Oct. 27 (Bloomberg) -- Pacific Investment Management Co.’s Bill Gross said the six-month rally in riskier assets is likely at its pinnacle, with U.S. economic growth to lag behind historical averages.
Gross, a founder and co-chief investment officer of the world’s biggest manager of bond funds, made the forecast in a commentary posted on Newport Beach, California-based Pimco’s Web site. Pimco has called for a “new normal” in the global economy that will include heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.
“Investors must recognize that if assets appreciate with nominal gross domestic product, a 4-5 percent return is about all they can expect even with abnormally low policy rates,” Gross wrote. “Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets -- while still continuously supported by Fed and Treasury policy makers -- is likely at its pinnacle.”
U.S. policy makers are in a predicament much like Japan faced in the last decade because they have to keep interest rates low to support asset prices in order to create growth while also worrying about the effects of excess liquidity, Gross wrote.
“The Japanese example over the past 15 years is an excellent historical reference point,” Gross wrote. “Their quantitative easing and near-zero percent short-term interest rates eventually arrested equity and property market deflation, but at much greater percentage losses, which produced an economy barely above the grass as opposed to buried six feet under.”
Gross wrote that economic growth in the U.S. will approach 4 percent in the second half of this year, although sustaining that rate of expansion is uncertain.
“The ability to sustain those levels once inventory rebalancing and fiscal pump-priming effects wear off is debatable,” Gross wrote.
To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net
