Gross said central banks are attempting to walk a fine line between generating mild credit growth that matches nominal GDP growth—"keeping the cost of credit at a yield that is not too high, nor too low, but just right. (Federal Reserve chair) Janet Yellen is a modern day Goldilocks."
While Gross rated Yellen as "so far, so good, I suppose," he said the U.S. recovery has been weak by historical standards. Yet banks and corporations have recapitalized, job growth has been steady and importantly—at least to the Fed—markets are in record territory, "suggesting happier days ahead."
But Gross said "our highly levered financial system is like a truckload of nitro glycerin on a bumpy road. One mistake can set off a credit implosion where holders of stocks, high yield bonds, and yes, subprime mortgages all rush to the bank to claim its one and only dollar in the vault."
It happened in 2008, Gross said, noting central banks were in a position to drastically lower yields and buy trillions of dollars via Quantitative Easing (QE) to prevent a run on the system.
"Today, central bank flexibility is not what it was back then," Gross said. "Yields globally are near zero and in many cases, negative. Continuing QE programs by central banks are approaching limits as they buy up more and more existing debt, threatening repo markets and the day to day functioning of financial commerce."