Tuesday, January 26, 2010

PIMCO's Bill Gross: Invest in 'Less Levered' Countries

This morning we had Jeremy Grantham's much read quarterly letter, and now we have Bill Gross' widely followed monthly letter.  In this month's missive, he essentially summarizes where we plan to be invested long for the next few decades - countries who act (relatively) fiscally responsible, with solid demographics, and either are modern commodity rich "Western" nations or developing countries who are akin to investing in the US in the 1950s, 1960s.  Old habits die hard and people still believe the fiscally irresponsible, borrow / spend developed economies are still the place to be... they are "safe". bah.

[click to enlarge any graphic]

*Norway is an extremely oil rich, "socialist" nation which runs public surplus - unfortunately except for 1-2 stocks in the US, there is no real way to get access to the country.  However, they might have the most stable currency in the world due to these reasons.

The only problem is EVERY country will be affected when the problems from the bloated ,irresponsible (developed) countries infect the entire world.  As we saw in latter 2008 and early 2009 there was no place to hide and ironically many of the more responsible countries were hit even harder than the irresponsible - since they are considered "developing".  Hence you can't confuse your long term views on these wonderful opportunities, with the pain that will surely be shared the world over the next time panic sets in (I expect the next generation of panic to be soverign debt - a bunch of dominos set to hit over the next decade - I'm not the only one)  [Jan 13, 2010: Kyle Bass of Haman Capital - Japan Defaults on Debt or Devalues in 3-4 Years; US in 10-12]  [Dec 10, 2009: Ken Rogoff (Videos) - Sovereign Debt Defaults Likely in Next Few Years]

Via Bloomberg:
  • Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said investors should seek “less levered” countries like China, India and Brazil that are “less easily prone to bubbling.”
  • Go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come,” Gross wrote in a monthly investment outlook published on Newport Beach, California-based Pimco’s Web site. “The old established G-7 and their look-alikes as they de-lever have lost their position as drivers of the global economy.”  (welcome to our world Bill!  You're still relatively early to the thesis - no worries)
  • Gross recommended that investors should look for “a savings-oriented economy, which would gradually evolve into a consumer-focused economy,” adding that miniature examples of China, India and Brazil would be excellent examples.
  • The U.K. is “a must to avoid,” Gross wrote in the commentary published today. “Its gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors.”   (the UK is the mini US - the only difference is the Brits seem to have *some* political will at fighting deficits whereas all we have is vague talk of "deficit fighting" that has been full of empty promises - while acting in complete opposite.)  [Dec 1, 2009: Morgan Stanley Lists UK Sovereign Debt / Currency as Potential "Fat Tail" Risks for 2010]
  • Among developed countries, Gross recommended Canada and Germany. “Given enough liquidity and current yields, I would prefer to invest money in Canada,” Gross wrote. “Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country.”  (both considered "socialist" by Americans - irony.  I would put in Australia as well - ahead of Germany.  Germany is going to be dealing with irresponsible brethern in the European Union over the next decade - a lot of very tough decisions)  “Germany is the safest, most liquid sovereign alternative,” Gross wrote. However, “its leadership and the EU’s potential stance toward the bailouts of Greece and Ireland must be watched. Think AIG and GMAC and you have a similar comparative predicament.”
  • In the firm’s investment outlook for 2010 released on Jan. 4, Pimco said it was cutting holdings of U.S. and U.K. debt as the two nations increase borrowing to record levels.

The full entry can be found here  (or read it below - click on "Fullscreen")

Bill Gross Marked Up

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