As manager of the Total Return Fund (one of the world’s largest mutual funds), PIMCO co-Founder and co-CIO Bill Gross has a unique perspective on economic and business conditions. Gross is widely regarded as one of the best bond investors on the planet, and is highly vocal about — and sometimes critical of — policy that affects the economic backdrop against which he makes investment decisions.
Most recently this means the accomodative monetary policy that has been fostered under U.S. Federal Reserve Chairman Ben Bernanke. The Federal Open Market Committee — which is responsible for quantitative easing, the Fed’s asset-purchasing program that pretty much sets the tone of market behavior right now — concluded a two-day policy meeting on Wednesday. Bernanke held a press conference in the afternoon discussing current Fed thinking and the future of the policy.
The markets reacted as only they could: with volatility and selling pressure. Gross was quick to weigh in.
To recap in case you missed it, Bernanke suggested that if Fed projections hold true over the next six to 12 months, the Fed could begin tapering purchases by the end of 2013, and end the program altogether sometime in 2014. It’s important to point out that this is by all means an estimate, and the Fed has emphasized time and again that its policy decisions will depend on incoming data.
Gross spoke to Bloomberg Television shortly after Bernanke’s press conference, and offered his perspective on the chairman’s comments and the market reaction.
“Based on what he said, based upon what the Fed estimates have given us in the last hour it suggests that yes, towards the end of the year, as we hit 7.25 percent, and if inflation rises as opposed to stays at 1 percent that the Fed would begin to taper and that ultimately they would end tapering in perhaps the first quarter of 2014. Is that a realistic possibility? At PIMCO, we don’t think that really is.”
Why not? The short answer to the question (the only answer that Gross really supplied) is that the problems facing the U.S. economy aren’t so much cyclical as they are structural. In other words, we can’t just wait for the headwinds to die down, something has to be done.
Shifting to the market reaction, Gross suggested to Bloomberg that investors may be misinterpreting Bernanke’s statements. For a little bit of context, here’s how the 10-year Treasury note traded in reaction to the press conference.
Gross commented that “Those who are selling treasuries in anticipation that the Fed will ease out of the market might be disappointed unless we have inflation close to 2 percent.” As indicated, the key ingredient here is inflation.
“I think the Chairman is almost deathly afraid and we have witnessed in speeches going back five or 10 years on the part of the chairman in terms of the helicopter speech and the reference not only to the depression but to the lost decades in Japan. I think he is deathly afraid of deflation,” Gross commented.