Bond Guru Bill Gross Is Short Uncle Sam

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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  ) .

If you’d like to track these 3 inflation-beating stocks using My Watchlist, click here. Alternatively, if you’d like to track the SPDR Gold Shares, click here. You'll get valuable updates as well as immediate access to a new special report, "Six Stocks to Watch from David and Tom Gardner." Click here to get started.

Fool contributor Alex Dumortier, CFA has no beneficial interest in any of the stocks mentioned in this article. You can follow him on Twitter. Berkshire Hathaway and Waste Management are Motley Fool Inside Value picks. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Waste Management is a Motley Fool Income Investor recommendation. The Fool owns shares of Abbott Laboratories, Berkshire Hathaway, and Waste Management. Motley Fool Alpha LLC owns shares of Abbott Laboratories. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 13, 2011, at 7:50 AM, globalsailor wrote:

    So you're saying that when the United States government defaults/abuses the currency, there is going to be enough of an American economy left for these companies to increase their profits. You've left little explanation.

  • Report this Comment On April 13, 2011, at 9:42 AM, cccisback wrote:

    Constellation Brands, a spirits and wine distributer may not be able to hold up through a currency devaluation.

  • Report this Comment On April 13, 2011, at 9:45 AM, cccisback wrote:

    The reason I say STZ may not hold up is many years ago I was looking for a business to buy and I asked my local liquor store if his business was holding up during a recession. His reply was that expensive wines and liquor sales were down and replaced by the cheap brands. His margins were down.

  • Report this Comment On April 13, 2011, at 9:48 AM, Huayra wrote:

    Headline on FT today 12-04-2011:

    "US lacks credibility on debt, says IMF"

    The US lacks a “credible strategy” to stabilise its mounting public debt posing a small but significant risk of a new global economic crisis, says the International Monetary Fund.

    In an unusually stern rebuke to its largest shareholder, the IMF said the US was the only advanced economy to be increasing its underlying budget deficit in 2011 at a time when its economy was growing fast enough to reduce borrowing.

    To meet the 2010 pledge by the Group of 20 countries for all advanced economies – except Japan – to halve their deficits by 2013, the US would need to implement tougher austerity measures than in any two-year period since records began in 1960, the IMF said. In its twice-yearly Fiscal Monitor, the IMF added that on its current plans the US would join Japan as the only country with rising public debt in 2016, creating a risk for the global economy.

    Carlo Cottarelli, head of fiscal affairs at the Fund, said: “It is a risk that if it materialises would have very important consequences ... for the rest of the world. So it is important that the US undertakes fiscal adjustment in a way sooner rather than later.”

    At the moment, the US has outlined less than half of the tax increases and spending cuts necessary to bring its public debt down in the medium term, the IMF calculated. “More sizeable reductions in medium-term deficits are needed and will require broader reforms, including to social security and taxation,” the IMF said.

    The IMF said the US economy “appears sufficiently strong” to withstand greater austerity measures and tax increases, adding that the benefit of last year’s stimulus package “is likely to be low relative to its costs”.

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