Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said there is no evidence that investment is being spurred by the Federal Reserve’s quantitative easing program.

“All of the money being created and freed up is elevating asset prices, but those prices are not causing corporations to invest in future production,” Gross wrote in a monthly investment outlook posted on the Newport Beach, California-based company’s website today. Lower interest rates are being used “to consume as opposed to invest,” he said.

Investors should recognize that asset and currency prices ultimately rest on the ability of the economy to grow, Gross wrote. If real growth is stunted in the U.S. and globally, then investors should also acknowledge “bite-sized” future returns and the growing risks of “misguided” monetary and fiscal policy that may disrupt financial markets at some point. The so- called fiscal cliff may be the first of a series of disruptions, though Gross expects some type of compromise on the possible tax increases and budget cuts.

The fiscal cliff refers to the more than $600 billion of federal spending cuts and tax increases that will take effect at the start of next year unless Congress acts. JPMorgan Chase & Co., the largest U.S. bank by assets, said last month that the combination will subtract 1 percentage point from U.S. growth.

Treasury Purchases

“To be fair, Ben Bernanke has been operating with one arm behind his back and has been calling for cooperative stimulation from the fiscal side of this government,” Gross wrote. “He has received little response - not from Democrats, not from Republicans.”

Fed officials led by Chairman Ben S. Bernanke implemented $2.3 trillion in two rounds of bond purchases, known as quantitative easing, since 2008 to boost economic growth. In June, the central bank expanded what’s become known as its Operation Twist program to replace $400 billion of short-term bonds with longer-term debt, by $267 billion.

The Fed announced Sept. 13 a third round of QE in which it’s making open-ended purchases of $40 billion of mortgage debt a month as it seeks to boost economic growth and reduce unemployment. Policy makers said they will keep pumping money into the economy until there was “ongoing, sustained improvement” in the labor market.

All 21 primary dealers that trade the securities with the central bank expect latest QE measures to be expanded to include Treasuries, according to a Bloomberg News survey in the week ended Oct. 19.

Election Pessimism

Gross domestic product was forecast to rise 2% in 2013 before the Atlantic storm Sandy devastated the northeastern U.S. this week, according to the median forecast of economists in a Bloomberg News survey as of Oct. 29. With damage still being assessed, predictions pegged the economic loss from the Texas-sized storm to be as much as $50 billion.

This year’s race for the White House between President Barack Obama and Republican challenger Mitt Romney doesn’t make Gross optimistic about the prospects for change.

“Fact is they’re all the same -- bought and paid for with the same money,” Gross wrote. “Pulling a Democratic or Republican lever will deliver the same results every four years.”

Market Returns

A report tomorrow from the Labor Department is forecast to show the U.S. added 125,000 jobs in October, compared with 114,000 in the previous month, according to the median forecast of economists in a Bloomberg News survey. The jobless rate is expected to rise to 7.9%, from 7.8%.

Treasury yields should stay low in this type of environment, while what Gross has called the “cult of equity” or even total return, is over, he reiterated, if that presumes a resumption of historical patterns anywhere close to “double digits.”

U.S. government bonds have returned 2.1% this year, while bonds in an index of U.S. investment-grade and high-yield company debt gained 10.95%, according to Bank of America Merrill indexes. The MSCI All-Country World Index of shares gained 13.2% this year, including reinvested dividends.

The $281 billion Total Return Fund managed by Gross has returned 10% in the past year, beating 94 percent of its peers, according to data compiled by Bloomberg. It gained 0.37% over the past month, beating 56% of its peers. The firm manages $1.92 trillion in assets as of Sept. 30.

Register or login for access to this item and much more

All Financial Planning content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access