PIMCO's Gross spotlights crumbling credit in September outlook

NEW YORK Wed Sep 5, 2012 12:49pm EDT

The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012. REUTERS/Lori Shepler

The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012.

Credit: Reuters/Lori Shepler

NEW YORK (Reuters) - Bill Gross, founder and co-chief investment officer of bond giant PIMCO, said in his September investment outlook that low returns for banks and other lenders will lead to reduced lending and a scaling back of operations in coming years.

Gross, whose Pacific Investment Management Co had $1.82 trillion in assets as of June 30, wrote that weak returns for banks and the "overleveraged" condition of borrowers has brought the global economy to a tipping point.

For some time now, Gross has been sounding a somber note about the economy and prospects for economic growth. In his last investor letter, he talked about the death of equities and the prospect for mediocre returns for both bonds and stocks.

"When credit is priced such that carry is no longer as profitable at a customary amount of leverage/risk, then the system will stall, list, or perhaps even tip over," Gross wrote.

Gross wrote that credit "is what makes the global economy go" and that financial institutions such as banks, insurance companies, and investment firms will lose their incentive to lend at low rates and cut back on lending and enact more austere measures.

"In the process, (financial institutions) lay off, instead of hire new workers; close branch offices or even ATM machines by the thousands as did Bank of America recently; and yes, ultimately reduce the rate of lending or credit growth which propelled the global economy so effortlessly over the past century," Gross wrote.

The U.S. Federal Reserve and other central banks may be "to blame" for the "current shipwreck," wrote Gross, and their plans to inject liquidity into the financial system have backfired.

Gross, who runs the world's largest bond fund, the PIMCO Total Return Fund (PMBIX.O), which has $272.5 billion in assets as of August 31 and attracted about $1.29 billion in inflows last month, according to Morningstar.

Gross wrote that reduced lending habits and a new "age of inflation" will lead to weaker returns on both stocks and bonds, which was the main point in his August letter.

"The age of credit expansion which led to double-digit portfolio returns is over. The age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price - both stocks and bonds," Gross wrote.

Gross recommended that younger investors own more stocks and that investors in their 60s own more bonds while avoiding high fees on mutual funds and exchange-traded funds.

(Reporting by Sam Forgione; Editing by Tim Dobbyn)

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