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James Carville, the famed political strategist once said:
I used to think if there was reincarnation, I wanted to come back as the President, or the pope, or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.
In today’s world, the bond market runs through Bill Gross, the Founder and CEO of PIMCO. The soft spoken Californian, former professional blackjack player and billionaire, oversees over one trillion (with a T) dollars in assets under management. He has been referred to as the 4th branch of the U.S. government and with the bond market under his thumb it’s not a stretch to say that he is the most powerful man in the United States.
His current outlook for the U.S. economy is not particularly rosy (read his latest outlook here). Gross recently coined the term “the new normal” when talking about the post-crisis economy. He believes the global economy has been effectively reset as investors take on less risk, de-leverage the mountain of debt, regulation hampers growth and de-globalization takes hold. He believes this is best presented by the low expectations in the bond market where 10 year treasuries, at 3.5%, are still positioned for very meager economic growth. He says we are entering a sustained period of low growth and low inflation.
A year ago, Gross was seen as a co-conspirator of sorts in the government bailouts. As the U.S. government began to take stakes in financial institutions Gross jumped in head first with them. He piled his firm’s assets into the riskiest of risky assets in what turned out to be a brilliantly simple bet – the U.S. government won’t let these assets fail therefore, we are wise to invest along side them. It couldn’t have worked out much better for the bond king. He is rumored to have netted $1.7B alone on the day of the Fannie and Freddie bailouts. Some saw it as talking his book and asking for his own bailout. Others see it as unrivaled power and brilliance.
Gross believes the U.S. economic recovery has been largely based on the stimulus and that the economy could suffer a relapse when the stimulus is finally removed. In preparation he says investors are wise to move money into stable, conservative income generating assets. He also says assets are likely to move from debt-laden governments such as the U.S and U.K. into those who were more fiscally responsible such as Germany and China.
So where is an investor to look for high quality, stable and conservative fixed income assets in this low yield, high risk environment? At the 2010 Barron’s roundtable Gross made a number of suggestions. He currently likes the Reaves Utility Income fund (ticker: UTG) which is a stable utility fund yielding 7.25%. He also likes the PIMCO Corporate Opportunity a high yield corporate bond fund that Gross himself manages. It yields a juicy 13%. In terms of specific bonds Gross still likes to trade along side the government. He recommends investors look into the GMAC 8% due 2031 and the AIG 8.25% due 2018.
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