Well, I don’t really know about the crazy part. But Bill Gross of Pimco does have some strong convictions, according to a recent piece in Bloomberg.
Bill Gross, who manages the world’s biggest bond fund, says the 30-year bull market in fixed-income securities is ending.
The article goes on to point out that Mr. Gross will apparently be responsible for a new fund that will invest in stocks (along with high yield bonds and distressed debt). It’s hard to say if Mr. Gross is truly concerned about the bond market or if he is just talking his book, but it is surprising to see someone so strongly associated with the bond market making public pronouncements about its imminent demise.
A couple of things make me think that he might be right. 1) The yield curve is a pretty good forecaster of economic activity and it is very steep right now, suggesting a stronger than expected recovery. 2)Retail investors have been ploughing money into bond funds like there is no tomorrow, and retail investors are almost always wrong. 3) Bonds have outperformed stocks in total return for the last 40 years, something that has happened only rarely in the past. When it has happened before, it’s generally been a sign that stocks are about to outperform bonds for a long stretch. 4) In order to keep the economic recovery going, the Federal Reserve has kept short-term interest rates very low for an extended period. Rates are so low-near zero-that they really can’t go lower. Unless they decline into negative numbers, rates are probably headed up at some point.
In fairness, I’ve also read several well-reasoned arguments about why deflation is a bigger risk than inflation and why bonds will therefore be the only good investments. My gut is telling me otherwise, but my gut could easily be wrong. What is more to the point is that bonds are among the lowest-rated asset classes in the relative strength rankings for our Global Macro strategy.
Posted by Mike Moody 
