Pacific Investment Management Company (Pimco) founder and co-chief investment officer Bill Gross offered a revised view of the global investing landscape in a letter published on the company’s website.
As the manager of the Pimco Total Return Fund, Gross’s 2011 investment decisions were driven in part by the “new normal” thesis.
The new normal view suggests that investors should seek emerging market debt because developed countries will experience a prolonged period of sluggish growth, high unemployment and inflation.
Gross’s most recent comments offer a dramatically different view. Gross sees the current landscape as fragile, high risk and dominated by large and growing factors at opposite ends of the risk spectrum.
At the right end of the spectrum is the risk of higher inflation. The inflation risk has developed over the past several years central banks have sought—through various means—to expand growth in the wake of the 2008 financial crisis.
The fat-tail risk at the other end of the spectrum is something new, and Gross devotes much of the letter to explaining this emerging risk factor.
Gross describes this risk factor as the possibility of “implosion” due to the combined credit and interest rate risks associated with sovereign debt.
More specifically, Gross describes the possibility that “zero-bound” interest rates (interest rates near or at zero on a prolonged basis and a very flat yield curve) may actually eat-away at the economic expansion that is, ironically, the focus of the monetary efforts.
In terms of investment implications, Gross cautions investors to hedge bets until the picture clarifies and becomes less bimodal.
Specific suggestions include:
- Maximize bond duration
- Gravitate towards US holdings
- TIPS for longer maturities
- Higher rated corporate credits
- Take a look at munis
- Avoid Europe
- High dividend yield, stable cash flow equities
- Very slightly positive on commodities
- Uncertain on the dollar—bullish under the implosion scenario and very bearish under the inflation scenario
Source: PIMCO
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