Janus bond portfolio manager Bill Gross has published his new monthly investment outlook.
In it, he spends a lot of time pondering dogs, and eventually gets to discussing negative interest rates. Here are some things to learn from Gross’s letter.
Dogs often look like their owners:
If you were a dog, what kind would you be? I can’t say I’ve thought about it a lot myself, but it is an interesting, possibly introspective question considering the theory that many dog owners pick a breed that looks or perhaps acts like themselves. There’s the Bulldog guy with the similar face, the blonde socialite with a pair of Afghan Hounds trailing alongside, and the paranoid homeowner with a Doberman Pinscher. You get the “picture”.
Gross has had a lot of dogs, but has only chosen one:
I myself have owned four different dogs during my 70 years, although only one of them came home because of my choosing. Budgie, the German Shepherd, and Daisy, the mutt, were my parents’ choices, and Wiggles, the irrepressible Pomeranian was Sue’s or perhaps 8-year-old Nick’s pick.
Gross’s son, Nick, put one of their dogs in a dog show once. It went pretty well:
Nick was so proud of Wiggles that we let him enter her in a dog contest a’ la the movie “Best in Show”. It was immediately apparent however, that Wiggles was no match for the better bred and coiffured competition. Thankfully though, the show was not well attended and there was a category — “home breed” — where no dog was entered. Nick never knew when he was walking Wiggles in front of the judges that he was guaranteed a blue ribbon! Wiggles didn’t seem to care much though, and seemed more interested in sniffing the competition’s crotches than observing their ear placement.
“It would be pretentious” of Gross to compare himself to the dog he chose, Honey:
“It would be pretentious to say that I resembled Honey in any way, but nonetheless she was the puppy I chose. Honey turned out to be a little bit of a tramp, so maybe there’s the connection. Back in the freewheeling ’80s when society had not even contemplated poop scooping and blue pick-up bags, Honey would roam the neighbourhood, depositing wherever she pleased, but bringing things back home in return. There was always a fresh assortment of rocks on the front porch, and stale loaves of bread from neighbourhood garbage cans. Like the Nathan’s hot dog eating champion, Joey Chestnut, who last July 4th downed 61 hot dogs to win the Coney Island championship, Honey once swallowed four frozen swordfish steaks placed innocently on the kitchen counter.”
But wait! This is actually related to financial markets. it’s an investment outlook, after all:
Sometimes when life seems to be going to the dogs, it’s not necessarily a bad thing. Like Wiggles, the “home breed” blue ribbon winner, there’s a similar contest going on in global financial markets where the “home country” seeks to outdo the competition in a race to the interest rate bottom.
The US had an advantage in the immediate aftermath of the Great Recession, says Gross, but has since lost it:
While it was once the only breed in the show, it now competes against better coiffured currencies with their own QE’s and promises to hold interest rates for lower and longer than does the U.S. Japan has a quantitative easing program 2 to 3 times greater than our own in comparative GDP terms and the ECB of course is about to embark on its own grand journey into the vast unknown of bond buying, yield lowering, and presumably further Euro currency devaluation.
Investors are starving on negative yields:
The universe of negative yielding notes and bonds in Euroland now total almost $US2 trillion. Not even “thin gruel” is being offered to our modern day Oliver Twist investors. You have to pay to come to the dinner table and then sit there staring at an empty plate.
This is going to affect a lot of different parts of the financial sector: pension funds, insurance companies, even Main Street:
…even households are handcuffed by low/negative yields, who everyday must now address their inability to save enough money at a high enough rate to pay for education, healthcare, and retirement obligations. Negative/zero bound interest rates may exacerbate, instead of stimulate low growth rates in all of these instances, by raising savings and deferring consumption.
It’s time, Gross thinks, to raise interest rates (bringing it back to the dog metaphor):
Investors and bondholders who have cheered every instance of lower and now sub-zero yields in developed countries because of near-term capital gains that accompany them, must now beware of the potential negative consequences going forward. Central banks have gone and continue to go too far in their misguided efforts to support future economic growth. “Home bred” monetary policies earn “blue ribbon” rewards in the short term, but in the long run may undermine the entire show and send the dogs towards the exits. Stay conservative in your investment portfolio. Own high quality bonds and low P/E, high quality stocks if you want to stay out of the doghouse. Arf, Arf.
This isn’t the first time that Gross has made his investment outlook all about the family pets. Recall the ode to his late cat, Bob, last year.
Which breed do you think Gross would be, if he were a dog? Let us know in the comments.