in a debt crisis. Money seeking a safe haven will find it in America’s deep and liquid (almost Aaa rated) bond and equity markets”.
No safe havens
Is ‘safe haven’ really an appropriate term? Gross offers the caveat that while the US debt/GDP ratio is not near-term threatening (despite being close to 100%), a continued upward trend could be “absolutely debilitating”.
“7-8% annual deficits while alleviated and tempered by the financing of them with negative real interest rates, promise to raise that 100% number to 125% within five years if nothing is done,” Gross warned.
He concluded: “Timing in investment markets is critical and at the moment the US is considered to be the cleanest. That’s why Pimco owns them. But things change. A blossoming rose wilts over time. A good name can be slandered, a great opportunity to change fiscal direction squandered within a few short years.
“This debt crisis should be considered global as opposed to regional.”