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 credit markets."
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 December 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 result.
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 time.
(Reporting by Herb Lash and Sam Forgione; Editing by Andrea Ricci and Leslie Adler)