Gross: how to make money and keep it

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The credit world that drives our financial system is running out of steam and investors must ensure they do not surrender to its dire future, says PIMCO bond star Bill Gross.

In his latest investment note, the manager of the $285 billion PIMCO Total Return fund warns that we are running out of time as the credit market is reaching supernova stage, soon it will begin to consume itself.

‘The end of the global monetary system is not nigh. But the entropic characterization is most illustrative. Credit is now funneled increasingly into market speculation as opposed to productive innovation.’

‘So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time.'

But why is our credit market running out of fuel?

'As it expands at a rate of trillions per year, real growth in the economy has failed to respond. More credit goes to pay interest than future investment.'

'Zero-based interest rates, which are the result of QE and credit creation, have negative as well as positive effects. Historic business models may be negatively affected and investment spending may be dampened.'

Look to Japan as a historical example, he added.

In this environment then how can investors possibly make any decent returns? Gross has the answer.

How to make money

1 - Position for eventual inflation: the end stage of a supernova credit explosion is likely to produce more inflation than growth, and more chances of inflation as opposed to deflation. In bonds, buy inflation protection via TIPS; shorten maturities and durations; don’t fight central banks – anticipate them by buying what they buy first; look as well for offshore sovereign bonds with positive real interest rates (Mexico, Italy, Brazil, for example).

2 - Get used to slower real growth: QEs and zero-based interest rates have negative consequences. Move money to currencies and asset markets in countries with less debt and less hyperbolic credit systems. Australia, Brazil, Mexico and Canada are candidates.

3 - Invest in global equities with stable cash flows that should provide historically lower but relatively attractive returns.

4- Transition from financial to real assets if possible at the margin: buy something you can sink your teeth into – gold, other commodities, anything that can’t be reproduced as fast as credit.

5- Be cognizant of property rights and confiscatory policies in all governments.

6 - Appreciate the supernova characterization of our current credit system. At some point it will transition to something else.

To read the full version of Bill Gross' latest investment note click here.