PIMCO just released their March Investment Outlook and Mr. Gross alludes to a concept with which we have explored many times before (in a former life) in the reflexive nature of ZIRP.
Low yields, instead of fostering capital gains for investors via the magic of present value discounting and lower credit spreads, begin to reduce household incomes, lower corporate profit margins and wreak havoc on historical business models connected to banking, money market funds and the pension industry. The offensively oriented investment world that we have grown so used to over the past three decades is being stonewalled by a zero bound goal line stand. Investment defense is coming of age.
While Gross doesn’t explicitly come out and discuss reflexivity, his point is similar. Falling interest rates at the zero bound begin to actually inhibit the growth rate they typically discount. Negative interest rates aren’t discounting deflation, they are causing it.
The ongoing atypical relationship between interest rates and the discount of growth and inflation that is driving such confusion in the market is rooted in the reflexive nature of ZIRP and the diverging behavior of the private economy v the public economy…