Investors should be careful in 2018 as risks abound, according to legendary bond investor Bill Gross.
In his first investment outlook letter since July, Gross cites low interest rates, high leverage and liquidity concerns as key risks that investors should pay attention to in 2018.
The veteran fund manager said that as a result of these risks, he thought the Federal Reserve should remain more accommodating in terms of rates rises than is currently expected, as it has few tools at its disposal should a crisis emerge.
‘Should a crisis arise because of policy mistakes, geopolitical crises, or other currently unforeseen risks, the ability to protect principal will be impaired relative to history,’ wrote Gross. ‘That in turn argues for a more cautious and easier Fed than otherwise assumed.’
The manager of the $2.2 billion Janus Henderson Global Unconstrained Bond fund said he was worried about how the substantial surge in leverage could lead to financial instability.
He referred to economist Hyman Minsky’s theory that long periods of financial stability lead to high leverage and ultimate instability.
‘He [Minsky] alerted economists to the fact that an economy is a delicate balance between production and finance. Both must be balanced internally and then the interplay between them balanced as well,’ wrote Gross.
The billionaire bond manager did not forget to touch on the current craze over bitcoin, saying that as more and more investors turn to ‘money’ such as bitcoin over high-quality credit, liquidity concerns could build up and cause a breakdown in the ecosystem.
‘When the possibility of default increases and/or the real return on credit or liquidity decreases and persuades creditors to hold classical ‘money’ (cash, gold, bitcoin), then the financial system as we know it can be at risk (insurance companies, banks, mutual funds, etc.) as credit shrinks and 'money' increases, creating liquidity concerns,’ he wrote.