Bill Gross Says Job Growth at Continued Pace Is a Stretch

TL;DR

Bill Gross says continued job growth at the reported pace is a stretch because the economy is growing only 1.2% after roughly 2% in the prior quarter. He argues that productivity must improve, expects the Federal Reserve to raise rates gradually, and warns that economies could slow when extraordinary credit creation becomes unsustainable. Read on for his views on Treasury rates, ECB and BOJ tapering, and Janet Yellen’s “Goldilocks” policy.

Transcript

you wrote a scathing note I thought yesterday on Mr Trump in Trump economics I mean it's mning in America who takes credit for this jobs report President Obama president Trump or Bill gross yeah well if it was a bad report Trump would certainly dismiss it uh but since it's a good report as part of his administration I'm sure he'll take credit for i... Read More

Key Insights

• Bill Gross is skeptical about the sustainability of current job growth numbers, citing low economic growth rates as a concern.
• The U.S. economy is growing at a modest rate, with the latest forecast predicting only 1.2% growth.
• Gross emphasizes the importance of productivity in driving economic growth, noting the lack of current plans to enhance it.
• He discusses the Federal Reserve's approach to interest rates, suggesting a gradual increase rather than rapid hikes.
• Gross highlights the role of the European Central Bank and Bank of Japan in influencing U.S. Treasury rates through their quantitative easing policies.
• He predicts that once the ECB and BOJ taper their bond-buying programs, it could end the bull market in their respective countries and impact the U.S.
• Gross uses a 'Goldilocks' metaphor to describe Janet Yellen's balanced approach to monetary policy, warning of potential long-term credit issues.
• He cautions that excessive credit creation could slow down economies, even if it doesn't lead to an immediate crash.

Questions & Answers

Q: Why does Bill Gross doubt that job growth can continue at the same pace?

Gross says continued job creation at the reported level is a stretch because economic growth is not “gangbusters.” He cites an Atlanta forecast of 1.2% growth following roughly 2% in the previous quarter, although he acknowledges that jobs are present and wages are moving ahead decently.

Q: How does Bill Gross connect productivity to job growth?

Gross says productivity determines economic growth, making it important for sustaining job creation. He also says Trump had not yet presented plans to improve productivity.

Q: Does Bill Gross expect the Federal Reserve to raise interest rates gradually?

Yes. Gross expects a series of increases and says the Federal Reserve, like any central bank, must be careful about how far it moves rates.

Q: What does Bill Gross say about the Federal Reserve’s neutral interest-rate target?

Gross describes “r-star” as the neutral real interest rate, or neutral real federal funds rate. With 2% inflation, he says it is assumed to be zero in real terms or 2% nominally, while emphasizing that nobody knows its precise level in the New Normal economy.

Q: How do the ECB and BOJ affect U.S. Treasury rates, according to Bill Gross?

Gross says ECB and BOJ quantitative easing helped the United States, with each buying about 80 billion a month in bonds. He argues that some of those funds flowed into U.S. Treasuries and that Treasury rates would otherwise be much higher.

Q: What could happen when the ECB and BOJ taper their bond purchases?

Gross says the bull markets in those countries could end when tapering begins, and the U.S. bull market might end as well. He expects the ECB under Mario Draghi to taper before the BOJ under Kuroda.

Q: What Treasury yield target does Bill Gross identify?

Gross identifies a 2.6% target for the Treasury and notes that the market had not reached it. He says exceeding that level could result from Draghi and Kuroda moving away from their existing monetary-policy measures.

Q: Why does Bill Gross think massive credit creation ends badly in the long run?

Gross says credit expanded from $11 trillion to $65 trillion, representing growth of roughly 10%, 11%, or 12%. He argues that creating credit at four times the rate of each unit of GDP cannot last, though he does not necessarily predict a crash or Armageddon; instead, he expects economies to slow when credit creation can no longer be sustained.

Summary & Key Takeaways

• Bill Gross expresses skepticism about the sustainability of current U.S. job growth, linking it to low economic growth rates. He emphasizes the need for increased productivity to sustain economic expansion. Gross also discusses the Federal Reserve's cautious approach to interest rate hikes, suggesting a gradual increase is more likely.

• Gross highlights the influence of international central banks, particularly the ECB and BOJ, on U.S. Treasury rates through their quantitative easing policies. He predicts a potential end to the bull market in these countries once they begin tapering their bond-buying programs, which could also impact the U.S. economy.

• Using a 'Goldilocks' metaphor, Gross describes Janet Yellen's balanced monetary policy approach. He warns of the risks associated with excessive credit creation, suggesting that while it may not lead to an immediate crash, it could slow down economic growth in the long term.