The end is nigh for debt-fueled economic growth, Gross warns

Negative interest rates, central banks' quantitative easing and more cumbersome regulations will squeeze profits at financial companies, Bill Gross told clients in his latest monthly outlook, threatening the credit-fueled expansion of the last almost half-century.

That was all part and parcel of a finance-based economy which was becoming increasingly dormant as finance itself burned out, Bill Gross believed.

Writing in his Investment Outlook for March, the prestigious fund manager from Janus Capital argued that quantitative easing and negative interest rates were turning finance-based capitalism into something destructive instead of growth enhancing.

In Gross’s opinion, that was ominous news for a global economy that had seen credit expand 58-fold since 1970 to reach $58trn.

“In addition, the return offered on savings/investment whether it be on deposit at a bank, in Treasuries/ Bunds, or at extremely low equity risk premiums, is inadequate relative to historical as well as mathematically defined durational risk.”

Hence, in his opinion the recent “collapse” in the banks sector had little to do with the risk of increasing defaults in the energy/commodity complex.

Instead, the main driver was investor recognition that in the future lenders’ return on equity would look more like that of a utility.

“Banking/finance seems to be either a screaming sector ready to be bought or a permanently damaged victim of write-offs, tighter regulation and significantly lower future margins. I’ll vote for the latter.”

The same went for insurers such The Met, the PRU, Hartford or pension funds, Gross said.

Central bankers were ever intent on going lower, ignoring the damage being done to savers and a classical economic model that has driven prosperity - until it reached a negative interest rate dead end.

Hence, he recommended investors avoid bank stocks – as they were cheap for a reason – and not chase overpriced Bunds and US Treasuries.

As far AAA sovereign bonds were concerned, he pointed out how a 30-year US Treasury at 2.5% could wipe out an investor’s annual income in one day with a 10 basis point increase.

However, investing in short maturity bonds in a mildly levered form might provide yields (and expected returns) of 5-6%, he concluded.

“The Sun still comes up every morning […] but be prepared for change.”