“This Cannot End Well,” says Gross
Wall Street is a casino and central bankers are the fools who think they can win against the house, says Bill Gross of Janus Capital Group (NYSE:JNS). In his most recent letter to shareholders, the “Bond King” eviscerated central banks for persisting with low and negative interest rates.
He starts the letter by talking about gambling. A crucial lesson he learned when working as, “one of the first blackjack counters” is that the, “House” always wins. But Gross also says the world is full of people who think they can overcome that basic rule and beat the “House.” (Source: “Doubling Down,” Janus Capital Group, October 4, 2016.)
These folks use some version of the “Martingale” system to try and win. It’s a system that promises victory if you keep “doubling down” on your bets, even if you keep losing. The idea is that eventually you’ll get a big enough payout to justify your losses. But there’s a big problem in this idea, says Gross.
“A string of 4, 5 or perhaps 30 straight losses cannot work in the long run because the size of the bets eventually reach billions of dollars,” he says. “This same mathematical logic seems to have eluded central bankers around the globe.” (Source: Ibid.)
Gross points out that central banks are basically doing the same thing as gamblers. They keep betting that cheap money and rock-bottom interest rates can stimulate the economy. Then each time that strategy fails, they double down with another round of stimulus.
“How else would one characterize the ‘whatever it takes’ statement by Mario Draghi in 2014?” asks Gross. “How else would one interpret BOJ’s Kuroda when just last week he upped the ante in Japan by capping 10 year JGB’s at 0% until inflation exceeds 2% per year? How else would a rational observer describe Carney and Yellen other than ‘Martingale gamblers with a wallet or a purse?’ (Source: Ibid.)
The crux of Gross’ argument is that at some point, this house of cards must crumble under its own weight. He says there is no endgame in which more than $11.0 trillion of negative yielding debt (he thinks it’s closer to $15.0 trillion) can possibly end well. The only safe havens are gold and maybe Bitcoins.
“At some point investors — leery and indeed weary of receiving negative or near zero returns on their money, may at the margin desert the standard financial complex, for higher returning or better yet, less risky alternatives,” he says. (Source: Ibid.)