Dear Financial Media: You Completely Missed Bill Gross’s Point

(August 2012) In a recent report, Bill Gross anticipated the following rate of returns over the coming years.



Combined Stocks & Bonds




In fact, he predicted that a mixed portfolio of stocks and bonds would provide a real return (after inflation) approaching zero. In the report, Gross specifically contrasted his thinking with noted economist, Jeremy Seigal. The financial media has focused on the disagreement between these two financial figures, and have encouraged them to attack each other  in dueling appearances on CNBC and Bloomberg.


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However, the financial media missed the most important message in Bill Gross’ August Investment Outlook:

The primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. The easiest way to produce 7–8% yields for bonds over the next 30 years is to inflate them as quickly as possible to 7–8%! Woe to the holder of long-term bonds in the process! Similarly for stocks because they fare poorly as well in inflationary periods. . . Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.

Gross is worried about central banks continuing to print money and causing massive inflation. I think this paragraph shows why Bill Gross is misunderstood. His time frame is not 1 year or 5 years, he is thinking in terms of decades. He describes the time frame of his prediction as 30 years, which makes it very hard to test the accuracy of his predictions. Also, it makes it very hard to develop a concrete trading strategy around his ideas.

If Gross stated his time horizon was three years, a smart investor would shorten up the maturity of their holdings or buy Treasury Inflation Protected Securities, to minimize the impact of higher inflation causing rising rates.  Because his time frame is 30 years, balancing the benefits of higher yields for longer term maturities versus the higher interest rate risk becomes more complicated. Luckily for us, we can actually see where Bill Gross is putting his money. For now, he does not appear to be shortening up maturities.

The PIMCO Total Return Fund ETF (BOND) has an average effective maturity of 6.54 Years and average effective duration ( a more precise measure of interest rates risk if rates rise) of 4.78 years. The effective duration is ⅓ of year shorter than the duration of overall market. Bill Gross is not yet positioning the fund for rapidly rising rates. However, if the fund was to have its effective duration fall below 4 years, it would be a strong sign that Bill Gross is expecting inflation to start heating up soon.

The real story is that while Bill Gross thinks inflation is the major theme for the future, he has not changed his holdings in a way that suggests he considers inflation to be a factor in next 3 to 6 months.

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  1. Mark DeWees says

    I think that this point in time for the individual, normal investor is problematic. To follow the standard well diversified portfolio of Stocks, Bonds, and maybe Real Estate within a typical 401K seems to be resigning one self to poor returns over the mid to long term. Bond fund returns will suffer in the inflation and stocks seem inflated because everyone is crowding into the narrow area of strong dividend driven stock. For someone like myself who still has 20 – 25 years before considering retirement it is truly difficult to find conviction in a traditional approach nor trust any of the current trendy systems of investing.

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