Is Bill Gross emotionally exhausted? One would think so from reading his latest outlook, one that is surprisingly subdued. No pondering the meaning of life; no obscure sports or literary references or allusions to … ahem, long-held rumors about actor Richard Gere.
His posit, titled “The Great Escape: Delivering in a Delevering World,” is a straightforward discussion of what happens when interest rates can decline no further and mild inflation takes hold.
“When interest rates cannot be dramatically lowered further or risk spreads significantly compressed, the momentum begins to shift, not necessarily suddenly, but gradually – yields moving mildly higher and spreads stabilizing or moving slightly wide,” Gross, chairman of bond behemoth PIMCO, writes. “In such a mildly reflating world, unless you want to earn an inflation-adjusted return of minus 2%-3% as offered by Treasury bills, then you must take risk in some form.”
The risk to which he refers involves the use of high quality, shorter duration and inflation-protected bonds; dividend paying stocks with a preference for developing over developed markets; and inflation-sensitive, supply-constrained commodity products.
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Launching into a historical review of “leverage” and how we arrived at this present point of “delevering” (his word), Gross takes readers from the Bretton Woods Accord, through the abandonment of the gold standard by the Nixon administration and into the crisis of 2008.