Bill Gross: Understated Inflation Means Commodities, Emerging Markets Should Outperform 9 comments
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In his June 2008 Investment Outlook, Pimco's Bill Gross seriously questions the authenticity of our method of inflation calculation. Let me reacquaint you with the debate about the authenticity of U.S. inflation calculations by presenting two ten-year graphs – one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the U.S. An observer’s immediate take is that there are glaring differences, first in terms of trend and second in the actual mean or average of the 2 calculations. These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the U.S. has measured 2.6%. The most recent 12 months produces that same 7% number for the world but a closer 4% in the U.S. This, dear reader, looks a mite suspicious. Sure, inflation was legitimately much higher in selected hot spots such as Brazil and Vietnam in the late 90s and the U.S. productivity “miracle” may have helped reduce ours a touch compared to some of the rest, but the U.S. dollar over the same period has declined by 30% against a currency basket of its major competitors which should have had an opposite effect, everything else being equal. I ask you: does it make sense that we have a 3% – 4% lower rate of inflation than the rest of the world? Can economists really explain this with their contorted Phillips curve, output gap, multifactor productivity theorizing in an increasingly globalized “one price fits all” commodity driven global economy? I suspect not. Somebody’s been foolin’, perhaps foolin’ themselves – I don’t know. This isn’t a conspiracy blog and there are too many statisticians and analysts at the Bureau of Labor Statistics [BLS] and Treasury with rapid turnover to even think of it. I’m just concerned that some of the people are being fooled all of the time and that as an investor, an accurate measure of inflation makes a huge difference. 
He then suggests five global investment solutions to the problem he outlined.
What are the investment ramifications? With global headline inflation now at 7% there is a need for new global investment solutions, a role that PIMCO is more than willing (and able) to provide. In this role we would suggest: 1) Treasury bonds are obviously not to be favored because of their negative (unreal) real yields. 2) U.S. TIPS, while affording headline CPI protection, risk the delusion of an artificially low inflation number as well. 3) On the other hand, commodity-based assets as well as foreign equities whose P/Es are better grounded with local CPI and nominal bond yield comparisons should be excellent candidates. 4) These assets should in turn be denominated in currencies that demonstrate authentic real growth and inflation rates, that while high, at least are credible. 5) Developing, BRIC-like economies are obvious choices for investment dollars.
Investment success depends on an ability to anticipate the herd, ride with it for a substantial period of time, and then begin to reorient portfolios for a changing world. Today’s world, including its inflation rate, is changing. Being fooled some of the time is no sin, but being fooled all of the time is intolerable. Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market’s assumption of low relative U.S. inflation in comparison to our global competitors.
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This article has 9 comments:
Concord, Mass. USA 1776.
Many men with many rifles ended royal governments around the world and replaced them with massively costly and totally overbearing elected governments throughout the 18 and 19 hundreds.
The consequences are upon mankind as the 21st century begins.
The costs of running governments which do nothing but miss allocate resources for wars and roads and space shots and money printing and and set up a multitude of regulations and set up cartels and etc are now reducing real per capita wealth even as most countries chop their populations by one method or another. One child laws in China, abortion in the USA for examples.
The USA, led by lawyers who now control the three branches of its governments from town to federal level and who enrich themselves by taking money from the corporations they ease into monopoly power positions with permit power and other means.
Hey, but the good news is that bad governments always crash and burn while the poor inherit the earth and plod on. The western Roman empire crashed and never rose again while a new religion arose. The eastern Roman empire crashed and a new religion arose. The British empire crashed in World War I. The Russian and Germain governments spent the 1900's crashing and burning over and over.
The individual is alway self educated and will learn what works. Thanks to Bill Gross and others who let the real situation be known.
i don't doubt bill's read on inflation, and especially agree with his call to join him "...in lobbying for change in U.S. leadership, the attitude of its citizenry..." ; but -
will he do the same if / when deflation is what takes hold?
absolute returns is what bill advocates (i think), so my guess is...yes
so i'll hold my tips for now, because, as bill says, "Investment success depends on an ability to anticipate the herd, ride with it for a substantial period of time, and then begin to reorient portfolios for a changing world."
and the pattern for many hundred yrs seems to be to inflate, then deflate
even thomas jefferson, in the late 1700's, said:
"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered."
found on: sonic.net/sentinel/nai...
maybe bill's saying he's willing and able to help us around that scenario; i hope so :-)