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Gross: Markets Are Too Leveraged to Withstand Fed Funds Rate Over 2%

CNBC  ( Original )
MAR 22, 2018

Another example of how the Fed has inevitably painted itself into a corner. You can’t engineer the downside out of economic systems. They can’t keep rates low and they can’t afford to raise rates. There is no easy solution anymore because there is no fiscal free lunch. If you want to get super drunk on stimulus today, you can’t do that without paying for it tomorrow.

Unless you’re not willing to feel the requisite pain required to pay for your overindulgence and get back to true equilibrium. In that case, you’re going to have to get drunker still on accommodative policy the next day. Getting perpetually drunker is not the ultimate solution to your problem, and can only end badly, yet this is the central bank long-term course of action.

Free markets stage interventions. And they don’t care how much they hurt or how bad the timing might seem to be.

In his latest Investment Outlook piece, Gross, who runs the $2.2 billion Janus Henderson Global Unconstrained Bond Fund, said the U.S. and global economies are too highly leveraged to stand more than a 2 percent fed funds rate in a 2 percent inflationary world.

"If more than 2 percent, a stronger dollar would affect emerging market growth and lead to perhaps premature tightening on the part of the ECB (European Central Bank) and other developed market central banks," Gross warned. "The Fed's purported three to four hikes this year beginning in March are likely exaggerated."

Gross said when it comes to financial markets, both bond and stock markets are over-leveraged and "while it's hard to pinpoint when enough is really enough, the Great Recession really informed us that Hyman Minsky was right – 'stability leads to instability' as good times and higher prices lead to a false sense of optimism.

ORIGINAL SOURCE: Janus' Bill Gross says US, global economies are too leveraged for an aggressive Fed at CNBC on 3/22/18