PIMCO's Bill Gross: Ten Little Assets

In his March Investment Outlook (IO) newsletter entitled "Ten Little Assets", PIMCO bond guru Bill Gross takes us on a roundabout excursion that resembles more of a bad acid drug trip than a reasoned economic discourse. Read it and you'll see for yourself! Eventually he tells us about the "ten little assets", which are actually major asset classes and then talks about how each of the asset classes is becoming overvalued and profit-less, and that ultimately this will lead to the Fed cutting interest rates in the second half of this year:

What I've been saying over and over again on the investment side is that the Fed will cut rates later this year and that their two key criteria will be employment and asset prices. With construction laborers about to hit the unemployment lines and the U rate in jeopardy of rising more than the Fed feels comfortable with, an ease as soon as mid-year may be in the cards.

His "ten little assets" are:

1. Yen and the yen carry trade
2. Bonds
3. Housing
4. Commodities
5. High-yield mortgages (subprime)
6. High-yield bonds
7. Emerging market bonds
8. Emerging market currencies
9. Private equity
10. Stocks

If I could summarize in my own words, he is telling us about how money managers and hedge funds and Wall Street investment banks are successively chasing after these asset classes in search of higher returns and that once enough money has poured into any given asset class, returns are "strangled" by diminishing returns relative to the yield on T-bills. Having "destroyed" the returns of a given asset class, "investors" move on to the next most promising class. And when they have exhausted all of the asset classes, the economy is probably in enough trouble that the Fed will be cutting interest rates. I agree with a fair amount of those facts, but not the complete "story."

Remember, he's a bond guy and constantly pitching you to give his firm money to invest in bonds.

-- Jack Krupansky