Bill Gross: Are Risk Markets Overpriced? 2
Bill Gross, co-chief investment officer of Pacific Investment Management Co., poses for a photograph in New York, U.S., on Monday, May 16, 2011. Treasury Secretary Timothy F. Geithner's action to stave off the federal debt limit until August gives the U.S. some "wiggle room," Gross said today. Photographer: Scott Eells/Bloomberg *** Local Caption *** Bill Gross

Bill Gross on growth, jobs, and arbitrage

On a recent Bloomberg Surveillance interview, Bill Gross shared his opinion on:

  • U.S. real growth
  • How the Trump administration and its policies stand to impact real growth in the U.S. (SPY) (IWM) (QQQ)
  • The reality behind the recent jobs report
  • How central bankers are distorting the economic equilibrium, and
  • A bond market arbitrage opportunity

Productivity growth is the key to real GDP growth

The Trump administration has been saying that it would boost real growth to 4%. Given their pledges with respect to fiscal stimulation and deregulation, the markets have already begun discounting an expected boost in real growth. Real growth is now hovering around 2%.

Gross made an interesting point in this regard. Real growth is a function of growth in labor force and productivity growth. So, with growth in labor force in the U.S. (IWD) (IWF) stuck at less than 1%, productivity growth is the key to real GDP growth.

If investments remain anemic, productivity will remain anaemic

Productivity growth is directly related to the amount of business and capital expenditure done in the economy. And, it isn’t an obscured fact that business investment in the U.S. economy remains anaemic. “If investments remain anaemic, productivity will remain anaemic,” said Gross. The Fed’s low interest-rate policy did little to boost business investment. Cheap money made available by the Fed was instead used by businesses towards share repurchases and M&A activity, thereby contributing little towards any productivity gains.

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Bill Gross on the jobs report

Moreover, the recent jobs report does not seem as shiny to Bill Gross. While jobs did rise by 227,000 in January 2017; against an expected 175,000, and a good 70,000 increment from the December 2016 figure; wage growth declined. Wages were revised down by 0.2% (from 2.7% to 2.5% annual). While lower wages may bode well for corporate profitability, it has an adverse impact on consumption and spending. And who wouldn’t agree that it is consumption and spending that primarily drive the economy? “So if consumers’ money is growing at just 2.5%, then that’s a slow growth economy,” says Gross.

Kyle Bass sees productivity rising from here

Kyle Bass, hedge fund manager at the $1.8 billion Hayman Capital, sees US productivity rising as we move ahead. Bass believes that, under Donald Trump, economic policy is going to take certain broad steps that would be extremely stimulative for the US economy (SPY) (IWM) (QQQ) and would favor labor over capital, leading to a rise in overall productivity. Read, Kyle Bass: U.S. Has Been Wage Giver For Past Decade, Now Time To Be Wage Taker for greater perspective on this.

Part 2 of this series talks about why Bill Gross thinks we’re stuck in a 2% real GDP world.

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