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Bill Gross' Six Point Plan

by Stephen Taub

Pimco bond guru Bill Gross has served up a six-point strategy plan for investors.

Gross regularly ruminates on his company's web site about life, philosophy and world events, and then as an aside throws investors a few shreds of bones.

But, in a rare moment of erudition, Gross shares a summary memo addressed to his company's Investment Committee on Feb. 17, which he says contains only minor modifications and additions.

In general, he expresses surprise that the bond market has performed as well as it has, given that the Fed has raised the overnight rate, with market expectations for more.

He says a recycling of the U.S. trade deficit back into the U.S. bond market as opposed to direct investment or investments in stocks, have produced artificially low yields of indeterminate magnitude, "perhaps 50-100 basis points but unclear," he adds.

Gross adds that a lack of global investment opportunities due to a shortfall of global aggregate demand has resulted "in a surfeit of savings, which is flooding the global bond markets."

He says the attempt by Asian Central Banks to suppress their own currencies is but a part of this larger secular phenomenon.

"A frenzy to capture carry has been the inevitable result, producing artificially low yields out the curve, artificially low spreads and artificially low volatility as participants anticipate a continuation of current trends," he adds.

He also asserts that a "measured" Fed policy combined with assumptions that short-term "real" rates will remain low have further dampened volatility, which has contributed to the flattening of the yield curve.

So, how should investors structure their portfolios in this environment?

Gross offers six suggestions:

1) Don't own nominal notes in 2-10-year paper in countries with average or vibrant demographic conditions, which are able to inflate their way out of the global aggregate demand predicament.

2) Focus on bond market economies that are decaying demographically and are deflation prone. This maximizes real returns over time and provides relative price protection, Gross adds.

3) Overweight U.S. TIPS, "since inflation in demographically stable economics is a natural result of low real interest rates and the asset inflation which it produces."

4) Seek cash/low duration opportunities in all markets, but in the U.S. specifically "if and when yields begin to approach the level of the bond market itself."

5) Be mindful of Asset Liability Management trends which may force money into markets with limited supply. "Although U.S. supply is severely constrained it is also subject to a Treasury Department policy reversal," Gross adds. "I'm not clear on which long end is more attractive but would be open to either."

6) Be alert to developments which may reverse what he describes as this "perfect Goldilocks" environments and anything that would affect the trade deficit or induce volatility back into the market.
 

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Stephen Taub is Contributing Editor to BondsOnline. Stephen has been covering financial markets for more than 20 years with Financial World magazine, Individual Investor.com, CFO.com, and others.