PIMCO's Bill Gross: "Capitalism needs ‘carry’"

From MarketWatch:

Bill Gross has some strong words for the Federal Reserve. The Pimco co-chief investment officer took to Twitter Tuesday to draw a connection between central bank programs that reduce “carry” and a stall in the normal functioning of capitalism....

...Carry, as Gross describes in his August letter to investors, is another word for yield, or the potential income earned on a bond investment. In addition to simple yield, taking different forms of risk that aren’t dependent on interest rates produce carry (think credit risk, volatility risk, and currency risk). But with the Fed holding short-term interest rates at near zero percent, a good amount of that risk premium has indeed been reduced.

So why does that impede the capitalistic plumbing of our economy? We’ll have to go all the way back to Gross’s June letter to investors – one of his more prolific — for the answer to that one:

“Just as profits are critical to the longevity of our capitalistic real economy so too is return or “carry” critical to our financial markets. Without the assumption of “carry,” or return over and above the fixed, if mercurial, yield on an economy’s policy rate (fed funds), then investors would be unwilling to risk financial capital and a capitalistic economy would die for lack of oxygen. The carry or return I speak to is most commonly assumed to be a credit or an equity risk “premium” involving some potential amount of gain or loss to an investor’s principal. Corporate and high yield bonds, stocks, private equity and emerging market investments are financial assets that immediately come to mind. If the “carry” or potential return on these asset classes were no more than the 25 basis points offered by today’s fed funds rate, then who would take the chance?”...MORE