Bloomberg News

Gross Says Government Financing Schemes Such as QE End Badly

January 03, 2013

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said investors should be alert to the longer-term inflationary risks of stimulus programs such as quantitative easing.

“Ultimately, government financing schemes such as today’s QE’s or England’s early 1700s South Seas Bubble end badly,” Gross wrote in his monthly investment outlook released today on the Newport Beach, California-based company’s website.

The risk of the combined $6 trillion expansion of the balance sheets of the world’s six largest central banks through debt-buying programs since the beginning of 2009 “comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold,” Gross said.

Investors should avoid longer-maturity debt, as inflationary effects of Federal Reserve’s actions are likely to be felt many years in the future, and focus on short to intermediate securities that are supported by central bank policies, Gross said. Central banks’ debt purchases though initially supportive of higher-risk assets, such as stocks, may ultimately harm them as quantitative easing proves “increasingly ineffective” with regards to bolstering the real economy, he wrote.

The Fed this month added $45 billion of Treasury securities to the $40 billion in mortgage debt it has been buying it its third round of quantitative easing. The central bank also last month for the first time linked the outlook for its main interest rate to unemployment and inflation targets.

Fed Targets

The concern that Fed Chairman Ben S. Bernanke’s policies threaten price stability has led some Republicans over the last year to seek a change in the Federal Reserve Act that would restrict the Fed’s focus solely to that goal, stripping the central bank of its jobs mandate.

The Fed has kept its benchmark interest rate close to zero since December 2008. The central bank said last month the rate would stay low “at least as long” as unemployment remains above 6.5 percent and inflation projections are for no more than 2.5 percent.

Growth “now is to be measured each and every employment Friday via an unemployment rate thermostat set at 6.5 percent,” Gross wrote in the note. “We at Pimco would not argue with that objective. Yet we would caution as Bernanke himself has cautioned, that there are negative consequences.”

Jobs Report

The benchmark 10-year yield rose less than one basis point, or 0.01 percentage point, to 1.84 percent at 8:55 a.m. New York time, based on Bloomberg Bond Trader data.

The economy gained 150,000 jobs in December, versus 146,000 in November, according to a Bloomberg survey of analysts regarding a Labor Department report scheduled to be released tomorrow. The jobless rate held at 7.7 percent, the least since 2008, according to a separate survey.

The firm’s $286 billion Total Return Fund (PTTRX:US) has gained 10.2 percent over one year, beating 94 percent of its peers, according to data compiled by Bloomberg. Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.92 trillion as of Sept. 30.

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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