Pimco's Bill Gross argues that credit isn't growing fast enough to support robust growth.
In a monthly investment outlook filled with swine and pot references (more on that later), the bond chief argues that credit isn't being created quickly enough to support the rosy growth forecasts for the economy and financial markets.
The reasons? A shrinking government deficit means the government is no longer as big a source of credit. The Federal Reserve is also scaling back on its monthly bond purchases. And Gross does not think the private sector is picking up the slack.
"...as credit goes, so go the markets, one might legitimately say, and I do most emphatically say that!," Gross wrote.
But this being Bill Gross, it's never that dull. The world's largest bond fund manager explained his thesis further with a hypothetical scenario in which two people live on an island. Each occupies half of the island and own four pigs.
One of these island dwellers starts growing a "crop," later revealed to be marijuana, and trades half of her harvest for one of the other islander's pigs.
"You love that bacon, but the lady is living higher on the hog...so you agree to a deal," Gross proclaims.
The next year, the weed-farming islander demands three pigs in exchange for the green stuff, and another deal is struck.
But what about the year after?
"Those little piggies have really been credit or cash substitutes all along," Gross explains.
So what happens to the price of marijuana? "It traded last year at 3 pigs to 1, but since you're out of pigs and credit, the price collapses," he said.
The point: the prices of assets such as stocks, bonds and real estate are inherently tied to the amount of available credit. Without it, they will falter.
And to Gross, our debt-fueled economy depends on the continuous creation of more and more credit. In other words, "we need those pigs and we need more of them," he said.
Credit grew at 8% to 10% annually prior to the 2008 financial crisis, compared to around 3% to 4% these days, according to Gross. Of course, the credit bubble did eventually burst and narrowing public deficits aren't necessarily a bad thing. But Gross contends that unless the private sector steps up to the plate to borrow and invest, growth will suffer.
His advice under these circumstances: be careful, and buy high quality bonds as riskier investments such as stocks may lose steam.
"Don't be a pig in today's or any day's future asset markets," he said. "The days of getting rich quickly are over, and the days of getting rich slowly may be as well."
Of course, Gross is a bond man, so his recommendations tend to be a bit biased.
Gross addresses weak returns and life without El-Erian: Gross also stepped up his game as Pimco pitchman in his latest outlook.
The company had a tough year in 2013 due to lackluster bond returns. His Pimco Total Return fund (lost over $41 billion in assets in 2013 as investors dumped bonds amid rising interest rates. It also ceded its title as the world's largest mutual fund. )
And just last month, Pimco CEO and right-hand man Mohamed El-Erian resigned unexpectedly from Pimco. El-Erian is remaining with parent company Allianz. But Gross and El-Erian have been the faces of Pimco for many years.
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