Pimco's Gross says weak credit creation jeopardizes growth

Pacific Investment Management Co.'s Bill Gross says insufficient credit creation, with economic growth of only about 2%, puts the U.S. expansion in jeopardy.
SEP 12, 2014
By  Bloomberg
Pacific Investment Management Co.'s Bill Gross, manager of the world's biggest bond fund, said insufficient credit creation with economic growth of only about 2% jeopardizes the U.S. expansion. “A credit-based financial economy, as opposed to pure cash, depends on an ever-expanding outstanding level of credit for its survival,” Mr. Gross wrote in his monthly investment outlook posted Wednesday on Pimco's website. “Credit creation is essential for economic growth in a finance-based economy such as ours. Without it, growth stagnates or withers.” If the credit growth is more than 4.5% a year, then private and public sectors must create about $2.5 trillion of new debt per year to pay for outstanding interest, Mr. Gross estimates. This failure to generate the required credit to fuel growth is keeping output since the recession capped, he said. The biggest gain in U.S. business investment in over two years helped the world's largest economy expand more than previously forecast in the second quarter. Gross domestic product, the value of all goods and services produced, rose at a 4.2% annualized rate, following a first-quarter contraction, Commerce Department data showed Aug. 28. In July, the Federal Open Market Committee changed the language of its policy statement to highlight “significant underutilization of labor resources” as a justification for continued easy-money policies, even though the jobless rate has fallen faster than Fed officials had forecast. At 6.2% in July, unemployment was 1.1 percentage points below the level a year earlier. CREDIT VELOCITY The velocity, or turnover of credit, is also a factor and is related to the level of interest rates offered in the economy, Mr. Gross wrote. Low levels of rates on longer-term debt make holding short-term, near cash, securities more attractive. “Today's levels of interest rates and stock prices offer a historically unacceptable level of risk relative to return unless the policy rate is kept low — now and in the future,” Mr. Gross wrote. “That is the basis for the New Neutral, Pimco's assumption that the Fed funds rate peaks at 2% or less in 2017 versus others' assumptions,” which forecast it will be much higher. “Existing asset prices in the U.S., while artificially high and bond yields artificially low, may continue to be so unless the Fed oversteps its interest rate line,” Mr. Gross said. Fed funds futures contracts show an over 50% chance the central bank will increase its benchmark to at least 0.5% in July 2015. FUND PERFORMANCE The performance of the $222 billion Total Return Fund, returning 4.03% this year, puts it behind 57% of similarly managed funds, according to data compiled by Bloomberg. Mr. Gross has 12% of the assets in the Total Return Fund invested in U.S. credit in July, his fourth-largest allocation. U.S. government and related securities was the largest at 45%, according to the data posted on Pimco's website. “Over the long term, however, economic growth depends on investment and a rejuvenation of capitalistic animal spirits — a condition which currently does not exist,” Mr. Gross wrote in the note.

Latest News

What advisors need to know about SECURE 2.0’s impact on retirement income planning
What advisors need to know about SECURE 2.0’s impact on retirement income planning

Catch-up contributions, required minimum distributions, and 529 plans are just some of the areas the Biden-ratified legislation touches.

EToro to tokenize US stocks on Ethereum network for 24/7 trading
EToro to tokenize US stocks on Ethereum network for 24/7 trading

Following a similar move by Robinhood, the online investing platform said it will also offer 24/5 trading initially with a menu of 100 US-listed stocks and ETFs.

GTCR to acquire FMG Suite, expanding its wealth tech portfolio
GTCR to acquire FMG Suite, expanding its wealth tech portfolio

The private equity giant will support the advisor tech marketing firm in boosting its AI capabilities and scaling its enterprise relationships.

$29B Lido Advisors expands in Utah with Olympus Wealth Management
$29B Lido Advisors expands in Utah with Olympus Wealth Management

The privately backed RIA's newest partner firm brings $850 million in assets while giving it a new foothold in the Salt Lake City region.

Annuities hit new $223B high in H1 2025, LIMRA says
Annuities hit new $223B high in H1 2025, LIMRA says

The latest preliminary data show $117 billion in second-quarter sales, but hints of a slowdown are emerging.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.