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Bond Guru Bill Gross Pours Cold Water on Eurozone QE Program

Bill Gross

Billionaire investor Bill Gross has expressed doubts about the effect of the European Central Bank (ECB)’s larger-than-expected quantitative-easing (QE) program, saying the step should have been taken much earlier.

In an interview with the Financial Times published on Sunday, the Janus Capital bond manager and former Pimco executive said the 60-billion-euros-a-month bond-buying scheme has come too late, raising doubts whether it will actually help to boost bank lending to the real economy, Marketwatch said.

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“Draghi had no choice (regarding QE) but it comes far too late. That will become his problem, ” Gross said.

“I don’t think QE will work as well in Europe as it did in the U.S., ” he added. “There are only a limited amount of securities to buy and interest rates are now so low that it’s not necessarily the case that [banks will use] the money to invest in the real economy. I do wonder if much good can come of it.”

The ECB’s decision to start pumping billions of euros into the eurozone financial system came after months of mounting pressure on the central bank to do something to fight off dangerously low inflation levels in the zone, MarketWatch said.

In December, growth in consumer prices turned negative for the first time since October 2009, largely due to the slide in oil prices. The deflationary pressures intensified in January, with inflation dropping to negative 0.6%, the report said.

In the Financial Times interview, Gross acknowledged that ECB President Mario Draghi had no option but to pull the QE trigger, although the actual success of the program is likely to be hampered by late implementation, MarketWatch said.

Meanwhile, Gross urged caution on long-term bond investing.

In an interview with Yahoo Finance, he said, “In the short term, bond investors are safe for six to twelve months, but not for ten to thirty years.”

Gross cited his own losses from 1979-1981 when long-term interest rates soared to 15%, cautioning investors to “be careful when you’re making a longer term commitment and interest rates are so low.”, the report said.

If rates pop like they did some 35 years ago, it will happen on the back of qualitative easing in Europe and continued growth in the U.S., Gross said.

“If Euroland is receptive to QE and begins to grow, if the United States stays at a 2-3% growth rate and if inflation in the U.S. and elsewhere moves back up closer to that 2% magic level that the Fed and other central banks seem to want, then a bondholder would or should be very cautious”, he added, according to the report.

Gross also reiterated his belief that a Fed rate hike is coming, Yahoo Finance said. “In terms of when it happens, June has always been the month that most of them circle around and so maybe June or July, but a small increase and probably one only for the year would be my guestimate.”

Gross also weighed in on the broader economy and, notably, jobs. He believes technology and demographics are weighing heavy on economies in the U.S. and abroad, the report said.

“Technology displaces workers, ” he said. “It’s wonderful that Google and Apple and other companies can create these magnificent technologies but it is true that Apple doesn’t create as many jobs as General Motors did in the 1930’s and 40’s.”





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