Say what you want about Bill Gross. He’s arrogant. He’s petty. He didn’t give his colleague El-Arian enough credit. He destroyed PIMCO Total Return (PTTDX) and now he is dragging down the bond funds at Janus. What kind of bond king is that?
From my vantage point, however, the rush to discredit Gross has its roots in schadenfreude – pleasure that one gets from witnessing another person’s misfortune. After all, Gross popularized the “new normal” to describe an era of feeble economic growth. Could he have been more accurate in the forecast? The expansion has averaged little more than 2% per year since 2009. In fact, the country’s inability to leave zero percent rate policy behind after seven years is a testament to the incisiveness of the “new normal.”
And there’s more. In May of 2014, before Gross left PIMCO, his company promoted the “new neutral.” The concept represented an evolution from the sluggish domestic growth of the new normal to negligible global growth.
Indeed, the global economic slowdown played out precisely as Gross had anticipated. World trade has dropped to one-half the average rate of 5% over the past two decades. Meanwhile, the J.P. Morgan Global Manufacturing PMI, a measure of economic well-being worldwide, posted its lowest reading since July 2013 (50.6).
Since the promotion of the “new neutral” roughly 18 months ago, countries around the world have fought off their recessionary pressures with the same types of monetary stimulus tricks as employed by the U.S. Federal Reserve. Electronic money creation, asset purchases, rate cutting, currency devaluation. Yet quantitative easing (QE) and rate slashing around the world have not benefited the global economy the way that many had hoped. The lack of progress came to a head at the Fed’s September meeting when chairwoman Yellen identified world economic woes as the primary reason for holding off on a change to the Fed’s overnight lending rate.
Perhaps ironically, the Fed walked back global economic concerns in its recent October meeting. Why? China, Sweden and the Europe Union via the European Central Bank (ECB) are all in the process of adding more juice to the punch bowl. Japan’s likely to “ease” as well. More QE. More rate cuts. Heck, if every central bank in the world can pursue a course of conventional and unconventional easing, that may just make up for the token gesture of a modest one-eighth or one-quarter point hike by the central bank of the United States.
On the flip side, it might not be that simple. If and when the Fed tightens, albeit modestly, it risks over-sized gains in the U.S. dollar. Super-sized strength in the greenback makes U.S. goods far more expensive and it causes pain for middle-class Americans via job cuts at overseas-dependent corporations. PowerShares DB Dollar Bullish (UUP) could easily revisit and/or eclipse 2015 highs.