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"I Am Confident This Country Will Default on Its Debt"By
Friday, April 1, 2011
"I am confident that this country will default on its debt," Bill Gross wrote this week.
Bill Gross is not some anti-American crackpot... quite the contrary.
He manages the world's biggest bond fund. As the founder and chief investment officer of PIMCO, he's responsible for over $1.2 trillion in assets – mostly in bonds.
And last month, in his main bond fund, he got rid of all of his U.S. government bonds.
"[I've] been selling Treasurys because they have little value within the context of a $75 trillion total debt burden," Bill said. "Unless entitlements [namely Social Security, Medicare, and Medicaid] are substantially reformed, I am confident that this country will default on its debt."
How would that happen?
"Not in conventional ways," he explained, "but by picking the pockets of savers."
He says the government will pick your pocket through "inflation, currency devaluation, and low to negative real interest rates."
These things are all happening right now...
The currency is already weak... The U.S. dollar index is right around the lowest levels it's ever been since we went off the gold standard in the early 1970s.
We already have low to negative real interest rates... The Fed is artificially holding short-term rates at zero. But officially, inflation is 2%. So your "real" rate of interest at the bank is a negative 2%.
You can hardly blame Bill for not wanting to own government bonds...
Right now, if you're willing to lock your money up for 10 years in a government bond, you'll collect 3.5% every year in interest. The benefit (a small 3.5% interest payment) isn't worth the risks that Bill writes about.
Remember, Bill isn't some wacko. He's the "Bond King" – and that nickname comes from decades of extraordinary performance in his bond funds.
If Bill is right, it's dangerous to be a "saver" in the traditional sense... Low-interest bank CDs will have their value eaten away by the government's stealth default on its debts. What to do instead is a story for another DailyWealth...
Right now, the asset class Bill's fund has the biggest exposure to is mortgage-backed bonds (like those held by longtime DailyWealth favorite Annaly). He's putting his chips on a "real" asset as opposed to an asset that's backed by the "faith and credit" of the U.S. government.
U.S. government bonds are no longer good enough for Bill Gross, the best bond manager in history. If they're not good enough for Bill, then they shouldn't be good enough for you or me either.
Stay out of U.S. Treasurys.
Good investing,
Steve
Further Reading:
When super investor Bill Gross talks, we listen. After recommending utility stocks in November 2009, the sector had jumped 27% one year later. And last year, he recommended avoiding the British pound. Four months later, the pound had dropped 10%, hitting a new one-year low.
So you'll want to check out his latest prediction, a long-term bet on the future of the U.S. dollar, here: Bill Gross' $8.1 Billion Bet.
Market NotesDIRTY ENERGY VERSUS CLEAN ENERGY: IT'S NOT EVEN CLOSE Today's chart tells the tale of two energy investments...
We occasionally use our space to heap abuse on the popular "clean energy" investment fund, PBW... which is a "one click" way to take a diversified position in solar and wind stocks. While this fund is popular with mainstream investors, we must point out that most clean energy plays are such terrible businesses, they are "perfectly hedged." They are able to lose money in both good and bad economic times. Their stocks are able to stink in both bull and bear markets.
For further proof of this idea, we present PBW's performance over the past two years (green line) against the performance of "dirty energy" in the form of coal stock investment fund KOL (black line). As you can see, PBW has barely nudged higher during the gigantic stock rally off the 2009 lows. Coal stocks, however, have climbed more than 250% during the same time.
We're all for pristine air and water at DailyWealth. We'd love to live in a world that runs on "clean energy." But we know solar energy has a problem called "night." We know wind energy has a problem called "calm." We know corn-based ethanol is a ridiculous, "clean" boondoggle. (Farmers will give Wall Streeters a run for your tax money any day.) We also know investing in what's unloved and unpopular is the sure way to make money in the markets. Today's chart is this idea at work. It's April Fool's day for PBW owners!
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