The Federal Reserve will start to raise interest rates later this year, but investors need not panic. That’s the message from Bill Gross in this months investment outlook released on Thursday.
The bond guru who now resides at Janus Capital—told investors that the Fed will start to increase rates some time in 2015, despite previously indicating that he did not see a Fed move on the horizon.
In his own inimitable style Gross likened financial markets to the board game Monopoly, in which the bank, acts like the Fed, by supplying money to players to invest in property.
Gross said the Fed has come to realize that for the game to function, players need incentives to invest.
Instead of getting invested in projects, cash has accumulated on corporate balance sheets or was used in share repurchases, “like the endgame in Monopoly where cash becomes king at the game’s conclusion,” and “those without cash and the ability to get it go bankrupt,” according to Gross.
Despite reasonable growth, the Fed had come to “recognize the system’s distortion if only because inflation is going down, not up, in the process.”
“…the Fed, uniquely in my opinion, will move up the Monopoly board’s interest rates in late 2015, hoping to avoid landing on the figurative Park Place and Boardwalk in the process,” Gross wrote. “It won’t however, move quickly—capitalism has been damaged by the change in rules since 2008. Caution, therefore will prevail in the U.S. and elsewhere for a long time.”
The result of this slow unwinding of zero percent rates will support both U.S. stocks and bonds. Bonds—”despite their ridiculous yields”—will not face a new bear market. He added.
In conclusion, Gross warned that investors “must be cognizant of future low and in some cases negative total returns in 2015 and beyond.”