PIMCO's Gross says QE measures stunting business growth

Reuters Business News
Posted: Jun 04, 2013 9:05 AM
PIMCO's Gross says QE measures stunting business growth

By Sam Forgione

NEW YORK (Reuters) - Bill Gross, founder and co-chief investment officer of bond fund giant PIMCO, said in his latest letter to investors on Tuesday that global stimulus measures are limiting companies' desire to invest in future production.

Gross, who runs the world's largest mutual fund, said that monetary stimulus has resulted in low yields and less reward on riskier investments, stunting real economic growth and leading corporations to return capital rather than invest it in productive tasks like research and development.

"Western corporations seem focused more on returning capital as opposed to investing it," Gross said in reference to companies returning cash through measures like dividends and stock buybacks.

The overall effect is negative to economic growth, Gross said.

Gross, who has criticized the negative impact of low interest rates on savers and business models, said in the June letter entitled "Wounded Heart" that investors should reduce risk assets as a result of the weak rewards to be gained.

The Federal Reserve's zero-bound interest rate policy and quantitative easing programs, which Gross characterized as "New Age chemotherapy" being employed everywhere in the world, are becoming more of a problem for an economy that needs structural reforms.

His letter picked up on a theme that other money managers are increasingly voicing: concern about how the Fed's easy money policies are distorting markets by keeping interest rates artificially low and creating an insatiable demand for riskier, higher yielding assets.

"Our global financial system at the zero-bound is beginning to resemble a leukemia patient with New Age chemotherapy, desperately attempting to cure an economy that requires structural as opposed to monetary solutions," Gross said.

For its part, the U.S. Federal Reserve is buying $85 billion in Treasuries and agency mortgage securities per month in an effort to spur hiring and lower long-term borrowing costs, a measure known as quantitative easing.

"The misunderstood after effects of this chemotherapy may also one day find their way into economic annals or even accepted economic theory," he said.

Gross added that global central banks, in particular the Bank of Japan, "seem to believe that higher and higher asset prices produced necessarily by more and more QE check writing will inevitably stimulate real economic growth via the spillover wealth effect into consumption and real investment. That theory requires challenge if only because it doesn't seem to be working very well."

Pacific Investment Management Co, a unit of European financial services company Allianz SE had $2.04 trillion in assets at the end of March. The firm's flagship PIMCO Total Return Fund has roughly $292.9 billion in assets.

The PIMCO Total Return Fund, which had 39 percent of its assets in Treasuries at the end of April, was hit by the selloff in Treasuries and fell 2.15 percent in May, according to Morningstar. The fund is down 0.39 percent for the year, according to PIMCO's website.

The fund also suffered its first outflows since late 2011 in May, Morningstar said. Investors pulled $1.3 billion from the fund in May, which marked the first outflows from the fund since $1.35 billion in outflows in December of 2011.

(Reporting by Sam Forgione; Editing by Theodore d'Afflisio and Tim Dobbyn)