Bill Gross: Economy is Dangerously Close to Deflation

Economy is Dangerously Close to Deflation
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Billionaire hedge fund manager, Bill Gross, says the Federal Reserve needs to raise interest rates to prevent deflation in the global economy. Gross is famous for steering Pacific Investment Management Corp. through the financial crisis, so much so that Wall Street calls him as the “Bond King.” He thinks we’re at risk of an economic collapse. (Source: Bloomberg, August 7, 2015.)

Gross, who now works at Janus Capital Group Inc., has been a long time critic of the Federal Reserve’s “easy money” policies, arguing they inherently distort market prices. The central bank kept the printing presses busy with more than $4.0 trillion in bond purchases since 2008. At the same time, interest rates were pushed to historic lows, brushing up against what economists call the “zero lower bound.”

The hope was that banks could borrow from the Fed at virtually zero percent, thus incentivizing them to create more loans for businesses and individuals. Spending by those end borrowers would circulate through the economy, pumping up demand and fostering economic growth.

The Fed Must Act to Prevent Deflation, Says Bill Gross

If the Fed’s stimulus plan worked, we would see a moderate rise in inflation. But the opposite is happening. In a phone interview with Bloomberg TV, Gross points to lackluster wage growth as evidence of deflation.  

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Prices are stagnant and could actually recede, according to the billionaire investor. In light of these facts, most analysts argue the Fed should hold off on raising interest rates. But Gross disagrees.

“It sounds counter-intuitive,” he said. “It’s a mirror type of image, in terms of logic, to think that by raising interest rates you could increase investment, you could increase bank loans and margins, and not just for financial companies.”

Markets have readied themselves for a rate hike, says Gross. A 50-point increase would likely spook investors, but 25 points seems appropriate, given that the Fed is “mentally committed to moving before year end.”

Famous Investor Warns of Deflationary Pressure in Global Economy

What’s the best investment play for this scenario? It’s certainly not equities, since the Federal Reserve has propped up the stock market for so long that investors forgot what real risk feels like.

Losing that kind of security will sow fear into the market. But play your cards carefully and there’s over 200% profit to be made on that panic. Click here for more information in our FREE special report.