Expert bond investor and PIMCO leader Bill Gross began the year looking at his Champagne glass as a little more than half empty:
It's as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century. Welcome to 2012.
These "two moons" represent the two extreme economic possibilities that Gross predicts. Let's take a peek into his crystal ball to find out what he thinks will happen, and what you can invest in to protect yourself.
There's that "delever" word again
The first potential future pictures a world that further delevers, with bleak outcomes. Fool Morgan Housel explains deleveraging in depth, but in short, it refers to the painful reduction of debt and credit that had once fueled economic expansion. Gross points out that only a few sectors of the developed world have actually delevered, like U.S. households, but otherwise total debt has remained the same because of central bank actions like quantitative easing.
But now, Gross says, governments and banks hold few tools left to prop up economies because quantitative easing practices are reaching their politically acceptable bounds and policy rates are falling to near 0%. With few options for further intervention, the threat of "unforeseen-delevering" exists. This ultimately means consumers and businesses will spend less. And with interest rates sitting at 0%, there is no reason to put money into risky investments. Therefore, banks will lend less and investors will hold on to their cash. This nightmarish scenario where money is hoarded, instead of pumped through the economy, is akin to that of any post-apocalyptic movie.
Another less gloomy possibility, please?
The second future presents central banks pumping more confidence into deflated economies. For example, Gross predicts that in January, the Fed will guarantee its rate will remain at the current 0.25% for three years or until inflation or unemployment reach acceptable levels. Following this, the Fed might employ another quantitative easing halfway through 2012. Gross' tone implies these actions will not be enough to reinflate the economy, but hopefully will give the last jolt that the economy needs for the near future -- and then our future has only a slight resemblance to Mad Max.
Where to put your money
Since the outcome of either scenario is uncertain, Gross finishes with a laundry list of recommendations to hedge against either polar possibility, including looking at five-year-or-longer Treasury bonds (especially TIPS), avoiding troubled European bonds, and investing in high-yielding companies with stable cash flows, like electric utilities, big pharmaceuticals, and multinationals. He also mentions that given further quantitative easings, gold could continue appreciating, despite being "pricey."
With these insights, what specific stocks should you seek if you agree with Gross' less-than-rose-colored futures?
For an electric utility, I like Fool Jim Royal's take on Brookfield Infrastructure Partners
For a big pharmaceutical, I like Israeli firm Teva
For a multinational, Coca-Cola
Gross' predictions may fail like so many other expert predictions before, but I still believe these stocks will outperform the market, which is why I'm giving all three stocks a thumbs-up CAPScall. And no matter whether it's the year of gloom or boom, one stock that our analysts think will beat the market is our top stock for 2012 -- read about it here in this free report.Fool contributor Dan Newman has stocked his cupboards with Spam, just in case. He also does not hold any shares in the companies mentioned above. The Motley Fool owns shares of Teva Pharmaceutical Industries, Coca-Cola, and Brookfield Infrastructure Partners. Motley Fool newsletter services have recommended buying shares of Brookfield Infrastructure Partners, Teva Pharmaceutical Industries, and Coca-Cola. 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.