“I blew it.”
Well, not exactly. But this, we think, might be a first for him:
“Do I wish I had more Treasuries? Yeah, that’s pretty obvious,” Mr Gross told the Financial Times last week, adding: “I get that it was my/our mistake in thinking that the US economy can chug along at 2 per cent real growth rates. It doesn’t look like it can.”
When the yield on the 10-year Treasury was 3.5 per cent in January, Mr Gross warned that the risk of rising inflation made government debt a poor investment.
To recap, earlier this year Gross was pushing the idea that the end of QE2, middling but stable economic growth, and the threat of inflation would combine to push up US Treasury yields.
So he went ahead and sold, then spilled a lot of ink in his Investment Outlook from early June explaining why. But then we found out two weeks later that he had reversed course and his Total Return Fund had started adding government bonds.
If we understand the interview with the FT’s Dan McCrum correctly, the admission of error came begrudgingly and he still thinks the danger of financial repression looms, just on a longer time-horizon than he previously thought:
Mr Gross still argues that on a long-term basis, governments are likely to use financial repression, where the rate of inflation is higher than bond yields, to erode the value of sovereign debt over time.
But he also suggested that the “new normal” – Pimco’s view of the global economic outlook in which growth rates for developed countries are slower than in the past – may have to be revised downwards to a “new normal minus”.
Mr Gross started to buy government debt, as well as related securities and derivatives, in recent months.
Unless we’re misreading something, Gross is worried both about the value of US sovereign debt being inflated away and, at the same time, about near-recessionary growth in developed countries over the long term.
But slow growth, of course, is anti-inflationary, and Gross even says above that the reason he should have held on to more Treasuries is because expected growth is weaker than he originally thought.
To simultaneously get both weaker long-term growth and inflation that erodes away the debt, at some point the flight-to-quality trade (which keeps down yields and strengthens the currency) would have to stop applying in periods of low or declining growth.
Is that what Gross thinks will happen? If so, then the only rationale that comes to mind for his starting to buy Treasuries again — and for saying he wishes he had more — is that he plans to time the market (and dump them) ahead of that moment.
Otherwise we’re having trouble making any sense of what he’s saying.
QEnding: rates and fates – FT Alphaville
Bill Gross: do not buy expensive bonds – FT Alphaville
Gross dumps his US government debt – FT Alphaville
Taleb: “Every Single Human Being” should short Treasuries – Clusterstock