The American economy is facing 'D-Day' on 30 June this year, says Bill Gross. That's when the current bout of quantitative easing (QE) is scheduled to end. Gross worries that by "eliminating QE II, the Fed would be ripping a Band-Aid off a partially healed scab".
He admits that since QE was introduced in 2008, "stocks have nearly doubled", while the "US economy will likely expand by 4% this year". But he still wonders whether "quantitative easing policies actually heal", or just "cover up symptoms of an unhealthy economy".
The problem, says Gross, co-founder of PIMCO, the world's biggest bond fund, is that QE is like a 'Ponzi' scheme. "The Treasury issues bonds and the Fed buys them", in an attempt to "cure a debt crisis with more debt". That's all very well but when QE stops "who will buy Treasuries when the Fed doesn't?".
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Gross points out that the Fed currently buys 70% of Treasury bonds. When it stops there will be a big "void" in the market. There won't be a "buyers' strike. Someone will buy them". But yields will have to go up to "attract buying interest".
Private investors need to be prepared to step in and fill the gap left by the Fed. If "the private sector cannot stand on its own two legs issuing debt at low yields and narrow credit spreads, creating the jobs necessary to reduce unemployment and instilling global confidence in the sanctity and stability of the US dollar then the QEs will have been a colossal flop."
This isn't just an issue for bond investors, says Gross. "QE has affected not only interest rates but stock prices and all risk spreads. The withdrawal of nearly $1.5 trillion in annualised check writing may have dramatic consequences."
-
How to pay in a chequeReceiving or writing a cheque has become much less common in recent years as instant bank transfers have grown in popularity. Amid widespread bank branch closures, we explain what to do if you get a cheque, and how you can pay one into your bank account.
-
Crypto assets of seven million UK investors at risk – how to keep yours safeCryptocurrency wallet rules make it hard to track down assets after someone has died, even if they leave a will saying who they would like to inherit them
-
Can Donald Trump fire Jay Powell – and what do his threats mean for investors?Donald Trump has been vocal in his criticism of Jerome "Jay" Powell, chairman of the Federal Reserve. What do his threats to fire him mean for markets and investors?
-
Freetrade’s new easy-access funds aim to beat top savings ratesFreetrade has launched an easy-access exchange traded fund (ETF) range - here’s how the ETFs work and how they compare to the savings market
-
Go for value stocks to insure your portfolio against shocks, says James MontierInterview James Montier, at investment management group GMO, discusses value stocks and slow-burn Minsky moments with MoneyWeek.
-
Where do we go from here?Features A new series of interviews from MoneyWeek
-
As China reopens, why pick an income strategy?Advertisement Feature Yoojeong Oh, Investment Manager, abrdn Asian Income Fund Limited
-
Income in the USAAdvertisement Feature Fran Radano, manager on The North American Income Trust
-
The challenge of turbulent marketsAdvertisement Feature Today, ISA investors face one of the most challenging economic environments seen in recent years. However, good companies can still thrive, even in the toughest economic conditions. That’s why BlackRock’s fund managers focus on these businesses when they’re looking for investment opportunities.
-
What the return of the bond vigilantes means for investorsAnalysis The US Federal Reserve is dancing to the tune of the bond vigilantes, says Max King. Here’s what that means for stockmarket investors, the economy, and you.
