In his latest investment outlook, PIMCO bond guru Bill Gross offers a sobering take on the global debt crisis, saying it could take decades for economies and markets to return to normal. But, he says that in a world of subpar investment options, the U.S. is currently the best place to look.
“What global investors, fixated on historical cyclical trends as opposed to secular delevering dynamics fail to appreciate is that economies and their financial markets historically have taken several decades as opposed to several years to renormalize once the fatal grip of too much debt wreaks havoc on the assumed perpetuity of capitalism’s prosperity machine,” Gross writes. He says that zero-bound interest rates are only “lightly” alleviating global debt woes, and that all that has happened in recent years is that the bad debt burden has shifted — from the private sector to the public sector in crisis areas, and now, in Europe, to the German core. “Does it matter that Greece decides to stay with the Euro or that the Southern peripherals move towards austerity, or that the U.S. in November decides to go Red or Blue?” Gross asks. “Not much. Solutions for real growth matter only at the margin. An authentic debt crisis – which the world is now experiencing – can only be ultimately cured in two ways: 1) default on it, or 2) print more money in order to inflate it away. Both 1 and 2 are poison for bond and stock holders, which is why 7% returns — guaranteed or not — are so comical.”
Gross says that in such an environment, investors shouldn’t underweight the U.S. in their portfolio. “Many of the [current] conditions point investors to the ultimate ‘safe haven,’ the cleanest of the dirty shirts, the champion of champions, rose of all roses — the United States,” he says. “I will not dispute it, market movements have confirmed it and my own experience in 2011 is a testament to it. Don’t underweight Uncle Sam in a debt crisis. Money seeking a safe haven will find it in America’s deep and liquid (almost Aaa rated) bond and equity markets.”
But Gross also offers some troubling longer-term debt figures for the U.S., and says that the U.S. must act soon if it wants to remain the cleanest of the dirty shirts. “A good name can be slandered, a great opportunity to change fiscal direction squandered within a few short years. This debt crisis should be considered global as opposed to regional, and investors should recognize that clean dirty shirts are not forever thus.”