Quotes from the news wire:
The reason nominal growth is critical is that it allows a country, company or individual to service their debts with increasing income, allocating a portion to interest expense and another portion to theoretical or practical principal repayment via a sinking fund, without the latter, a credit-based economy ultimately -devolves into Ponzi finance, and at some point implodes. Watch nominal GDP growth.
Banks, insurance companies, pension funds and Mom and Pop on Main Street are stripped of their ability to pay for future debts and retirement benefits, central banks seem oblivious to this dark side of low interest rates. If maintained for too long, the real economy itself is affected as expected income fails to materialize and investment spending stagnates.
Negative returns and principal losses in many asset categories are increasingly possible unless nominal growth rates reach acceptable levels, i don’t like bonds; I don’t like most stocks; I don’t like private equity. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories.
They buy the bonds by printing money or figuratively dropping it from helicopters – expanding their balance sheets in the process, they then remit any net interest from their trillions of dollars or yen bond purchases right back to their Treasuries. The money in essence is free of expense and free of repayment as long as the process continues uninterrupted.
The real market and the real economy await a different conclusion as losses from negative rates result in capital losses, not capital gains, investors cannot make money when money yields nothing. Unless... nominal GDP can be raised to levels that allow central banks to normalize short-term interest rates, then south instead of north is the logical direction for markets.
I think central banks have gone too far...certainly the ECB (European Central Bank) and the BoJ (Bank of Japan) have gone into negative territory and I think there are long-term consequences for that, the closeness to the zero-bound (interest rates) basically robs savers of their ability to earn money and threatens business models, such as insurance companies and banks in terms of their margin - and certainly, pension funds in terms of their ability to earn money.
A 30-year Treasury at 2.5 percent can wipe out your annual income in one day with a 10 basis point increase, the secret in a negative interest rate world that poses extraordinary duration risk for AAA sovereign bonds is to No 1, keep bond maturities short and No 2 borrow at those attractive yields in a mildly levered form that provides a yield and expected return of 5-6 percent.
It is true that if much of the developing world is younger demographically (think India), then developed nations could and should transfer an increasing percentage of their financial assets to emerging markets to help foot the demographic bills back home, long term then, as opposed to currently, think about increasing your asset allocation to the developing world.
But like (former Fed chairman Paul) Volcker recognized in 1979, the time has come for a new thesis that restores the savings function to developed economies that permit liability based business models to survive – if only on a shoestring – and that ultimately leads to rejuvenated private investment, which is the essence of a healthy economy, near term pain? Yes. Long term gain? Almost certainly. Get off zero now!
Zero destroys existing business models such as life insurance company balance sheets and pension funds, which in turn are expected to use the proceeds to pay benefits for an aging boomer society, these assumed liabilities were based on the assumption that a balanced portfolio of stocks and bonds would return 7-8 percent over the long term.
They should, but their September meeting language must be so careful, that 'one and done' represents an increasing possibility - at least for the next six months, the Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy - it destroys historical business models essential to capitalism such as pension funds, insurance companies, and the willingness to save money itself. If savings wither then so too does its Siamese Twin - investment - and with it, long-term productivity, the decline of which we have seen not just in the U.S. but worldwide.
They should, but their September meeting language must be so careful, that 'one and done' represents an increasing possibility – at least for the next six months, the Fed is beginning to recognize that 6 years of zero bound interest rates have negative influences on the real economy – it destroys historical business models essential to capitalism such as pension funds, insurance companies, and the willingness to save money itself. If savings wither then so too does its Siamese Twin – investment – and with it, long-term productivity, the decline of which we have seen not just in the U.S. but worldwide.
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