Bill Gross says QE3 Unlikely Even as Job Growth Slows; Gross Still Shuns Treasuries, Likes Dividend Yielding Equities

Bill Gross says QE3 Unlikely Even as Job Growth Slows

Pacific Investment Management Co.�s Bill Gross, manager of the world�s biggest bond fund, said the Federal Reserve is unlikely to do a third round of quantitative easing even with the economy adding fewer jobs than forecast.

Central bankers are likely to �extend the extended period� language for longer in their policy statements, Gross said in a radio interview on �Bloomberg Surveillance� with Tom Keene. The less-than-projected pace of jobs growth in May that the Labor Department reported today shows that �there is a persistency here. It�s back to our old new normal,� he said.

�We don�t see a QE3. There has been too much discussion and dissent within the Fed to permit that type of program,� Gross said in the interview from Pimco�s headquarters in Newport Beach, California. Given the current pace of growth and inflation �they will speak to a fed funds rate that persists for an extended period of time, which in effect caps interest rates in the process.�

Investors could seek higher real returns than those now offered from government debt through investing in shares of �conservative� companies such as Procter & Gamble Co. (PG), Merck & Co. or those of utilities, according to Gross.

�The Treasury market up to seven or eight years is negative in terms of real interest rates, and that�s not a positive for savers,� Gross said. �But if they took that money and invested it in a conservative stock, such as a Proctor or a Merck or a utility yielding 4 percent; then that�s 3.5 to 4 percent real yield in comparison to those negative real yields in the Treasury side. So you have to take a little bit of a chance in order to avoid getting your pocket picked here.�

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I concur with Gross about the likelihood of QE3 in the near-term horizon and suggested the same thing in a recent interview on Market Ticker with Aaron Task. The key to that sentence is the phrase "near-term".

Right now, the Fed does not want more froth in junk bonds, nor does it want higher commodity prices or $150 crude, especially since QE2 was a miserable failure in producing jobs or reviving housing.

However, should the economy enter a sustained downturn, and if commodity prices plunge (giving the Fed some breathing room), it's a given the Fed will try something. Whatever the Fed tries will likely be good for gold.

Please see Why I Continue to Like Gold for a video discussion.

The problem with Gross's dividend stock play is that it is likely all stocks get hit in another sustained downturn. A 4% yield may be nice, but not if it comes at the expense of a 25% haircut in equity prices.

With valuations stretched everywhere one looks, there is a lot to be said for waiting on the sidelines for better opportunities.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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