The world's biggest private-sector bond investor says the U.S. Federal Reserve Board is doing about all it can reasonably do to backstop the struggling U.S. economy and stave off deflation. But America's government, despite $1-trillion (U.S.) of stimulus spending, isn't doing nearly enough.
And until it comes up with some new solutions, Bill Gross says, his investment eyes will continue to wander to greener pastures - including Canada.
"We're much more in awe of countries such as Canada, with a decently balanced budget, and with low debt-to-GDP, and with financial institutions that have been solvent and sound and conservative in their lending, and that have something to export," said Mr. Gross, founder and co-chief investment officer of Pacific Investment Management Co. LLC (commonly known as PIMCO), which oversees more than $1.1-trillion (U.S.) in investment assets, primarily in the bond markets.
"North of the border has become, while not our favourite destination, certainly a preferable destination to what we see in the United States."
There are higher-yielding and better alternatives in this global marketplace than a U.S. two-year Treasury at 50 basis points.
In an exclusive interview with The Globe and Mail on the heels of the Fed's monetary-policy decision Tuesday - in which the central bank took a small step back into re-investing some of its own balance sheet to ease monetary conditions - the influential bond manager gave a vote of confidence to the Fed's strategy, criticized the Obama administration and Congress for a their lack of innovation and leadership, and argued that unless big government-policy changes are made, the United States faces years of economic stagnation.
This, he suggested, means he's looking elsewhere for decent returns on his firm's huge fixed-income investments, as U.S. government bond yields look set to continue to wallow at historic depths. (The two-year note was a shade above 0.5 per cent late Wednesday, while the 10-year note was at 2.69 per cent, its lowest since the March, 2009 depths of the market crisis.)
"There are higher-yielding and better alternatives in this global marketplace than a U.S. two-year Treasury at 50 basis points."
Mr. Gross believes the Fed's re-investment move - a mild form of what's commonly known as quantitative easing - signals that the central bank's interest rate policy is on hold for "two to three years at least," implying a long and painfully slow economic recovery.
[Fed Chairman Ben]Bernanke has done all he can. Now it's up to [Treasury Secretary Tim]Geithner and to the Congressional leaders to do something right for a change. In our opinion, they haven't done things right.
"What it basically does is it prolongs the period at which investors feel comfortable that the Fed will stay at 25 basis points [in the benchmark Federal funds rate] I mean, if they were going to raise the Fed funds rate, they would stop this quantitative easing before they did that. So this effort basically says, 'Hey, we may be here for longer than you think'."
To him, that's a welcome signal that the Fed is going to continue to do what it needs to do to keep deflation - one of the most dreaded of economic and market bogeymen - at bay.
He called the re-investment pledge "a weak form of stimulus" - nothing close to the Fed's rate-slashing and $1.5-trillion of quantitative easing last year. But he suggested that given the political environment in Washington, there's not much more the Fed is could be doing at this stage.
"[Fed Chairman Ben]Bernanke has done all he can. Now it's up to [Treasury Secretary Tim]Geithner and to the Congressional leaders to do something right for a change. In our opinion, they haven't done things right.
"The stimulus that they've provided has been consumption-oriented - it's not directed at investment, industrial policy … What they've done up to this point has been ineffectual and obviously unsuccessful in terms of appropriately stimulating the economy to do what needs to be done: produce jobs."
I've mentioned Brazil, and, yes, Canada's a good place. Even Mexico has better initial conditions in terms of low debt than the United, States, but admittedly the stability issues and politics are a question. But in general, the developing world is in much better position than the developed world, so that's where dollars should go.
Mr. Gross declined to say whether his bearish views are translating into a reduction in PIMCO's exposure to U.S. government bonds - indeed, as recently as June his funds' holdings of Treasuries were on the rise and at eight-month highs. However, he has been raising his exposure in Canadian and Brazilian government bonds, and his favoured investment strategies right now are outside the U.S. market.
"Investors, whether it's equity or bonds, should be oriented toward growth and stability, and, yes, a political foundation that promotes both.
"I've mentioned Brazil, and, yes, Canada's a good place. Even Mexico has better initial conditions in terms of low debt than the United, States, but admittedly the stability issues and politics are a question. But in general, the developing world is in much better position than the developed world, so that's where dollars should go."
Despite all the market turmoil and the serious issues Mr. Gross weighs in on, he's enjoying living in interesting times.
"The events of the past 18 to 24 months, as chaotic as they've been, have really been too much fun, because they've presented a challenge and allow you to match wits with not just other investors but with policy makers," he said.
"For me, I couldn't imagine anything more fun."
Investor Education: Bonds
William (Bill) H. Gross
Title: Co-Chief Investment Officer, Pacific Investment Management Co.
Born: Middletown, OH, 66 years old
Education: Bachelor's degree, psychology, Duke University; MBA, University of California; Chartered Financial Analyst
1960s: Student; Professional blackjack player; Officer in the United States Navy
1970s: Investment analyst with Pacific Mutual Life; Co-founder of Pacific Investment Management Co (PIMCO)
2000s: PIMCO, one of the world's largest bond-fund managers, becomes a unit of German insurer Allianz
Sources: Bloomberg News, Investopedia.com