Bill Gross: Fear mindless U.S. deficit spending

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Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the shrewdest money men around. His monthly Investment Outlook newsletter therefore always makes for thought-provoking reading.

The following are a few excerpts from the January report:

“The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that “old normal” norms have returned. Not likely. There will be pain aplenty and it’s imperative that we recognize now what the ultimate cost of blueberries will mean for American citizens of tomorrow. Four major factors come to mind:

  • American wages will lag behind CPI and commodity price gains.
  • Dollar depreciation will sap the purchasing power of U.S. consumers, as well as the global valuation of dollar denominated assets.
  • One of the consequences of perpetual trillion dollar deficits is the need to finance them, and at attractively low interest rates for as long as possible.
  • Trillion dollar annual deficits add up, and eventually produce a stock of debt that can become unmanageable.

Investment implications

1.     An astute investor must defer immediate gratification, make a 180˚ turn from long term bonds and mend his ways fast! It is still possible to earn an attractive return from bond strategies, and the way to do it is to focus on “safe spread” that emphasizes credit, as opposed to durational risk.

2.     These “safe spreads” include: emerging market corporates and sovereigns with higher initial real interest rates and wider credit spreads; floating as opposed to fixed interest obligations; and importantly currency exposure other than the dollar.

3.     For those inclined to lunch on stocks, remember to go where the growth is – developing as opposed to developed markets. If the U.S. must pay an eventual price for mindless deficit spending, then find countries and currencies that appear to have their act under control: Canada, Brazil, and yes even Mexico with its drug related violence. Mexico has a net national savings rate that exceeds our own by 20% of GDP.

4.     Above all, remember that all investors should fear the consequences of mindless U.S. deficit spending. Higher inflation, a weaker dollar and the eventual loss of America’s AAA sovereign credit rating are the primary consequences.”

Click here for the full interview.

Gross also shared this message in the following CNBC interview:

Sources: Bill Gross, PIMCO – Investment Outlook, January 2011 and CNBC, January 5, 2011.

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2 comments to Bill Gross: Fear mindless U.S. deficit spending

  • very very serious and correct analysis.
    this means that the us treasury 10 year treasuries is gonna go up over 4, soon and this way they will attract more money in the US dollar, which in turn will keep the US $ stable against the other currencies.
    the only concent comes from the inflation, which could errode the real value of the t bills coupon baking it less attractive that is apparently look at nearly 4%.
    thats why i think it would be interesting to monitor the important us indicators such as employment report,and the inflation indicators such as CCI, PDE deflator and PMI.

    thanks for the nice article

  • So if one is offshore ex USA, stop investing via Dollar denominated funds.

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