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.