Bill Gross cautioned the Fed and other central banks from raising interest rates much higher.
The "Bond King" warned further tightening could cause a credit crunch with global fallout.
Gross rang the alarm on the amount of US debt, and economic headwinds in other countries.
Bill Gross has warned the Federal Reserve and its central-bank peers against hiking interest rates much higher, as they risk causing a painful credit crunch and tanking the global economy.
The Fed has lifted its benchmark rate from virtually nothing to a range of 3% and 3.25% in recent months, and signaled rates could reach as high as 4.9% in 2023.
Gross, whose nickname is the "Bond King," cofounded Pimco and managed its flagship Total Return fund. He argued the US economy is too indebted to handle materially tighter financial conditions, especially with a raft of growth headwinds buffeting other nations.
"Recent events in the UK, cracks in the Chinese property-based economy, war and a natural gas freeze in Europe, and a super strong dollar accelerating inflation in emerging market economies, point to the conclusion that today's 2022 global economy in no way resembles Volcker's in 1979," Gross said, referring to former Fed Chair Paul Volcker.
Gross, who retired in 2019 and now manages money for his family and foundation, underlined the importance of "carry" — the difference in yields between short-term bonds and long-term ones.
The billionaire investor explained that if there's positive carry, companies can borrow money cheaply, lend it out at a higher rate, and make a profit. In contrast, negative carry makes them reluctant to lend, so it weighs on economic growth.
"Almost all financial-based economic activity now depends upon this 'mother's milk' called carry," he said, adding that the past four US recessions were caused by a lack of it.
Gross added that Volcker conquered double-digit inflation in the 1980s by setting up a negative carry of over 500 basis points for three years. It came at the cost of a severe recession.
However, the Fed can't act as aggressively today because "our significantly higher levered economy cannot withstand the same amount of negative carry," Gross said.
"A negative carry of 500 basis points now would slay inflation but create a global depression."
He noted the current negative carry of 45 basis points between the 2-year and 10-year Treasuries already exceeds the levels seen with US recessions in 2007, 2000, and 1989.
Gross is worried that if the Fed hikes rates significantly, lending will become so unappealing and debt so onerous in the highly levered US economy that credit dries up.
Coupled with a slew of overseas challenges, the outcome could be a global economic disaster.
The investor has previously cautioned the Fed against going overboard in its inflation fight. He warned in March that interest rates above 3% would likely tank the US housing market and create cracks in the economy.
He's also blasted the central bank's policy of near-zero rates in recent years, arguing that it discouraged saving, decreased returns from retirement accounts, and fueled speculation on meme stocks, non-fungible tokens, and other risky assets.
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