Wednesday, January 5, 2011

"Pimco's Gross Says Investors Should Fear `Mindless' U.S. Deficit Spending"

From Bloomberg:

Pacific Investment Management Co.’s Bill Gross said investors should favor emerging market corporate and sovereign debt as “mindless’ U.S. deficit spending may result in higher inflation, a weaker dollar and the eventual loss of America’s AAA credit rating.

Buying debt in emerging market countries with higher real interest rates and wider credit spreads will offer more return as well as protection from dollar depreciation as U.S policy makers run up record deficits at the expense of economic growth, Gross, the manager of the world’s biggest bond fund, wrote in his monthly investment outlook.

“The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit,” Gross wrote in a note on Pimco’s website today. “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."...MORE reportage 
Here's Gross' "Off With Our Heads!"

Here's the wrap-up:
Investment Implications
  1. An astute mantis-like investor must defer immediate gratification, make a 180˚ turn from that sexy looking female with those long green legs (long term bonds) and mend his ways fast! It is still possible to earn an attractive return from bond strategies (such as PIMCO’s Total Return strategy in 2010), 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 as far as the mantis eye can see. Higher inflation, a weaker dollar and the eventual loss of America’s AAA sovereign credit rating are the primary consequences. Fear your head – fear your head.