NEW YORK (TheStreet) -- Investors hoping that their portfolios will be able to pay for retirement are about to be sorely disappointed, according to legendary bond king Bill Gross.
Recent market volatility, including wild gyrations on the Dow Jones Industrial Average and S&P 500 as China's economy slows, point to a fundamental problem in the global economy, Gross, who cofounded Pimco and is now lead portfolio manager at Janus Capital Group (JNS) , said in his monthly investment outlook.
Changing course will be a time-consuming endeavor, he says: It requires China, the world's second-largest economy, to shift more quickly to a consumer-based system and necessitates the developed world abandoning its "destructive emphasis on fiscal austerity." In the interim, investors are likely to receive lackluster returns, which makes paying for college educations and funding a comfortable requirement more difficult.
The timing and size of the Federal Reserve's interest-rate increase, which may occur as early as this month, will play a role, too. Interest rates have been held to nearly zero since the financial crisis of 2008, and while Gross has long advocated starting to raise them, such a move "now seems to be destined to be labeled 'too little, too late,'" he said.
Low rates hurt savers because interest on deposits is limited or nonexistent. And with fewer incentives to save, Gross argues there are fewer incentives to invest, which could hurt long-term productivity.
"Finance based capitalism with its zero-bound interest rates has now produced global imbalances that impair productive growth and with it the chances for 'old normal" prosperity,' Gross says.
"Major global policy shifts -- all in the same direction -- are required that emphasize government spending as opposed to austerity" and attempt to address the issue of "too little aggregate demand," Gross says, echoing the philosophies of 20th-century economist John Maynard Keynes as well as economist and New York Times columnist Paul Krugman.
Such recommendations, he concedes, are "politically Pollyannaish." The policies of Angela Merkel, the German chancellor who has championed austerity in the European Union, are unlikely to be abandoned anytime soon, Gross says, "nor will Bernie Sanders be elected U.S. president."
Sanders, the Vermont senator seeking the Democratic nomination for 2016 elections, has advocated $1 trillion in infrastructure investments over five years and argued that the U.S. is sliding into "economic oligarchy."
Currently, almost 50% of U.S. tax dollars go to entitlement programs such as Social Security and Medicare, and only 7% goes to transportation, education, and medical research, according to data collected by the Center on Budget and Policy Priorities.
"Global fiscal (and monetary) policy is not now constructive nor growth enhancing, nor is it likely to be," Gross says. If that be the case, then equity market capital gains and future returns are likely to be limited if not downward sloping."
What's an investor to do? Hold cash or "near cash" investments such as one- to two-year corporate bonds, despite their likely uninspiring returns, Gross says.
The mindset he proposes is one that actor and comedian Will Rogers voiced during the Great Depression of the 1930s: "I'm not so much concerned about the return on my money as the return of my money."
In the long run, though, "the return of your money will likely not pay for college, health care or retirement liabilities," Gross says. "Whether you are tall or short, or your portfolio big or small -- better to be big -- they're not going up as much as you hope they would over the foreseeable future."