Bill Gross, in his second investment outlook since joining JanusCapital Group Inc., said deflation is a “growing possibility” asgovernments worldwide are struggling to create inflation andstimulate growth.

Central banks around the world have made “a damn fine attempt”at fueling inflation, yet their efforts have pushed up financialassets, rather than prices in the real economy, Gross wrote in hisoutlook titled “The Trouble with Porosity and Prosperity.”

“The real economy needs money printing, yes, but money spendingmore so, and that must come from the fiscal side –-from the dreadedgovernment side –- where deficits are anathema and balanced budgetsare increasingly in vogue,” he wrote. Until then, the possibilityof deflation is a challenge to wealth creation, according toGross.

The 70-year-old Gross, who last month started managing JanusGlobal Unconstrained Bond Fund, has forecast subdued market returnsin what he calls the 'new normal,' a view he and Pimco firstexpressed in 2009 coming out of the financial crisis.

At Pimco, Gross ran the $201.6 billion Total Return fund, theworld's biggest bond mutual fund, which had trailed peers since thebeginning of 2013 as he misjudged the timing and impact of theFederal Reserve's tapering of its stimulus. Gross left the firm heco-founded in 1971 after his deputies threatened to quit andmanagement debated his ouster, according to people familiar withthe matter.

Gross, whose investment commentaries are known for theircolorful anecdotes and comparisons, in today's outlook calledhimself a “philosophical nomad” with a foundation formed from sand.The 21st century economy is built on the sand of finance instead ofthe firmer foundation of investment and innovation, he wrote.

“Stopping the printing press sounds like a great solution to thedepreciation of our purchasing power but today's printing is simplysomething that the global finance based economy cannot livewithout,” he wrote.

U.S. government bonds maturing in 10 or more years have returned18 percent this year, beating the Standard & Poor's 500 Index.The personal consumption expenditures price index has been below 2percent for more than two years, resisting policy makers' attemptto maintain a minimum level of inflation. The threat of fallingprices can cause businesses and consumers to be reluctant tospend.

Deflation Ogre

At the start of the year, International Monetary Fund ManagingDirector Christine Lagarde warned policy makers in advancedeconomies to fight the “ogre” of deflation.

Stimulus is “not working like it used to,” and “the trillionsseem to seep through the sandy loam of investment and innovationstraight into the cement mixer of the marketplace,” Gross wrote.Even as prices rise, “wages simply sit there for years on end. Oneeconomy (the financial one) thrives while the other economy (thereal one) withers.”

In last month's outlook and a broadcast conversation with JanusChief Executive Officer Dick Weil, Gross said investors should bid“bye-bye” to double-digit returns as growth worldwide is slowingdown.

“We're doing the best of them all,” Gross said of the U.S., “butfrankly it's not like the old normal, it is the new normal whereglobal growth proceeds at a very slow pace.”

Bloomberg

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