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November 03, 2014 at 09:25 AM
A bond manager embracing inflation or — gasp — calling for more government spending, is about as far from the hard-money stereotype of a fixed-income portfolio manager as you can get.
Perhaps, though, when that manager is bond king Bill Gross, now of Janus Capital after more than 40 years at PIMCO, investors are not likely to miss the fact that he has changed his corporate home.
Whereas his cross-town emeritus bond manager Bob Rodriguez has taken to racing cars in his retirement — when he’s not denouncing government spending — Bill Gross has grown philosophical, and in his November investment outlook, grasps for meaning in a world of “relative” values in which man is “insecurely grounded.”
So too does the 70-year-old money manager view the global economy and financial markets as “insecurely grounded” to such a great extent that it is unclear as to whether inflation or deflation “is just around the corner.”
But the philosopher-bond manager focuses his argument on what he perceives as a new reality that inflation is essential to today’s modern financial economy, despite the harm it does in eroding hard-earned wealth.
Gross likens the 2% level of inflation that the world’s central bankers are currently targeting to a firebreak aimed at arresting the “deflationary firestorm” that can be difficult to stop once inflation approaches zero.
“Best then to keep inflation at a reasonable 2% so that the zero hour never comes,” Gross writes, lamenting that the price of such a policy is an average 30-year-old’s retirement dollars worth half as much when he turns 65, or a third as much at 3% inflation, or worse, the 75% depreciation a 30-year-old Gross has experienced since he was that age in the ’70s.
Gross argues against the famously hard-money financial historian and newsletter writer Jim Grant, who pines for the days when “good deflation” proved compatible with economic growth while empowering consumers to spend more money.
While that could work in the 1880s, today’s economy simply cannot endure deflation, Gross argues.
“Stopping the printing press sounds like a great solution to the depreciation of our purchasing power, but today’s printing is simply something that the global finance-based economy cannot live without,” he says.
