Gross: No asset bubbles given Fed neutral policy rate of 2%

Pacific Investment Management Co.'s Bill Gross said asset markets from stocks to real estate are not overpriced because the Federal Reserve's long-term policy rate will be half of what policymakers are forecasting.
MAY 27, 2014
Pacific Investment Management Co.'s Bill Gross said asset markets from stocks to real estate are not overpriced because the Federal Reserve's long-term policy rate will be half of what policymakers are forecasting. “Estimates which average less than 2 percent are much closer to financial reality than the average 4% 'blue-dot' estimates” of Fed policymakers, Mr. Gross wrote in his monthly investment outlook posted on Pimco's website today. He was referring to the Fed's neutral policy rate, a level that would be consistent with full employment, growth and stable prices. The Fed's March summary of policymakers' economic projections, or SEP, had a median estimate for the long-run policy rate of 4%, unchanged from the December report. The median forecast was for the federal funds rate to move to 1% in December 2015 and 2.25 percent a year later. That compared with estimates in December of 0.75% and 1.75%. Mr. Gross has stumbled in the past year after building one of the best long-term track records in the industry. Over the past year, his $232 billion Pimco Total Return Fund, the world's largest bond fund, has lost 1.85%, trailing 90% of similar funds. Over the past five years, the fund is beating 57% of peers. LOWER RETURNS While investors don't face the risk of market bubbles if the long-run Fed policy rate proves lower than Fed officials now foresee, they will suffer from lower-than-average returns, Mr. Gross wrote. Pension-fund assumptions of 7% to 8% total returns will prove too high, he wrote. “Still there are ways to fight back — most of which involve taking different risks than you may be commonly used to taking: alternative assets, hedge funds, leveraged closed-end funds, a higher proportion of stocks versus bonds in a personal portfolio,” he wrote. “All of these alternatives are potentially higher-returning assets in a world of 2% policy rates where cash is a poor-performing asset, but likewise a cheap liability that can be borrowed to an investor's advantage.” Implied yields on federal funds futures traded at the CME Group Inc. exchange signal a 51$ probability the Fed will first increase its target rate in June 2015, according to calculations available on the exchange's website. Fed policymakers have cut their monthly debt buying by $10 billion increments at each of their last three meetings, lowering it to $55 billion. The Federal Open Market Committee will complete a two-day policy meeting today and probably will continue with reductions at that pace and end the program in October, economists said in a Bloomberg News survey last month. (Bloomberg News)

Latest News

RIA M&A stays brisk in first quarter with record pace of dealmaking
RIA M&A stays brisk in first quarter with record pace of dealmaking

Driven by robust transaction activity amid market turbulence and increased focus on billion-dollar plus targets, Echelon Partners expects another all-time high in 2025.

New York Dems push for return of tax on stock sales
New York Dems push for return of tax on stock sales

The looming threat of federal funding cuts to state and local governments has lawmakers weighing a levy that was phased out in 1981.

Human Interest and Income Lab streamline workflows for retirement-focused advisors
Human Interest and Income Lab streamline workflows for retirement-focused advisors

The fintech firms' new tools and integrations address pain points in overseeing investment lineups, account monitoring, and more.

Buy or sell Canada? Wealth managers watch carefully as Canadians head to the polls
Buy or sell Canada? Wealth managers watch carefully as Canadians head to the polls

Canadian stocks are on a roll in 2025 as the country prepares to name a new Prime Minister.

Carson, Lido strengthen RIA networks with bicoastal deals
Carson, Lido strengthen RIA networks with bicoastal deals

Carson is expanding one of its relationships in Florida while Lido Advisors adds an $870 million practice in Silicon Valley.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.