Bill Gross, Treasuries, And The Forecasting Follies

Includes: TBT, TLT
by: Dorsey Wright Money Management

Bill Gross has a tremendous long-term track record in the fixed income markets. Even legends, however, can have feet of clay. A recent Wall Street Journal article discusses how Mr. Gross wrongly forecast that Treasury yields would surge when quantitative easing ended. Instead, the economy slowed and Treasury prices surged.

Forecasting is a mug’s game. Even skilled, experienced forecasters can get things completely wrong. This is why we use a trend following approach driven by relative strength. There are no slam dunks in financial markets—nothing is easy. Your best bet is often just to go with the trend, until it ends.

As a result, several of our global tactical asset allocation portfolios have fixed income exposure, even though philosophically (or mathematically) we are not any more comfortable with bonds here than Mr. Gross. In fact, Mr. Gross may prove to be right down the road—but it’s also possible that we will see a Japan-like scenario where bonds hold their value for a long time. We’re not about to guess (i.e. forecast). When fixed income is highly rated on our relative strength models we’ll own it, and happily sell it if the rank weakens.

As the old saying goes, “The tree that bends to the wind does not break.”

Disclosure: Dorsey, Wright Money Management has positions in TIP, WIP, AGG, IEF, and BSV in various global tactical allocation accounts.