Gross scoffs at a Fed driven by historical models.
Reversion to the mean is the Fed's philosophy but in the New Normal, expecting Fed funds to rise back to a 'neutral' level is a mistake, according to Janus Capital's Bill Gross.
The one-time Bond King is out with his latest investment outlook and uses it to tackle the big question: How to invest in a perpetual low rate environment. But first, he takes a moment to prod the Fed, where they continue to believe that Fed funds will rise above 3%, eventually.
"They still believe in their 3¾% nominal blue dots which conflate to a 1¾% real rate of interest that has been in vogue for 30 years now. Yellen herself has admitted that the real neutral rate changes and that it depends on a variety of factors including fiscal and monetary policy, term premiums, equity prices and yield curves - so many as to be impossible to model. When Jim Cramer screamed "they know nothing, they know nothing", he was being a little unfair but not by much."
Ouch.
Gross circles toward how to invest in the low-rate, cheap money environment. He looks at four approaches touted by Ray Dalio, Jeremy Grantham, Warren Buffett and Jack Bogle. He says at Janus they most closely align with Dalio: That if " borrowing costs center around 0% real, then assets can be cautiously levered, being cognizant at the same time of the fat tails inherent in our new world of leverage and extreme monetary policy." So levered, long and cautious.
In the bond world, Gross sees little value remaining, calling government bonds "clearly overvalued" and instead bets that ECB QE will keep sovereign bond yields pinned.
"I would not buy these clearly overvalued assets but sell "volatility" around them, such that much higher returns can be captured if say the German 10 year Bund at 20 basis points doesn't move to -.05% or up to .50% over three months' time. Draghi's QE should place a high probability on staying within that range."
