In his monthly note, PIMCO’s Bill Gross artfully compared Americans today to female praying mantises chewing the heads off of future off future generations post-coitus.
He also gave out four bits of investment advice.
- An astute mantis-like investor must defer immediate gratification, make a 180˚ turn from that sexy looking female with those long green legs (long term bonds) and mend his ways fast! It is still possible to earn an attractive return from bond strategies (such as PIMCO’s Total Return strategy in 2010), and the way to do it is to focus on “safe spread” that emphasises credit, as opposed to durational risk.
- 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.
- 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.
- Above all, remember that all investors should fear the consequences of mindless U.S. deficit spending as far as the mantis eye can see. Higher inflation, a weaker dollar and the eventual loss of America’s AAA sovereign credit rating are the primary consequences. Fear your head – fear your head.
So he dislikes US debt and he dislikes the dollar, which is interesting because eveoday since the bond selloff really began last fall, the dollar been solid (today was a micro example: Strong selloff in bonds, strong gains in the dollar).
Not only is that been the long historical pattern, but it’s logical: Higher yields are strengthening for a currency.
So it suggests that when Bill Gross went bearish on bonds last year, it was for the wrong reason, basically. He thought that a selloff would be due to fears over the US credit rating, but obviously that hasn’t been the case (the strong dollar, and strong bank stocks are pretty clear evidence of that). So he was right… but for the wrong reasons.
And in case you had any doubt that the bond selloff coinciding with dollar strength has been totally normal, here’s the long-term relationship betwen 30-year yields and the trade weighted dollar index.
Photo: St. Louis Fed