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[NEW YORK] Central bankers must figure out a way to generate better economic growth by next year or markets will "go south" as investors lose faith, according to Bill Gross, manager of the US$1.3 billion Janus Global Unconstrained Bond Fund.
"Capital gains and the expectations for future gains will become giant pandas - very rare and sort of inefficient at reproduction," Gross wrote in his monthly outlook for Janus Capital Group Inc. "Developed and emerging economies are flying at stall speed and they've got to bump up nominal GDP growth rates or else."
Central bank efforts to stimulate economies with low or negative interest rates have failed to generate sustained growth while depriving investors and savers of returns on their money, according to Gross. Federal Reserve Chair Janet Yellen signaled on Tuesday that US policy makers will raise rates at a cautious pace while monitoring indicators such as foreign economies and core inflation, which strips out food and energy costs. Stocks rallied following her comments, lifting the Standard & Poor's 500 Indexto a 2016 high.
US nominal growth, which includes inflation, was about 3.1 per cent last year, according to the Bureau of Economic Analysis. By 2017, Gross said, nominal growth needs to reach 4 per cent to 5 per cent for the U.S.; 2 per cent to 3 per cent for Europe; 1 per cent to 2 per cent for Japan and 5 per cent to 6 per cent for China.
"Or else what?" he writes.
"Or else markets and the capitalistic business models based upon them and priced for them will begin to go south." 'Logical Direction' Commercial paper in Japan valued at US$5.7 billion was marketed for yields of minus 0.647 per cent or less on Monday, about a fifth of which failed to find a buyer. The Bank of Japan, which has been pushing bond yields below zero by charging interest on bank reserves, was among the buyers shunning the debt.
"Investors cannot make money when money yields nothing," Gross wrote in today's report. "Unless real growth/inflation commonly known as nominal GDP can be raised to levels that allow central banks to normalize short-term interest rates, then south instead of north is the logical direction for markets." The Unconstrained Bond Fund, which Gross manages with Kumar Palghat, returned 1.75 per cent this year through Tuesday.