Bill Gross is going after central bankers… again.
The famed bond investor at Janus Capital released his monthly outlook for October on Tuesday and again compared the world’s central banks to a dangerous game, this time blackjack.
Gross noted the theory of a Martingale System in which a bettor in a casino will eventually win if they continually increase the size of their bets.
Gross then compared the world’s largest central banks — the Federal Reserve, Bank of Japan, and European Central Bank — to one of these gamblers, calling them “Martingale gamblers without a purse.”
“Our financial markets have become a Vegas/Macau/Monte Carlo casino, wagering that an unlimited supply of credit generated by central banks can successfully reflate global economies and reinvigorate nominal GDP growth to lower but acceptable norms in today’s highly levered world,” wrote Gross in the outlook.
Of course in theory these banks can continue to print money and purchase assets and drive down bond yields until they hit their goals, Gross noted. There is no theoretical limit to them doing so, as there is no theoretical limit to how high the bet for a Martingale gambler can be.
“An interesting counter to my Martingale characterization of central bankers is in fact that they do have an unlimited bankroll and that they can bet on the 31st, 32nd, or ‘whatever it takes’ roll of the dice,” noted Gross. “After all, their cumulative balance sheets have increased by $15 trillion+ since the Great Recession. Why not $16 trillion more and then 20 or 30?”
The issue is these central banks do not work in a theoretical world, and eventually the savings erosion from negative yields will cause pain for investors and damage the world’s financial markets, in Gross’ opinion. Here’s Gross (emphasis added):
“I think that the latter contention is true, but central bankers cannot continue to double down bets without risking a ‘black’ or perhaps ‘grey’ swan moment in global financial markets. At some point investors — leery and indeed weary of receiving negative or near zero returns on their money, may at the margin desert the standard financial complex, for higher returning or better yet, less risky alternatives. Bitcoin and privately agreed upon block chain technologies amongst a small set of global banks, are just a few examples of attempts to stabilise the value of their current assets in future purchasing power terms. Gold would be another example — historic relic that it is. In any case, the current system is beginning to be challenged.”
All of this is to say that central banks cannot keep rates this low forever. Which, given that the Fed is already hiking and that the ECB has recently signalled that it may bring its asset purchases to an end, many central banks have already recognised this.
Gross goes on to say that these policies threaten “capitalism itself” since capital can no longer be efficiently allocated.
“Central bankers have fostered a casino like atmosphere where savers/investors are presented with a Hobson’s Choice, or perhaps a more damaging Sophie’s Choice of participating (or not) in markets previously beyond prior imagination,” concluded Gross. “Investors/savers are now scrappin’ like mongrel dogs for tidbits of return at the zero bound. This cannot end well.”