Oxstones Investment Club™by Prieur du Plessis,
Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the shrewdest money men around. His monthly Investment Outlook newsletter therefore always makes for thought-provoking reading.
The following are a few excerpts from the January report:
“The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit. As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that “old normal” norms have returned. Not likely. There will be pain aplenty and it’s imperative that we recognize now what the ultimate cost of blueberries will mean for American citizens of tomorrow. Four major factors come to mind:
- American wages will lag behind CPI and commodity price gains.
- Dollar depreciation will sap the purchasing power of U.S. consumers, as well as the global valuation of dollar denominated assets.
- One of the consequences of perpetual trillion dollar deficits is the need to finance them, and at attractively low interest rates for as long as possible.
- Trillion dollar annual deficits add up, and eventually produce a stock of debt that can become unmanageable.
Investment implications
1. An astute investor must defer immediate gratification, make a 180˚ turn from long term bonds and mend his ways fast! It is still possible to earn an attractive return from bond strategies, and the way to do it is to focus on “safe spread” that emphasizes credit, as opposed to durational risk.
2. These “safe spreads” include: emerging market corporates and sovereigns with higher initial real interest rates and wider credit spreads; floating as opposed to fixed interest obligations; and importantly currency exposure other than the dollar.
3. For those inclined to lunch on stocks, remember to go where the growth is – developing as opposed to developed markets. If the U.S. must pay an eventual price for mindless deficit spending, then find countries and currencies that appear to have their act under control: Canada, Brazil, and yes even Mexico with its drug related violence. Mexico has a net national savings rate that exceeds our own by 20% of GDP.
4. Above all, remember that all investors should fear the consequences of mindless U.S. deficit spending. Higher inflation, a weaker dollar and the eventual loss of America’s AAA sovereign credit rating are the primary consequences.”
Tags: bill gross, bond strategies, devaluations, dollar deficits, dollar depreciation, emerging market coporates, emerging markets, floating rates, foreign currency exposure, great ideas, Great Minds, inflation, investment strategy, pimco, safe spreads, sovereign credit rating