June 8, 2011

PIMCO’s Gross Warns to Flee Treasuries, Dollar Assets: Morningstar Confab

The high-profile bond manager suggests seeking opportunities beyond U.S. shores.

PIMCO Co-Chief Investment Officer and Founder Bill Gross painted a gloomy picture of U.S. investment prospects during his opening keynote address at the Morningstar Investment Conference in Chicago on June 8.

The high-profile bond portfolio manager encouraged the audience of financial advisors to seek investment opportunities outside the Treasury market and away from dollar-based markets more generally.

Gross (left) noted that real, or inflation-adjusted, interest rates, as indicated by pricing in the 5-year market for Treasury Inflation Protected Securities (TIPS), have fallen from about 4% in October 2008 to minus 0.5% today.

Such negative rates benefit debtors, including the U.S. government, but amount to “picking the pockets” of investors and savers, he emphasized. The drop in interest rates has put a damper on the prospects for U.S. stocks as well as bonds, he added, since equity prices cannot be expected to benefit from further drops in rates.

“If real interest rates cannot go much lower, stocks are on their own. The bird is out of the nest,” Gross said.

“Get out of [negative] real interest rate space, and find something more attractive,” he suggested. In particular, Gross cited Brazil, Mexico, Canada and Germany as countries meriting investor interest.

Brazil, Gross acknowledged, has currency risk and country risk reflecting a history that includes defaults on government debt. However, he noted that real interest rates in Brazil have lately been 6% and higher.

Gross denounced the high levels of U.S. government debt as a form of “financial repression” that damages the ability of investors to benefit from their assets. He contrasted this with policies in Canada, which he said “has a much cleaner balance sheet,” and in Germany, noted for its fiscal conservatism.

“You don’t have to go too far afield in terms of developing countries to find less repressive countries than the U.S.,” he said.

He did, however, suggest that some U.S. companies remain attractive investments because they offer high dividends and extensive exposure to foreign markets. He cited Coca-Cola, Johnson & Johnson and Procter & Gamble as examples.

Gross likened the predicament of investors whose assets gradually erode because of negative real interest rates to that of the proverbial frog sitting in a pot that’s gradually heated until it boils. He amplified on the amphibian theme by citing a frog that escapes from a pitcher of milk by energetically churning its legs to find an alternative situation. “Don’t be a frog,” said Gross. “And if you are a frog, be one in a pitcher of butter.”

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