Bill Gross: Prepare for Coming Inflation

Bill Gross, the Chief Investment Officer over at PIMCO, was on CNBC late last week talking about inflation.  I did not get a chance to listen to the segment until today but I am glad I did, as it was quite insightful.  It should be clear from watching the video and from the constant chatter in the media that inflation will likely remain a significant overhang for the U.S. Economy in the coming year or so.

One of Gross’s primary arguments is that the housing bubble and the resulting efforts by the Federal Reserve to prevent asset depreciation in the housing sector have essentially tied the hands of the Federal Reserve when it comes to dealing with inflation.  As a result, the Federal Reserve has essentially given up on fighting inflation in an effort to ease the pain of the masses as they try to deal with falling housing values. 

This standpoint will result, according to Gross, in “inflation [that is] here to stay for the next year or two.”  Inflation will be allowed to run rampant during that time period as the Federal Reserve, “can’t raise interest rates by 100s of basis points.”

In stating that the Federal Reserve “can’t raise interest rates by 100s of basis points,” I believe that Gross is offering us a window into his own personal mindset on inflation.  It is fairly clear that Gross believes that at some point in the future the Federal Reserve will have to raise interest rates dramatically.  If this occurs, our only hope is that enough time is given for the housing sector and credit markets to recover or else a deep recession is likely, in my opinion. 

Gross briefly touches on suitable investments in a rising rate environment, suggesting that individuals reduce their exposure to bonds and position their portfolios in securities that are tied to real assets that appreciate with inflation. 

Gross’s recommendation can mean many things, although my favorites include TIPS, REITs, Mutual Funds dedicated to rising rate environments (as I discussed here), and “pick and shovel plays” that support commodities and select gold plays.  I am leery of outright commodity plays in most circumstances as I believe that commodity prices will come under pressure should the U.S. enter a deep recession or the Federal Reserve becomes inadvertently successful in strengthening the dollar through higher interest rates being used to quell inflation.  If you have time, watch the video, as it is a good one.

 

Comments

[nobull]

Whats next? Bill Gross is going to warn us of a housing crisis? Talk about being late. Geez! Bill, everyone and their dog has realized this and screaming at the top of their lungs for over a year now while only Ben Bernanke and you didnt seem to get it.

[R. Richard Schweitzer]

A further factor is the point that the "reported" rate of U S inflation is a fabrication of statisics which makes them unrelaible, and probably misleading if not false. He has written about this in his June opinion at Pimco. The global inflation rate is probably running at around a 7% baseline. The true U S rate should likely be closer to that range than to the 3% range being assumed.

The underlying "reasons" (read: pressures) for inflation are that debts can not be devalued (reset lower) and so the the unit of account for relative values (the fiat dollar) is debased instead. Existing debt holdings become worth less in relation to other (hard or commodity) assets; historically to the point that we can't meet commitments to feed the Goths and Alrics come storming in.

[bluesmoke]

Interesting article. I think Bill Gross is right on the money. I clicked on your link you suggested for investments dedicated to rising rate environments, and the only thing I would add, and I think Bill Gross would agree, is the numbers the government provides are calculated in such a way that they don't tell the full story. That may affect some of those funds negatively.

[notsosmart]

the inflation rate of the 5 daily needs of the average person in the u.s. is 15.68%. saw it on this site. anything to do with our govt. is phony.

[bruin532]

TIPS! Why let the goverment with therir phony inflation figures re-set your TIP rate at 2%? Go to GOLD

[iThinkBig]

My speculation: The FED will raise rates in August to combat inflation and it will be 100s. It's an election year. Consumers are screaming for heads on pikes and do you really think the Republican party is going into election in November with $4.00 gas? Nope didn't think so. The G7 is also making a lot of noise about our monetary policy and Central Banks are an important factor in keeping the liquidity engine lubed (even if it is running low on oil).

[Eagle-Chief]

I'm with you, NoBull - what a joke this is. Any clown could tell you that inflation is a problem, and will be a problem in the near future. Oh boy, what a genius.

Inflation is a man-made beast. It robs people of their wealth. People saving for retirement find their saving worth-less or sometimes entirely worthless due to inflation.