PIMCO’s Bill Gross is predicting a titanic battle between the forces of deflation and reflation as a result of the Fed’s third quantitative easing (QE3). He estimates the Fed’s chance of success at 70% - 75%, at least on the reflation part.
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He doesn’t predict a return to the days of 12% and 13% interest rates. But he does see an inflation rate around 3.5%, above the Fed’s target of 2%.
Some Fed officials, however, stated that they would be willing to risk a 3% inflation rate temporarily in the process of getting the unemployment rate lower.
If inflation indeed reaches 3.5%, Gross admits investment strategies should likely include equities. This is after the attention-getting pronouncement that the cult of equities is dead, made not so long ago.
Regardless, a mixed portfolio of equities, Treasury Inflation Protected Securities (TIPS), shorter duration bonds primarily in developing countries with some real assets thrown in should end up being prudent.
Gross doesn’t anticipate a tripling in the value of gold, either. He’s not very bullish on gold
but he also says that if the Fed prints another trillion dollars or more, it will have debased the currency relative to gold and other assets that cannot be produced at that rate.
Gross’s comments are worth hearing, especially in light of the performance of PIMCO’s Total Return Exchange Traded Fund against the broader bond benchmark, the Barclays Aggregate Bond Index.
He says because the fund is managed on a cash flow basis, it can be more flexible in its investment choices. The fund has grown substantially and now has $2.7 billion in assets.
That makes it a bit unwieldy, but not enough to fail to achieve its objectives.
It's always good to hear what investment gurus are saying but even their comments have to be considered from multiple perspectives and not necessarily taken at face value.