Business Insider Writes: BILL GROSS ‘Be Careful
In his February investment letter, Bill Gross, the manager of the biggest bond fund around at PIMCO, warns investors to “be careful.”
Why? Gross believes the rally has been fueled by ever-expanding debt.
Now, due to a combination of smaller government deficits and tapering of the Federal Reserve’s quantitative easing program, the rise in debt is slowing, which Gross argues is bad news for risky assets like stocks and good news for bonds.
“Bull markets are either caused by or accompanied by credit expansion. With credit growth slowing due in part to lower government deficits, and QE now tapering which will slow velocity, the U.S. and other similarly credit-based economies may find that future growth is not as robust as the IMF and other model-driven forecasters might assume. Perhaps the whisper word of “deflation” at Davos these past few weeks was a reflection of that. If so, high quality bonds will continue to be well bid and risk assets may lose some luster.”
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Bill Gross is, of course, right on the money.
The one question that gets left behind is whether or not we will have inflation or deflation over the next 5-10 years. That is an incredibly important question. A correct answer should greatly impact your overall portfolio allocation over the next couple years. Getting it right would mean outperformance, getting it wrong would only yield severe losses.
Gold bugs, inflationist and hyper inflationist would lead you to believe that hyperinflation is just around the corner, your dollars won’t be worth the paper they are printed on and that gold is about to surge to $100,000 an ounce.
Deflationist would lead you to believe that we are on a verge of an economic collapse, credit collapse, market collapse, great depression and that all asset prices are likely to decline to the tune of 90-95% over the next few years. If this scenario does indeed come true, it would be prudent to invest into a stockpile of canned food, a small arsenal of guns and a container load of ammo.
Who is right?
No one. The reality is somewhere in the middle. Technically we are in a deflationary environment due to a massive credit expansion and the subsequent collapse of that credit throughout our economic system. Basically, we are still feeling the impact of 2007-09 credit defaults, with more defaults coming up over the next few years (due to upcoming recession).
On the other hand, the FEDs have been printing money like crazy over the last couple of years and distributing it though various channels of the economy. Mostly through financial institutions, speculation and asset price appreciation.
That is why we are seeing the evidence of both inflation and deflation throughout the economy. Which one will win out over the next couple of years and how to invest in such an environment?
Please listen to today’s podcast in order to get your answer.
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Revealed: Who Will Win The Inflation Deflation Battle And Make A Killing Google