Bill Gross, founder of Pimco, the world’s largest bond fund with over $1.92 trillion under management, penned a new piece this morning entitled, “Survival Of The Fittest?

In this editorial he indicates that an ongoing $1 trillion annual expansion of the Fed’s balance sheet has ultimately disastrous consequences—ie. death and/or destruction to certain parts of the economy.

Says Gross: “The Fed will have to taper, cease and then desist someday. They can’t just keep adding one trillion dollars to their balance sheet every year without something negative happening – either accelerating inflation, a tanking dollar or a continued unwillingness on the part of corporations to invest because of the resultant low and unacceptable returns on investment. QE (quantitative easing) has to die sometime. Just like Mother Nature, death and creative destruction seem to be part of the Grand Economic Scheme.”

Gross further adds that, “I think investors should listen and invest accordingly. Not with total innocence, but sort of like a totally hyena-aware lion cub – knowing there’s bad things that can happen out there in the jungle, but for now enjoying the all clear silence of the African plain…The critical question to ask…is how high a rate can a levered economy stand? How much wood can a woodchuck chuck? How high a rate can a homebuyer handle? No one really knows, but we’re beginning to find out. The increase of over 125 basis points in a 30-year mortgage over the past 6–12 months seems to have stopped housing starts and importantly mortgage refinancings in its tracks. It was the primary ‘financial condition’ that Chairman Bernanke cited in his September press conference that shifted the ‘taper to a tinker to a chance’ that maybe they might do something next time.”

Bottom Line : As Bill Gross implies, the ‘lagging’ negative unintended consequences of the Fed’s grand monetary experiment have yet to be unleashed on world markets. This might also suggest, as natural resource investor Rick Rule indicated this week, that, “it’s not unreasonable to expect very, very volatile markets” going forward.

To read Survival Of The Fittest? in its entirety, as well as Bill Gross’ other works, visit:

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Tekoa Da Silva
Bull Market Thinking

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