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Bill Gross: U.S. Government is Picking Your Pocket

Gross In Chicago
Bill Gross told investors to stay away from U.S. Treasury bonds and instead look overseas for the best investment opportunities. Gross, who manages a $1.2 trillion portfolio, kicked off the annual Morningstar investment conference in Chicago Wednesday by saying that the U.S. government is "picking the pockets" of investors by offering what amounts to a negative return, after inflation is factored in.

Recently the market has turned against Gross, and Treasury bonds have rallied even while the investor known as the Bond King has been betting against them by taking a "short" position. His flagship fund, Pimco Total Return, has stellar long-term returns, but has been lagging its peers recently. But Gross argued that interest rates are "staggeringly low," and dramatically out of line with historical norms. His conclusion: absent a cataclysmic event, there's no where for interest rates to go but up, and that will cause losses for anyone holding today's low-yielding bonds.

Quoting economist Carmen Reinhart, Gross referred to the low rates as "financial repression," which, he said, "takes money out of the hands of investors and savers and put it in the hands of debtors." He urged investors to look to other countries for better returns, singling out Brazil, which he said offered after inflation interest rates of 6 to 7 percent (around the time Gross was speaking Brazil raised rates again). Pimco recently launched two funds that invest in emerging markets. "Yes, it entails currency risk and all the things that mom and pop in Des Moines don't want to hear about," he said. Among developed nations, he identified Canada and Germany as good places to put your money.

He even recommended stocks over bonds, suggesting that dividend-paying companies such as Proctor and Gamble, Coca-Cola, and Johnson & Johnson would offer inflation-beating returns through a combination of yields and a "smidgen of growth."

Gross said he did not think the Federal Reserve would embark on a third round of buying bonds, or QE3. Instead, he said, Ben Bernanke and his colleagues -- at least the ones not worried about inflation -- would talk interest rates down. "Language will be the new QE3," he said.

While Gross doesn't see much opportunity for the Fed to help the economy through monetary policy, he believes the government needs to use fiscal policy to reduce unemployment by investing in innovation.

Gross has taken some shots in the press recently, both for his wrong-way bet against Treasury bonds and, notably in a recent Wall Street Journal article, for losing money on Lehman Bros bonds. In his speech, he pointedly noted that PIMCO had avoided private, or "non-agency" mortgage bonds before the crash and then snatched them up on the cheap after they fell too far. "That's a headline someone can print, and I guarantee you they won't," he said.

Well, it's not our headline, but we gave him the last word.

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