The Wall Street Journal reports"in the new normal, a world of excessive leverage and slower growth, a “neutral” interest-rate policy will by necessity produce lower rates than in previous business cycles, Pimco’s Bill Gross wrote in his monthly commentary, and understanding that is the key for investors of all asset classes".
“The old saying goes that when the U.S. economy sneezes, the world catches cold. That still seems to be true enough, although Chinese influenza is gaining in importance,” he wrote. The world saw what happened when the U.S. got a really, really bad cold in 2008. How to thread the needle today, keeping rates more or less neutral, but not too high to make debt servicing onerous, is a real trick. In a global economy with as much debt as the one we have today, “it’s important to realize that the price of money and the servicing cost of that leverage are critical for a healthy economy.”
"What this likely means, he concludes, is a lower “neutral” rate than we’ve seen in the past. At Pimco, we believe that this focus on the future “neutral” policy rate is the critical key to unlocking value in all asset markets,” he wrote. In a nutshell, he thinks a neutral fed funds rate may be closer to 2% than 4%. Understanding this would give a bond investor “the key to the kingdom,” he writes, but even holding that key comes at price, the price being lower returns across assets classes".
“So you say you need more? Join the club.” "Most pensions funds, he notes, assume total returns somewhere around 7-8%. “That won’t happen with a 2% neutral policy rate.” This will push investors into riskier assets".
“Bring a handkerchief in any case.”
