Historically low interest rates over the last several years did more than dramatically increase the money supply; they set the stage for a monumental economic collapse that could send bond yields sky high. Or at least that’s the opinion of billionaire investor Bill Gross, also known as the “The Bond King.”
Gross earned a stellar reputation while running Pacific Investment Management Company (PIMCO), the Newport-based firm focused on investing bonds. Now he’s warning investors that equity markets have been severely distorted by the extended period of rock-bottom interest rates, and many inefficient firms are masquerading as high-quality stocks.
“Schumpeter’s ‘creative destruction’—the supposed heart of capitalistic progress—has been neutered,” said the legendary investor. “Because BB, B, and in some cases CCC rated companies have been able to borrow at less than 5%, a host of zombie and future zombie corporations now roam the real economy.” (Source: Janus Capital, July 30, 2015.)
Gross’s point is directed at central bankers across the world, many of whom have pushed interest rates to near-zero levels. Japan has periodically maintained an easy money policy, the eurozone recently began a bond-buying program, and China is open-handed with its printing press. In particular, quantitative easing and effectively free credit from the Federal Reserve helped to drive asset prices higher, but the programs utterly failed to stimulate real investment.
Gross argues that policymakers at the Fed are finally tuning in to these developments, increasing the likelihood of an interest rate hike this year. “The Fed [is beginning] to recognize that zero percent interest rates increasingly have negative, as well as positive consequences,” said Gross. “There is no statistical reason per se for [them] to raise interest rates, yet absent a major global catastrophe we are likely to get one in September.”