Investors in the present climate would be better off preserving capital rather than fixating on high returns, bond guru Bill Gross told clients Thursday.
In his latest monthly take on the markets, Gross worries over the explosion of credit since the financial crisis — up to $65 trillion total in the U.S. now, with $12 trillion coming since 2007, according to his count.
Making sure that doesn't come toppling down is the job of central banks like the Federal Reserve, which Gross said has done a good job so far of walking a tightrope but faces a perilous task ahead.
The Fed has to make sure that interest rates aren't too high to make the cost of capital prohibitive or too low to thwart returns for savers, pension funds and insurance companies.
Fed Chair Janet Yellen "is a modern day Goldilocks," Gross, a portfolio manager at Janus Capital, said in the letter.
"While the recovery has been weak by historical standards, 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 our highly levered financial system is like a truckload of nitroglycerin on a bumpy road."
Gross, who runs the $1.9 billion Janus Unconstrained Bond fund, has been sending cautionary signals about markets and the Fed's role in maintaining them for months.
He has warned investors about both stocks and bonds even as equities have continued to rally.
Gross' fund has underperformed this year, returning just 0.56 percent against the 1.18 percent return of other funds in the category, according to Morningstar, and well below the S&P 500, which has gained 5.55 percent.
His latest caution comes on the eighth anniversary of the bull market and amid the latest leg that has come since the election of Donald Trump as president.
However, Gross warned investors against putting too much faith in the "the Trump mirage of 3-4 percent growth and the magical benefits of tax cuts and deregulation."
Trump has pushed an agenda of lower taxes, less regulation and $1 trillion of spending for infrastructure improvements. Gross, though, thinks a system that relies so much on credit is in danger of imploding.
"The U.S. and indeed the global economy is walking a fine line due to increasing leverage and the potential for too high (or too low) interest rates to wreak havoc on an increasingly stressed financial system," he said.
"Be more concerned about the return of your money than the return on your money in 2017 and beyond."