PIMCO's Bill Gross on Empty Nesting/Successful Investing and the bond bull market

Take a look at PIMCO's "Bond King" Bill Gross' latest monthly investment outlook commentary for October entitled "Empty Nesting/Successful Investing." Here's one of his main points:

Currently, PIMCO’s best 60/40 bet is a cyclical one that proposes that the Fed is done and ultimately will have to lower interest rates in order to restimulate an asset based/housing led economy that has been its primary growth hormone in recent years. With inflation leveling off at admittedly unacceptable levels and the domestic economy moving towards a 2% real growth rate or less in the next year or so, the Fed at some point in 2007 will be forced to cut short rates. Don’t ask us when or by how much yet. A lot will depend on the evolution of the domestic housing market and the equally important maturation of the global economy sans U.S. consumer imports and perhaps sans hyper investment spending in Asia. We will monitor daily. But with the ongoing uncertainty of why 10-year Treasuries should yield 4.65% in a 5.25% Fed Funds world, we feel more comfortable with the observation that the front-end of the U.S. Curve is only valuing a 40 basis point cut in FF by September of 2007. Like I suggested above, we’re not sure how much it should be but we’re comforted by the fact that in effect we’re only paying a 40 basis point premium in the form of a lower 4.85% yield in order to find out what’s behind Monte Hall’s/Ben Bernanke’s door #2. The U.S. bond bull market, which began almost two months ago, remains in its infancy but the best way to play it is via durations above index and concentrated in the front-end of the curve. Importantly, although other central banks remain focused on raising short rates another 25 or 50 basis points, global bond markets usually follow the U.S. lead and we expect the same pattern this time as well with a mild exception in Japan, and slightly different curve dynamics in Euroland.

I actually don't subscribe to much of his thinking, but it is always useful to read a variety of points of view and then make your own best judgment.

I suspect that PIMCO has already placed its own in-house bets on Bill's investment scenario, so that PIMCO will profit handsomely as everyday investors begin to invest with Bill's advice. I also suspect that Bill has already offered his advice to his institutional investors, so that retail investors will gain only a modest portion of the potential gains, at best. Bill manages enough money and has enough followers than he is capable of creating a self-fulfilling prophesy, at least on occasion.

My main point of departure from Bill's outlook is that I suspect that the housing slowdown will have less of a net negative impact than Bill and friends project and that the economy will do better than Bill projects. GDP will likely slow, but maybe only to the 1% to 3% range at worst over the coming year and certainly not slow enough for long enough to cause the Fed to seek to re-stimulate the economy.

One key point that the "bond bulls" are not admitting in public is that current interest rates are not restrictive, but merely neutral, neither accommodative nor restrictive. The Fed has eliminated the froth, but hasn't damaged the availability of capital for worthy ventures. The world is still awash with cash, not the least of which is all the money that recently flowed out of commodities speculation.

-- Jack Krupansky