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While the folks in Washington did manage to narrowly avoid a government shutdown, they are essentially fiddling while confidence in the dollar is burning. Bill Gross of PIMCO, one of the world’s most closely followed bond fund managers, is acting on his concern -- in a big way. As of the end of March, PIMCO’s flagship fund, the Total Return Fund (TRF) is short U.S. Treasuries with a negative 3% weighting by market value. That’s a signal all investors should reflect on.
Let me hammer home the depth of Gross’s concern: His short position represents an estimated underweighting of 43 percentage points in government-related securities with respect to his benchmark index -- that’s completely unheard of, particularly among large, diversified bond funds like TRF.
“Confident that this country will default…”
The move shouldn’t come as a complete surprise; Gross didn’t exactly mince words in his April Investment Outlook, in which he wrote: "[PIMCO has] been selling Treasuries because they have little value within the context of a $75 trillion total debt burden. Unless entitlements are substantially reformed, I am confident that this country will default on its debt; [but] not in conventional ways…"
"What are these unconventional ways?" you may ask. Gross lays them out in plain terms: “…Picking the pocket of savers via a combination of less observable, yet historically verifiable policies -- inflation, currency devaluation and low to negative real interest rates."
From someone who has a first-class track record
If Gross weren’t so successful, it would be easier to dismiss him as an alarmist. However, the TRF’s 15-year record puts it in the top 1% of funds in its category, according to Morningstar. Furthermore, another guru, Berkshire Hathaway (NYSE: BRK-B ) CEO Warren Buffett sounded the same warning in an August 2009 New York Times op-ed, in which he wrote: “Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress.”
Gold or stocks?
As an individual investor, how can you protect yourself against this risk? Gold enthusiasts will point to PIMCO’s revelation that gold is a “must-own” alternative to the dollar. I expect inflows into the SPDR Gold Shares (NYSE: GLD ) and other gold vehicles will continue, but I don’t think this is the answer for investors.
My preference is to own assets that generate a real return, i.e., one that exceeds the rate of inflation. Prominent among which are (well-bought) stocks, and particularly those that belong to businesses with pricing power. Think of Abbot Laboratories (NYSE: ABT ) , trash hauler Waste Management (NYSE: WM ) , or wine and spirits distributor Constellation Brands (NYSE: STZ ) .
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