Lessons from Bill Gross

We often have heard M. Gross explaining his opinions against the Fed’s monetary policy, but this time he gave us some good lessons. In his last letter to investors, he argued why the Fed was wrongdoing through its Twist operations. Intervening in the market with these Twist operations, the Fed has not further expand the money supply but has tried to better control the long term interest rates on the secondary bond market.

The Fed has a total control on the short term interest rates and less on the long term rates. Thus, buying long-dated bonds and selling the same amount of short term bonds, the Fed has effectively lowered the long term rates without printing money. But so doing, it has further flattened the yield curve. The basic idea was that, lower long term rates, would have helped individuals and companies to borrow money and to invest on long term investments, boosting the total investments in the economy and the GDP.

According to Mr. Bill Gross it was all wrong. We live in a finance dominated economy and the asset allocation is more relevant than the real economy. The money managers will not invest on long term with low returns and high risks, especially in an uncertain environment. Somehow, the risk-taking process has been altered badly by the Fed. The best way to push investors putting their money on long term investments, is to let the long term rates raise up again. How can this be done? Very simple, operating on the reverse side. Through a Reverse-Twist operation, in which the Fed will sell long-dated bonds and buy short term bonds.

Unless you are not informed about the prior predictions of Mr. Gross, you won’t believe this time the guy is right. But if only you turn back the time and see how often he guessed right, then you will start thinking seriously, about his revolutionary idea.

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