“Low or zero interest rates it seems do wonders for asset prices and for a time even stabilize real economies, but they come with baggage…

…and as zero or near zero becomes the expected norm, the luggage increasingly grows heavier…Model driven central banks seem not to notice. But models aside, there should be space in an economic textbook or the minutes of a central bank meeting to acknowledge the destructive influence of 0% interest rates over the intermediate and longer term. How so? Because zero bound interest rates destroy the savings function of capitalism, which is a necessary and in fact synchronous component of investment. Why that is true is not immediately apparent. If companies can borrow close to zero, why wouldn’t they invest the proceeds in the real economy? The evidence of recent years is that they have not. Instead they have plowed trillions into the financial economy as they buy back their own stock with a seemingly safe tax advantaged arbitrage…But more importantly, 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…They are not so much in a pickle barrel as they are on a revolving spit, being slowly cooked alive while central bankers focus on their Taylor models and fight non-existent inflation.

My advice to them is this: get off zero and get off quick. Will 2% Fed Funds harm corporate America that has already termed out its debt? A little. Will stock and bond prices go down? Most certainly. But like 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.”, Bill Gross, October 2015 Investment Outlook, Janus Capital, October 2015

Here is the link, but if you want the pdf, it is attached, too.

Attachment – Bill Gross Investment Outlook Oct 2015 – Saved by Zero?

Posted on October 20, 2015, in Postings. Bookmark the permalink. Leave a comment.

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