Bill Gross compares investors to falconsMarch 4, 2014: 11:38 AM ET
Leave it to Bill Gross to use the falcon and the falconer from William Butler Yeats' "The Second Coming" to describe investors and central bankers.
In his latest monthly investment outlook, Pimco's founder and chief investment officer used the first three lines of the 1919 poem to introduce how his firm's investment process works.
"Yeats describes a falcon, which in this metaphorical context should be assumed to be the investors, 'turning and turning in the widening gyre,'" in search of higher and higher returns," said Gross.
The falconer, he said, is the global central banker, "training the vulturous investors to swoop down and snatch attractively priced assets on command."
But Gross thinks the key question is whether the falcon can even hear the falconer anymore at this point. Central banks around the world, including the Federal Reserve, have been holding interest rates low for years since the financial crisis in an effort to boost lending and stimulate the economy.
"Does the investor have confidence in the word and efficacy of the falconer's artificially priced policy rate? Can the center hold?" asked Gross.
He argues that if central bankers can convince investors that their policies of holding interest rates artificially and abnormally low can stimulate the economy, then riskier assets such as stocks and bonds can have higher returns than cash.
This will be particularly important as the Fed considers tweaking its guidance. The Fed has been saying it will keep interest rates low until unemployment falls to around 6.5%. But now that threshold is about to be crossed, and officials are considering changing its guidance to be more qualitative.
While Pimco has been saying for several years that the Fed's policies will ultimately be ineffective over the long-term, Gross said that "to be specific for 2014," investors will believe the Fed. The falcon will listen to the falconer.
But he still warns investors to be mindful of longer-term consequences as the central bank unwinds its stimulus measures, including scaling back its monthly bond purchases. In fact, he said 2014 "may be the last of the years in which falconer and falcon act in capitalistic unison."
As the Fed ends its bond buying program, Gross said liquidity in the corporate bond market will be challenged. And if inflation begins to ramp up as interest rate rise from their lows, then that could create more turmoil. But for now, Gross concludes that investors should not fight the Fed.
"Another 'coming' is certainly in our future, but perhaps not just yet." Gross said. "Falcons, for now, can keep circling."