By Herbert Lash and Sam Forgione
Jan 31 Bill Gross, the PIMCO bond guru, said on
Thursday a heavy reliance on credit has put the U.S. economy on
a trajectory toward extinction, and he warned of an investor
exodus from financial markets.
The level of credit needed to spur economic growth has grown
five-fold since the 1980s, said Gross, who is a founder and
co-chief investment officer of Pacific Investment Management Co.
He likened the need for more and more government stimulus to
produce ever-diminishing rates of growth to Japan's experience
over the past decade.
Using a supernova as a metaphor for the U.S. financial
system, Gross said the universe is expanding so rapidly now that
in the far future it will end in a "big freeze." Dependence on
credit for growth will produce similar results, he said.
"Our current monetary system seems to require perpetual
expansion to maintain its existence," Gross said in a PIMCO
investment outlook commentary for February posted on the firm's
website. "The advancing entropy in the physical universe may in
fact portend a similar decline of 'energy' and 'heat' within the
Gross, who runs the $285 billion Pimco Total Return Fund,
the world's largest bond fund, said a breakdown in credit
markets will likely spur inflation, something he has warned
against in previous letters. PIMCO, based in Newport Beach,
California, had $2 trillion in assets as of Dec. 31.
He again recommended inflation-protected Treasuries, gold
and other commodities, and recommended investing in countries
with less debt such as Australia, Brazil, Mexico and Canada, and
in world equities with healthy cash flows.
U.S. government, corporate, household and personal debt is
now $56 trillion, a monster that needs ever increasing amounts
of fuel, Gross said, calling it a "supernova star that expands
and expands, yet, in the process begins to consume itself."
Gross said in the 1980s it took $4 of new credit to generate
$1 of real gross domestic product, while over the past decade it
took $10, and since 2006, it has taken $20 to produce the same
The end of credit markets will begin, said Gross, when
assets offer too much risk and too little return, causing an
investor exodus into alternatives such as cash or real assets.
Gross also held to a claim he made in an investment letter
last August that returns on both stocks and bonds weaken over