While some people, especially in the financial services industry, are enjoying low or almost zero interest credit fueled by the Fed, PIMCO’s Bill Gross warns that when the music stops — which could be soon — the party will end. For an example, look at Japan, Gross says — but there are options for investors who recognize this trend and prepare.
At the beginning, credit is good for the economy as it fuels growth by companies that invest in expansion, creating jobs and real revenue. But when it gets out of control, new money is increasingly used to pay off old credit. In the 1970s, outstanding U.S. credit was $3 trillion; today it’s $56 trillion. Growing credit is needed to sustain itself. Real growth declines every year, reaching the 2% we see today compared with the 3.5% we had known. As a result of lower interest rates, savers get lower yields, insurance companies’ equity is threatened and pension plans have to contribute more. Credit dries up when lenders conclude there is too much risk for too little return — which is when the music stops.
Your recommendations please, Mr. Gross:
• Inflation protected investments like TIPs
• Investments in countries with less debt and hyperbolic credit systems
• Global equities with stable cash flows
• Real assets like commodities
