PIMCO's William H. Gross made the case Thursday for his firm's view of the “new neutral” – that real interest rates will remain closer to zero than to the Fed's projected 2% range.
Assuming this thesis holds, Mr. Gross said Pacific Investment Management Co. sees bond returns in the range of 3% and 4% and stock returns between 4% and 5%. He did not specify over what timeframe.
Mr. Gross, speaking at the 26th annual Morningstar conference in Chicago, dedicated the first part of his keynote address to the media attention surrounding his firm lately — comparing his situation to that of the main character in “The Manchurian Candidate” — jokingly saying he has spent a lot of time convincing people “what a nice guy he is.”
He addressed the situation at PIMCO saying he's “never been happier at work,” applauding his new lineup of deputy CIOs, appointed over the last few months since the resignation of former CEO Mohamed El-Erian.
Turning his attention to the markets, Mr. Gross outlined his argument that real interest rates would be closer to zero than the 2% the Fed has projected.
He argued that the Taylor Rule, which stipulates that for each one percentage point increase in inflation, the central bank should raise the nominal interest rate by more than one point, has to be wrong, saying “it worked until it didn't,” highlighting that in 2007, a real rate of 1% essentially broke the economy.
Mr. Gross said a 2% real rate makes it impossible for the Federal Reserve to help spur economic growth in a leveraged economy such as that of the United States.
In terms of return expectations, Mr. Gross said he believes “most of the jazz has been enjoyed,” thus the 3% to 5% return expectations for stocks and bonds.
Investors need to keep an eye on the end of quantitative easing, Mr. Gross said, noting 30-year Treasuries have “long feasted on almost 100% purchasing by the Fed,” and it will be interesting going forward when the buyer of last resort disappears.
Mr. Gross said if the new neutral thesis holds up, the Total Return Fund and its three-element approach to investing — use of derivatives, intermediate securities and the use of volatility sales — is well positioned to perform well in the long term for its shareholders.
