Pimco's Gross: We're Witnessing 'Death of Abundance,' Birth of Austerity

MONEYNEWS by Julie Crawshaw
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Pacific Investment Management Co.’s Bill Gross says the age of abundance is over.He thinks the zero-bound interest rate policies embraced by central banks including the Federal Reserve may end up killing — as opposed to creating — credit and developed economies may suffer accordingly, Bloomberg reported. "We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time," Gross writes in a note to investors. While recent actions by policy makers provide assurances that short and intermediate U.S. bond yields may not change for years, any potential for price appreciation is limited, Gross says.“Monetary and fiscal excesses carry with them explicit costs,” Gross wrote. “My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic.”When credit dies, Gross says, “it delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers.”“The transition from a levering, asset-inflating secular economy to a post bubble delevering era may be as difficult for one to imagine as our departure into the hereafter,” he says. “We'll all be making this up as we go along for what may seem like an eternity."Most short to intermediate Treasury yields are dangerously close to the zero-bound which imply limited potential room, if any, for price appreciation, observes Gross. Gross says that when all yields approach the zero-bound, as in Japan for the past 10 years, and now in the U.S. and selected “clean dirty shirt” sovereigns, then the dynamics may change. “Money can become less liquid and frozen by ‘price’ in addition to the classic liquidity trap explained by ‘risk,’” he says.“We can’t put $100 trillion of credit in a system-wide mattress, but we can move in that direction by delevering and refusing to extend maturities and duration.” Gross boosted the proportion of U.S. government and Treasury debt in the $244 billion Total Return Fund to 30 percent of assets in December, the highest since November 2010, Bloomberg reported, citing a report placed on the company’s website last month. His fund has returned 6.57 percent in the past year, beating 53 percent of its peers, according to data compiled by Bloomberg. It gained 2.58 percent over the past month, beating 99 percent of peers.Pimco, a unit of the Munich-based insurer Allianz SE, managed $1.35 trillion of assets as of September.Meanwhile, a top Federal Reserve official sharply criticized the U.S. central bank's decision last week to telegraph ultra low interest rates for nearly three more years, saying on Wednesday the move undermined confidence and caused confusion, Reuters reported.The Fed's policy-setting committee, citing a bleak outlook for the fragile economic recovery, said last week it expected to keep rates "exceptionally low" at least through late 2014. The forecast, which was contingent on economic conditions, pushed the target date some 18 months later than a previous forecast and it sparked a rally in stocks and bonds."Such statements are, in my mind, particularly problematic from a communications perspective," Philadelphia Federal Reserve President Charles Plosser told a business audience. "Monetary policy should be contingent on the economic environment and not on the calendar."