Bill Gross, the former manager of the world's largest bond fund, said the U.S. Federal Reserve will raise interest rates late in 2015 to end distortions that six years of near-zero borrowing costs have brought to financial markets.
Any increase by the Fed will be slow to avoid startling markets that have gotten used to cheap money, and caution will prevail for a long time, Mr. Gross wrote in an investment outlook for Janus Capital Group Inc., where he runs the $1.4 billion Janus Global Unconstrained Bond Fund.
The former chief investment officer of Pacific Investment Management Co., who left that firm in September to join Janus, likened financial markets to the board game Monopoly, in which a bank, much like the Fed, supplies money to players who invest it in properties. Mr. Gross said the Fed realizes that for the game to function, players need incentives to invest.
“Capitalism depends on hope –- rational hope that an investor gets his or her money back with an attractive return,” he wrote. “Without it, capitalism morphs and breaks down at the margin. The global economy in January of 2015 is at just that point with its zero percent interest rates.”
Mr. Gross, 70, has previously said that falling oil prices and a strong dollar constrain the Fed from raising rates until late this year, “if at all.”
Mr. Gross earned his reputation by building Pimco into a $2 trillion money manager with some of the industry's highest returns. He left the firm he co-founded in 1971 to join Denver-based Janus after losing a power struggle with management and some of his deputies.
The Janus Global Unconstrained Bond Fund, run by Mr. Gross since Oct. 6, has lost 0.6% in the past three months, trailing 58% of comparable funds, according to data from Chicago-based research firm Morningstar Inc.
Mr. Gross said Jan. 28 on CNBC that policy makers would raise rates at their meeting in June or September, depending on oil prices and conditions in Europe and China.
Even as the Fed boosted its assessment of the U.S. economy and downplayed low inflation, tumbling oil prices and concerns that Greece could exit the euro have sent American equities lower this year.
In his previous outlook, Mr. Gross forecast negative returns for many assets this year as record-low rates fail to restore economic growth. Investors should hold high-quality assets with stable cash flows, such as Treasuries, high-grade corporate bonds and stocks of companies with little debt and attractive dividends, he wrote.
While domestic and global stocks will be supported as rates rise, “their heyday is over,” he wrote today.
Instead of getting invested in projects, cash has accumulated on corporate balance sheets or was used in share repurchases, “like the endgame in Monopoly where cash becomes king at the game's conclusion,” and “those without cash and the ability to get it go bankrupt,” according to Mr. Gross. With an aging population and high debt ratios, he wrote, “hope is challenged.”