Bill Gross on how to make money

Bill Gross with his latest Investment Outlook

In this month’s letter, Bill Gross talks about the fundamentals of using money to make money and how today’s economy is so different from historically.

Because of secular changes to the economy like demographics, debt a technological displace of workers, Gross argues that companies are no longer willing to make capital investments.

“Investors in the real economy (not only large corporations but small businesses and startups) sense future headwinds that will thwart historic consumer demand and they therefore slow down investment,” he writes.

Instead of making money with investment, they’ve turned to the financial economy — making money with money. With the help of central banks, it’s worked surprisingly well.

“The real economy has been usurped by the financial economy,” he writes.

It’s okay to make money with money, he says, but it ultimately must be channeled into the real economy or the cycle can’t restart but for now the arteries of the system are clogged.

“Don’t be mesmerized by the blue skies created by central bank QE and near perpetually low interest rates. All markets are increasingly at risk,” Gross writes.

To me, this Investment Outlook is simple but it’s profound. What’s especially troublesome is that this kind of financial economy growth only works once. After central banks hit zero and QE is tapped out, there’s nothing left to stoke the financial or the real economy and that sets up a long-term low-return future.