The US economy has been growing at 2 percent real and perhaps 2.9 percent nominal for the past several years, said Bill Gross, portfolio manager at Janus Capital Group.
Japan is above the (recession) line and euro-land seems to have come out of their recession; so easy monetary policy is working a little bit, but central banks’ philosophy remains questionable. Their age old economic models that suggest the lower the interest rates are driven, the better it gets because asset prices go up and the wealth effect gets disseminated down the real economy, but the economy getting normal does not seem to be working for a number of reasons.
The rush for more and more negative interest rates could have negative consequences as it affects business models of insurance companies and pension funds. Ultimately it affects savers; if savers don’t earn a return of their money, then saving diminishes and investment languishes, he noted.
Banking stocks got hammered in recent days amid market turmoil. Negative interest rates have made it extremely difficult to make money for European banks. Asked if investors need to be cautious about US banks as some experts have predicted bankruptcies in that sector and if he is buying European and American bank debt, Bill answered in negative.
In Europe, Italian banks are facing difficulties in particular and many of their problems have been covered up and have been swept under the rug. In the US, however, banks are much better capitalized; instead of 5-6 percent of equity, they have 9-10% equity and growing.
Because of low interest rates, US banks can make some money though not as much if interest rates were higher and the yield curve was more positive. While the US banking system is not threatened, it’s not healthy from the standpoint of its willingness to make loans. Ultimately, that’s how real and nominal growth is stimulated, which is critically important for central banks, he concluded.
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