Bond guru Bill Gross believes investors should "be careful in 2018" and cites six areas they need to see as the calendar sets.
The Federal Reserve and its global counterparts have begun the first steps of standardizing policies, but have maintained the as of interest what w.
While providing support for the economy and markets, it has also given central banks less room to move in the future. Gross sees it as a problem because investors have less "insurance," in the form of central bank maneuverability, for bad times.
"Should a crisis arise due to policy errors, geopolitical crises or other currently unforeseen risks, the ability to protect the director will be affected in relation to the story," he wrote. "That in turn calls for a Fed that is more cautious and easier than it is supposed to be."
Gross quotes economist Hyman Minksy, who warned about how long periods of financial stability could actually create instability. A "Minksy moment" in market jargon refers to a point where asset prices plummet due to a sudden change in debt or the stability of the currency.
The increase in leverage since the financial crisis has been a concern for Gross and others. Janet Yellen, who recently warned that the increase in public debt should "keep people awake at night"
Minksky "alerted economists to the fact that an economy is a delicate balance between production and finance. they should be balanced internally and then the interaction between them also balanced, "said Gross
The prices of credit and assets
Capitalism in the current sense depends on the creation of credit that leads to Asset price growth finally said
However, it is a delicate ecosystem that can decompose
"This model, however, depends on leverage and – 1) levels of debt, 2) availability, and 3) the cost of that leverage is a critical variable on which their success depends, "he wrote. "When one or more of these factors deteriorates, the likelihood of success and stability of the model decreases."
"Carry" refers to the price that investors pay to maintain assets in their balance sheets.
Professional investors should be aware of that cost and how it compares to any benchmark they are trying to overcome. When the carry equation no longer works, investors have to move on.
"The moment when the exit is obviously difficult and dangerous, but fundamental to survive in a new era, we may be reaching a tipping point so invest more cautiously," said Gross.
The question of "money"
Gross analyzes the difference between cash and credit. When too many investors turn to cash and credit equivalents, that can create a collapse of liquidity in the system.
"When the possibility of default increases and / or the actual yield of credit or liquidity diminishes and persuades the creditors to maintain the classic level" money "(cash, gold, bitcoin), then the financial system as we know it, it may be at risk (insurance companies, banks, mutual funds, etc.) as credit is reduced
and the "money" increases, creating liquidity problems, "he said
The Fed and inflation
The Federal Reserve and the Treasury always have an interconnected relationship, but particularly during the last decade as the central bank's government debt holdings increase.  Currently, the The Federal Reserve has about $ 2.5 trillion of Treasury bonds in its balance of $ 4.5 trillion, however, the Fed is allowing a maximum level of public debt to be executed each month, basically, what the Fed has been doing is allowing It is important that the government borrow money and pay a low level of interest on its debt.
"Money for nothing, the Treasury issues free debt, there is no need to pay the debt unless it creates inflation," Gross wrote. "For now, it's not, probably later."
CLOCK: Gross discussions about the dangers in the credit cycle .