Bill Gross: “Central Banks Have Gone Too Far”

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Central Banks Have Gone Too Far In Their Misguided Efforts To Support Economic Growth

from  Zero

The usual stuff in Bill Gross’ latest monthly letter which could have been picked form the pages of Zero Hedge circa late 2009/early 2010, now that virtually all the “conspiracy theories” we first presented years ahead of everyone have not only been validated, but accepted as New Paranormal canon.

The excerpted highlights:

  • None dare call it a “currency war” because that would be counter to G-10/G-20 policy statements that stress cooperation as opposed to “every country for itself”, but an undeclared currency war is what the world is experiencing. Close to the same thing happened in the 1930’s, a period remarkably similar to what many countries’ policies resemble today.
  • … the U.S. tailwind from competitive devaluation has since stalled – in fact the tailwind has now turned into a headwind. While it was once the only breed in the show, it now competes against better coiffured currencies with their own QE’s and promises to hold interest rates for lower and longer than does the U.S. Japan has a quantitative easing program 2 to 3 times greater than our own in comparative GDP terms and the ECB of course is about to embark on its own grand journey into the vast unknown of bond buying, yield lowering, and presumably further Euro currency devaluation.
  • The universe of negative yielding notes and bonds in Euroland now total almost $2 trillion. Not even “thin gruel” is being offered to our modern day Oliver Twist investors. You have to pay to come to the dinner table and then sit there staring at an empty plate.
  • A more serious concern however, might be that low interest rates globally destroy financial business models that are critical to the functioning of modern day economies. Pension funds and insurance companies are perhaps the most important examples of financial sectors that are threatened by low to negative interest rates.
  • Negative/zero bound interest rates may exacerbate, instead of stimulate low growth rates in all of these instances, by raising savings and deferring consumption.
  • Asset prices for stocks, high yield bonds and other supposed 5-10% returning investments, become stretched and bubble sensitive; Debt accumulates instead of being paid off because rates are too low to pass up – corporate bond sales leading to stock buybacks being the best example. The financial system has become increasingly vulnerable only six years after its last collapse in 2009.
  • Central banks have gone and continue to go too far in their misguided efforts to support future economic growth.

And the punchline:

  • common sense would argue that the global economy cannot devalue
    against itself
    . Either the strong dollar weakens the world’s current
    growth locomotive (the U.S.) or else their near in unison devaluation
    effort fails to lead to the desired results, much like Japan experienced
    after its 50% devaluation against the Dollar beginning in 2012.

Actually, that is not exactly correct: just ask FDR and executive order 6102 what the global economy can “devalue” against.

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