Bill Gross – world famous investor and founder of PIMCO, a global fixed income investment company has warned that central banks and their seemingly perpetual stimulus is creating a “dreamland” for investors.
This level of stimulus is most prominent with the Federal Reserve in the USA – over 40% of all dollars to ever exist have been printed in the last year. When the supply of money increases, a few things happen…
- Lending becomes cheaper, easier and more frequent.
- With greater supply of lendable funds, more people are likely to borrow.
Generally, people borrow with a purpose and therefore those borrowed funds are usually spent.
In basic terms, if a central bank prints money, that money will trickle down through various layers in the economy from central banks to commercial banks, to businesses and finally to consumers. Once the money leaves a central bank, a lot of that will be consumed via increased spending.
This consumption will generally be in the private sector and therefore people will be buying more goods and services than they were before. As such, financial stimulus is a top-down approach at directly boosting both the demand for goods and services as well as increasing company valuations.
Visually, this “dreamland” can be easily demonstrated by the clear and steady upward trend that has been present US markets over the last 18 months.
Interestingly, prior to the pandemic the S&P 500 hit its all-time high at 3,340 points and as of today it is sitting at just shy of 4,700 – a 40% increase in valuation compared to before the pandemic. Remind me again how much the money supply was increased in the USA during the same period? Yes, 40%! Correlation and causation in one neat package.
Bill Gross uses “dreamland” with a heavy sense of irony. US equity markets have seen a meteoric recovery in the last 18 months much of which is thanks to the central banks and their monetary stimulus. He is not suggesting that US markets are not a good place to invest, he is managing expectations that steady increases month after month are atypical with long-term investing. As such, if there are small and short-term pull backs Mr Gross is encouraging a new investor to stay the course, not to worry and to remain invested.
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