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Bill Gross Sounds the Siren

Bill Gross’ latest investor newsletter is more alarming than usual.  He takes the time to sound his warning against the United State’s love of deficit spending and lack of any semblance of fiscal discipline.  You can read the whole letter here, but the highlights include:

Unlike Euroland or the United Kingdom, which appear to have gone on an extreme fiscal diet, the American answer to a bulging waistline is always “mañana.” Debt commission recommendations are tossed in the trashcan, tea party election rhetoric eventually focuses on miniscule and merely symbolic earmarks, and both Democrats and Republicans congratulate each other on their ability to reach a bipartisan agreement for the good of the nation… (as a consequence) …

  1. American wages will lag behind CPI and commodity price gains.
  2. Dollar depreciation will sap the purchasing power of US consumers, as well as the global valuation of dollar denominated assets.
  3. One of the consequences of perpetual trillion dollar deficits is the need to finance them, and at attractively low interest rates for as long as possible.
  4. Trillion dollar annual deficits add up, and eventually produce a stock of debt that can become unmanageable

His investment recommendations summed up are to buy non US dollar denominated assets, take credit risk rather than duration risk by keeping bond investments relatively shorter or in floating rate assets, buy debt where real interest rates are higher than in the United States, invest in equities in emerging markets rather than debt burdened developed nations, and last but definitely not least, be careful because “all investors should fear the consequences of mindless US deficit spending as far as the mantis eye can see“.

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