Bill Gross, the founder and co-CIO of PIMCO, does not envy Fed Chairman Ben Bernanke. Hawkish members of the central bank are publicly suggesting an exit from the Fed’s three-year stimulus program, also known as quantitative easing. Bernanke and Fed Vice Chair Janet Yellen are expressing more caution and have indicated that the bank’s $85 billion monthly bond-buying program will continue until the U.S. economy can stand on two legs or the national unemployment rate hits 6.5% (the rate ticked up a tenth of a percentage point to 7.6% in May).
“It is a conundrum,” Gross tells The Daily Ticker. “He’s in a corner as are all central banks. We have sympathy.”
“Sympathy” for Bernanke does not equal support; Gross has been critical of the Fed’s QE program. He writes in his latest investment outlook:
“Our global financial system at the zero-bound is beginning to resemble a leukemia patient with New Age chemotherapy, desperately attempting to cure an economy that requires structural as opposed to monetary solutions. Their near-zero-based interest rates and QEs that have lowered carry and risk premiums have stabilized real economies, but not returned them to old normal growth rates. Perhaps, in addition to a fiscally confused Washington, [the Fed’s] policies that may be now part of the problem rather than the solution.”
Gross has three main sticking points in his argument against QE:
- Low interest rates discourage investment and “capitalism as we know it doesn’t function as well,” he says.
- Small savers are disadvantaged and consumption is limited.
- Business models that operate on a spread – such as banks, insurance companies and investment management firms – “can no longer generate sufficient carry” and are forced to close branches and lay off employees as margins tighten and profitability falls.
Companies are looking at the returns available in the “real” economy – about 2.5% over a 12-month period – and are realizing that handing money to investors in the form of stock buybacks or higher dividends is a better move, Gross explains.
“Western corporations seem focused more on returning capital as opposed to investing it,” he writes. “Low ROIs fostered by central bank policies in financial markets seem to have increasingly negative influences on investment and real growth.”
The Fed’s leadership may be wary of turning off the QE spigots too soon but Bernanke has also “exacerbated” the negative consequences of monetary policy, Gross notes.
“It’s hard to get out once you get in the quicksand,” he quips.