Zero Hedge provides a salient insight into our current financial system via some quotes from Bill Gross, which I have excerpted below.
Answering the question, “When does our credit-based financial system sputter/break down?” Bill Gross answers, “When investable assets pose too much risk for too little return.”
So when investors and lenders don’t see opportunities or credit-worthy borrowers, he says, the credit they could have offered is exchanged instead, “for figurative and sometimes literal gold or cash in a mattress.”
Putting it another way, he says, “Central banks can create bank reserves, but banks are not necessarily obliged to lend it if there is too much risk for too little return. The secular fertilization of credit creation may cease to work its wonders … .” He says that when this happens, “the system delevers as cash … or real assets like gold,” attract all investable liquidity to themselves and commerce withers for the lack of it.
Applying this to the current fiat money system, he says, “Low interest rates may raise asset prices, but … if maintained for too long, the real economy itself is affected as expected income (from the assets) fails to materialize and investment spending stagnates.” We are there. We are in the end stage of the credit cycle wherein Wall Street, being the vampire that it is, sucks the blood out of Main Street – in the process creating a few vampires following after it, and a zombie economy being left to eat each other’s brains.
When asked, “Can $180 billion of monthly quantitative easing by the ECB, BOJ, and the BOE keep on going? How might it end?” Gross answers, “Almost all assets are a bet on growth and inflation (hopefully real growth) but in its absence at least nominal growth with some inflation. … Watch nominal GDP growth. In the U.S. 4-% is necessary, in Euroland 3-4%, in Japan 2-3%.”
Four percent growth is necessary in the United States!? Oops!
So Gross’ answer to, “What should an investor do?” is:
I don’t like bonds; I don’t like most stocks; I don’t like private equity. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories. But those are hard for an individual to buy because wealth has been “financialized”. How about Janus Global Unconstrained strategies? Much of my money is there.
Ah, but Harry Dent says, I think, that gold is going to $700. Stay tuned! I’ll post on that next!