Despite the strength of the U.S. dollar, it was actually theU.S. that fired the first shot in an undeclared currency war whoserisks investors need to mitigate through conservative investments,Janus Capital's Bill Gross warned.

Writing in his March investment outlook, the bond managerreached beyond today's headlines about the Swiss franc-euro pegback to the Federal Reserve's near-zero rate reduction immediatelyfollowing the Great Recession six years ago.

That rate cut effectively devalued the dollar by 15%, a movethat Gross said, in a novel explanation “seldom” addressed by otheranalysts, was the reason the U.S. has led the world in globalgrowth since the financial crisis.

Likening the current period to that of the competitive currencydevaluations of the 1930s, when the countries first to abandon thegold standard were the first to escape the clutches of the GreatDepression, Gross said the Fed's 2008-2009 policies gained the U.S.a first-mover advantage in global trade.

But the U.S. must today compete against “currencies with theirown QE's and promises to hold interest rates lower and longer thanthe U.S.,” such as Japan, whose own QE program, he said, is two tothree times greater in relative GDP terms.

Competing with America's zero rates has introduced globalinvestors to a previously unimagined world of negative rates; thevalue of negative-yielding notes and bonds in the eurozone alreadytotal close to $2 trillion.

As Gross colorfully described it: “Not even 'thin gruel' isbeing offered to our modern day Oliver Twist investors. You have topay to come to the dinner table and then sit there staring at anempty plate.”

The novelty of this situation has been such that “no textbook orcentral bank research paper even mentioned” negative interest ratesprior to last year.

Gross cited as an example former Fed Chairman Ben Bernanke'sfamous 2002 paper on deflation, which mentioned dropping money outof helicopters to ward off the threat of deflation but made nomention of the possibility of negative rates.

“But here we are,” he wrote. “Negative 25 to 35 basis pointmoney market rates in Germany with minus signs all the way out tosix-year maturities, reflecting the expectation that negativepolicy rates are likely in store for at least 3 to 4 years in thefuture. Sweden has gone the furthest with negative 75 basis points,but Switzerland and Denmark are not far behind.”

While countries lower rates to make exports more competitive orsovereign debt more tolerable, Gross summoned common sense torefute the notion that the global economy, acting in near unison,could devalue against itself. That implies that the hoped-foradvantages of currency devaluation will fail to materialize, as hashappened over the two-plus years with Japan's Abenomics experience,or global growth will peter out as a result of the dollar'srelative strength.

But Gross raised what he regards as an even bigger problem withtoday's negative rates — namely, the ravishing effect they have onexisting financial business models.

Pension funds and insurance companies, for example, have alwayssought to match their liabilities with similar duration investmentsat higher yields.

“With 10-year German Bonds at 30 basis points and thepossibility of them going negative after the beginning of the ECB'sQE in March, what German, Dutch or French insurance company wouldattempt to immunize liabilities at the zero bound or lower?” Grossasked.

This same perverse condition also affects households, who mustsave ever more to compensate for zero or negative rates in order topay for future college, medical or retirement liabilities. Thatmeans consumers will spend less as they save more, thus squelchingeconomic growth.

Alternatively, savers channel their funds into higher-riskinvestments, fueling asset bubbles, while corporations unable toresist such low rates sell bonds (thus accumulating debt) and buyback stock, increasing the vulnerability of the financialsystem.

In light of these increasing risks, the Janus Capital managerrecommended “high-quality bonds and low P/E, high-qualitystocks.”