Bill Gross: “Investors Are All Playing The Same Dangerous Game – That Depends On Perpetual Cheap Financing”!

• Bill Gross: “Investors Are All Playing The Same Dangerous Game—That Depends On Perpetual Cheap Financing”! 
  by Tekoa Da Silva, http://bullmarketthinking.com/ 
  Bill Gross, founder of Pimco, the world’s largest bond fund with over $2 trillion in assets under management, penned a new piece this morning entitled, “On The Wings Of An Eagle”.
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  In this editorial he indicates that ongoing “Fed Medicine” is forcing money managers globally into assets further out onto the “risk-curve”—which are being supplemented with ever-growing levels of portfolio leverage (ie. borrowing at low rates and using the funds to purchase mountains of “alternative assets”).
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  Speaking towards growing investor desperation caused by Fed Policy, Gross notes that:
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  “Investors now await nervously for news on the real economy as well as the medicine that Janet Yellen will apply to it. That medicine, however, will most assuredly include negative real interest rates that at some point will give bond and stock investors pause as to the continued potency of historical total return policies generated primarily by capital gains. Bond investors found that out in May, June and July after 10-year Treasuries had bottomed at 1.65%. Stock investors, however, were only mildly discouraged and continued their faith-based, capital gain dependent investments despite what should be the obvious conclusion that QE and low interest rates were as critical to their market as they were to bonds. ‘What other choice do we have?’ has become the mantra of stock investors globally, which speaks more to desperation than logical thinking.”
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  A “what other choice do we have?” mindset is exhibiting itself in institutional portfolios globally, according to Gross, in that:
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  “The standard ‘three musketeers’ menu for retail investors has always been 1) investment grade and 2) high yield bonds as well as 3) stocks. In recent years, institutional investors have gravitated into 4) alternative assets, 5) hedge funds and 6) unconstrained space, and so for them there appears to be an increasing array of higher return alternatives. All of the above 1-6, however, contain artificially priced assets based on artificially low interest rates. Some are unlevered, like Treasury bonds, but nonetheless priced too high by the Fed in an effort to encourage migration to riskier bonds and/or asset classes. Others, such as many alternative assets, depend on the levering of portfolios themselves, borrowing at 10-50 basis points in overnight repo and investing at higher rates of return despite their artificiality.”
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  Gross notes in conclusion that, “Investors are all playing the same dangerous game that depends on a near perpetual policy of cheap financing and artificially low interest rates in a desperate gamble to promote growth. The Fed, the BOJ (certainly), the ECB and the BOE are setting the example for global markets, basically telling investors that they have no alternative than to invest in riskier assets or to lever high quality assets. ‘You have no other choice,’ their policies insinuate. ‘Get used to negative real interest rates, move out on the risk spectrum and in the process help heal the real economy,’ they seem to command.”
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