Bill Gross, founder and co-chief investment officer of Pimco, the world’s largest mutual fund, made news last month when he dumped all U.S. Treasurys from the $1 trillion fund he operates. I spoke with him by phone yesterday afternoon. He had a solemn warning: The United States has a year or two to change course or face a debt crisis akin to what Greece, Portugal and Ireland have experienced.
He describes bond traders as “vigilant but not vigilantees,” meaning they are cautious and on the outlook for signs that inflation (“the enemy of bonds”) will rear its head. He explained that he got out of Treasurys because the return was too small relative to the huge risk on the horizon. Moreover, the Federal Reserve, he says, has masked the problem because “the right hand is buying from the left,” referring to the Fed’s controversial move in November to engage in huge buying of U.S. debt (“quantitative easing”). Gross says, “Mortgage rates would have been 1 percent higher if the Fed hadn’t done what it did.” (In other words, it is getting increasingly hard to lure purchasers of U.S. debt so long as a massive debt goes unaddressed.)
He doesn’t think much of the Fed’s inflation model, which doesn’t account for increasing demand for commodities from emerging countries. He thinks it is “definitely possible” we will have some form of stagflation, “3 percent or 2 percent or 4 percent inflation and low growth.”
Gross got out of Treasurys ahead of the crowd. But, he says, “It’s like California in the 1960s with Datsuns and Toyotas.” It took a while for the rest of the country to figure out what good cars these were, and by then “it was too late” for American car companies to straighten themselves out.