The historical models embraced by the world’s central bank leaders are out of touch with the current era of extraordinary monetary policy and could potentially lead global economies into another recession, warned veteran bond manager Bill Gross.
In his most recent investment outlook, the Janus Henderson bond manager reiterated his criticism of the Federal Reserve’s decision to boost a US recovery through a bond-buying program and believes its tightening policy is putting the economy at risk.
Gross, who runs the $2.1 billion Janus Henderson Global Unconstrained Bond fund, said central bankers’ gluttony meant that ‘they can’t seem to stop buying bonds, although as compulsive eaters and drinkers frequently promise, sobriety is just around the corner’.
Since the start of global quantitative easing, central bank balance sheets have accumulated over $15 trillion of sovereign debt and equities ‘in a desperate effort to keep global economies afloat’, Gross said.
‘The adherence of Yellen, Bernanke, Draghi, and Kuroda, among others, to standard historical models such as the Taylor Rule and the Phillips curve has distorted capitalism as we once knew it, with unknown consequences lurking in the shadows of future years,’ wrote Gross, referring to current Fed chairwoman Janet Yellen, her predecessor Ben Bernanke, European Central Bank president Mario Draghi and Bank of Japan head Haruhiko Kuroda.
Since the last recession, he said, more and more highly levered corporations and indebted individuals, with floating rate student loans now exceeding $1 trillion, simply cannot their debt payments, resulting in reduced investment, consumption and, ultimately, default.
‘Commonsensically, a more highly levered economy is more growth sensitive to using short term interest rates and a flat yield curve, which historically has coincided with the onset of a recession.’
He concluded: ‘Today’s highly levered domestic and global economies which have ‘feasted’ on the easy monetary policies of recent years could face a recession if global central banks were to implement additional tightening and ‘normalizing’ of short term interest rates.’