Most analysts that have warned of our reckless policy makers (up to this point) have been the typical “crazies.” Ron Paul, Marc Faber, aka Dr. Doom, Peter Schiff, Jim Rogers (and many other Austrian Economists). The message is usually regarded as an overreaction because it’s delivered by one of the aforementioned “crazies.” That is, until now…
There are a hand-full of names in the universe that, when they speak, cause all participants in the financial markets to pay attention. One of those names is Bill Gross. The David Spade look-a-like has been proclaimed the King of Bonds. On the 1st of every month, he shares his unique view on global fiscal and economic policy. Keep in mind that PIMCO, the company he founded, manages about $2 Trillion.
In this month’s Investment Outlook, he is very critical of Ben Bernanke. In the article titled “Money for Nothin’, Writing Checks for Free,” he reiterates everything you’ve been reading on this blog. I recommend you check out the full article, but in case you’re busy, I’ll highlight a few excerpts below:
“Like gold,” [Bernanke] said, “U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
$54 trillion of credit in the U.S. financial system based upon trusting a central bank with nothing in the vault to back it up. Amazing!
Well ultimately government financing schemes such as today’s QE’s or England’s early 1700s South Sea Bubble end badly.
The future price tag of printing six trillion dollars’ worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold.
Investors should be alert to the longterm inflationary thrust of such check writing. While they are not likely to breathe fire in 2013, the inflationary dragons lurk in the “out” years towards which long-term bond yields are measured. You should avoid them and confine your maturities and bond durations to short/intermediate targets supported by Fed policies.
Does all of this sound familiar to you? The King of Bonds is telling you to keep your duration short.
