Could Bill Gross’s tightening derail economy view have mileage?
Bill Gross, co-founder for Pacific Investment Management Co (PIMCO) the world’s largest fixed-income fund (with $600 billion AUM) fired a shot across the bow of the Fed’s Open Market Committee (FOMC), which is in charge of setting Fed fund rates, when he said that the economy can’t support higher interest rates.
“The economy can’t support higher interest rates”
BILL GROSS
But could Bill Gross’s tightening derail economy view be overblown?
Bill Gross has been dethroned so let’s play devil’s advocate.
When a money manager plays a tune on stage it is rarely for an altruistic motive, put another way more often than not there is a self-interests profit motive for money managers to take to the stage and pedal their views.
So Bill Gross’s tightening will derail economy tune is favorable to the billionaire’s (with a personal net fortune of $2.5 B) fixed income portfolio, particularly bonds with long maturities.
Let me decode the riddle and at the same time keep it simple.
“Bill Gross has been dethroned”
Bill Gross’s tightening will derail economy could be another way of playing the FOMC with the aim of persuading the monetary committee from being overwhelmingly hawkish on rate rises going forward and more dovish to keep rates on hold. But why?
Bond, fixed income assets, market is hypersensitive to a changing interest rate environment.
So rising interest rates are bad for bondholders because it means that future bonds will be issued with higher coupon yields. That makes existing bonds less attractive to investors and as investors exit the bond market in search of higher returns the fall in investor demand for bonds also cause bond prices to slide. For further explanation see here.
“So Bill Gross’s tightening will derail economy could be the billionaire’s favorable tune to protect his personal fortune”
So Bill Gross’s tightening will derail economy could be the billionaire’s favorable tune to protect his personal fortune, bearing in mind that in a rising interest rate environment bond prices dive (trade at a discount).
Moreover, bonds with longer maturities will be hit harder when interest rates rise, after all, which investors want to be locked into a low rate for a long time.
That also explains why the US 10-YR chart indicates rising US 10-YR yields and the corresponding fall in the bond price (there is an inverse relationship between bond price and yield).
Bill Gross’s tightening will derail economy view suggests that the FOMC should pack-pedal further Fed fund rate hikes. So if interest rates were to fall then the existing value of Bill Gross’s fixed income portfolio fund (particularly bonds with long maturities) would become more valuable because investors would not be able to buy a new issue bond with a higher coupon than that held by the bond king, Bill Gross. Put simply, lower rates would make the billionaire investor even richer and Bill Gross’s tightening will derail economy view could then be influenced by the billionaire investor’s self-interest.
“Bill Gross’s tightening will derail economy view could also be based on the bond king’s genuine fear of monetary tightening simultaneously when the economy (global) is slowing”
But equally, let’s look at Bill Gross’s tightening will derail economy view in the cold light of economic fundamentals which indicates that G7s economies have peaked and the economic cycle is now trending downwards.
US economic data are the weakest and most disappointing in 7 months with subprime loan delinquencies at a 22-year high. Moreover, the German economy has slowed more abruptly than expected and Japan GDP suffers the first contraction since 2015.
Meanwhile, emerging market fx is suffering a death cross.
Bill Gross’s tightening will derail economy view could also be based on the bond king’s genuine fear of monetary tightening simultaneously when the economy (global) is slowing.
But Bill Gross’s tightening will derail economy could come second to the FOMC’s policy to give meaning to in “God We Trust” inscribed on every dollar note while other fiats implode.
