Investors should cut risk by placing money in real assets and accept lower returns, given that markets no longer offer double-digit gains in a zero interest-rate environment, said Bill Gross, a portfolio manager at Janus Capital (jns).
"Negative returns and principal losses in many asset categories are increasingly possible unless nominal growth rates reach acceptable levels," Gross said in his latest Investment Outlook note published Wednesday.
"I don't like bonds; I don't like most stocks; I don't like private equity. Real assets such as land, gold, and tangible plant and equipment at a discount are favored asset categories."
Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said capitalism cannot function efficiently at zero-bound rates.
He reiterated that low interest rates may raise asset prices, but they destroy savings- and liability-based business models in the process.
"Banks, insurance companies, pension funds and Mom and Pop on Main Street are stripped of their ability to pay for future debts and retirement benefits," he said. "Central banks seem oblivious to this dark side of low interest rates. If maintained for too long, the real economy itself is affected as expected income fails to materialize and investment spending stagnates."
Overall, global monetary policies cannot succeed without nominal growth, Gross said. "The reason nominal growth is critical is that it allows a country, company or individual to service their debts with increasing income, allocating a portion to interest expense and another portion to theoretical or practical principal repayment via a sinking fund," Gross said.
"Without the latter, a credit-based economy ultimately -devolves into Ponzi finance, and at some point implodes. Watch nominal GDP growth."
Gross said in the United States, 4-5% GDP growth is necessary, in the euro zone 3-4% GDP growth and in Japan 2-3% GDP growth.