Bill Gross Issues a Call to Arms

The shenanigan's over government statistics have been well documented in the blogosphere; the perpetual understatement of inflation stats are probably the most egregious of them all.

Inflation is enemy #1 of the equity holder. It might be time to face facts; stocks would face severe multiple compression if we were dealing with more accurate, ie higher, readings on inflation:

But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation.....A readjustment of investor mentality in the valuation of all three of these investment categories – bonds, stocks, and real estate – would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate. PIMCO

Bill Gross is arguing that U.S. inflation is probably closer to the worldwide average of 7%, something most of us probably would not quibble with, and is issuing a call to arms:

Being fooled some of the time is no sin, but being fooled all of the time is intolerable. Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market’s assumption of low relative U.S. inflation in comparison to our global competitors.

Watching the pigeons come home to roost has been a painful process, but if equities are repriced to reflect the gamesmanship we have long tolerated, the pain will suddenly become much more acute.

Perhaps the mischief makers can take a glance at the chart of Moodys Corporation to see what happens when you get called on the carpet; but in this case, the government’s actions have set us up for a huge margin call that many of us are only beginning to come to grips with.

Gross is looking for growth, which means investing in BRIC countries and commodity plays, which should, at the margin, begin to pressure US Treasuries as money flows out of what he considers the most overvalued areas of fixed income, and global capital markets.
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PIMCO June Investment Outlook
Hmmmm.....
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