Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk

Today’s investment outlook entry at PIMCO is a great read. Bill Gross, perhaps as much as anyone in the world, has benefited by the incredible performance of fixed income (relative to equities) over the past 30 years. So when he questions the future efficacy of investment in sovereign fixed income–and even mentions the term “hard money“–we listen.

To be sure, fiat-based fixed income securities have been “the” investment of the past generation. Many believe this megatrend has run its course, but it hasn’t reversed itself yet on a large scale. The strategy of investing the majority of a portfolio in fiat-based fixed income products will of course keep working–until it stops working! [see also Jim Rogers Says: Buy Commodities Now, Or You’ll Hate Yourself Later].

It is foolhardy to issue too specific of a prediction–especially when such prediction is issued by your humble writer–when it comes to the intersection of the following trends: 1) the increased issuance of fiat-based sovereign fixed income products, 2) the unparalleled manipulation of domestic fixed income markets by their respective central banks, and 3) various other experiments in fiat money printing, debt-to-GDP “limit testing”, and so forth. The bottom line is, fiat currencies are an ongoing experiment [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].

Of course, the staff at Commodity HQ would say that, right? But before you click the “back” button on your browser, please digest a few choice quotes from the King of Fixed Income himself:

“…with dollar reserves widely dispersed in Chinese, Japanese, Brazilian and other surplus nations, it is likely to assume that there will come a point where 2% negative real interest rates fail to compensate for the advantages heretofore gained in buying sovereign bonds. China, for instance, may at the margin shift incremental Treasury holdings to higher returning commodity/real assets which might usher in a gradual or somewhat sudden reconfiguration of our current dollar-based credit system.” (The bolding is by the author–the italics are mine.)

Let me ask you this. As the global balance of power (both financial and otherwise) gradually shifts Eastward, would you rather be buying gold and silver along with China’s central bank, or would you prefer to take the other side of that trade? Of course, China can only keep buying more and more US Treasuries indefinitely for the next fifty years… right? Right?! Mr. Gross continues.

“Together, there is the potential for both public and private market creditors to effect a change in how credit is funded and dispersed – our global monetary system. What that will look like is conjectural, but it is likely to be more hard money as opposed to fiat-based, or if still fiat-centric, less oriented to a dollar-based reserve currency. In either case, the transition is likely to be disruptive and an ill omen for seafaring investors.” (Italics are mine.)

Remember, this is not a Ron Paul column. This is Bill Freakin’ Gross talking.

There are many popular, time-tested  portfolio strategies a long term investor can implement with their own savings. Some portfolio strategies will achieve positive real returns in the next decade, and some will not. A prudent investor should take this month’s relatively minor correction in equities, as an opportunity to “gut check“: what are the real world possibilities for equities, fixed income, commodities and indeed currencies in the next decade? Inflation, deflation… sovereign defaults? Massive credit writedowns? Could we see a Dow at 6500 again? Or even 2,000? What about 20,000? [see also Three Reasons Why Gold Is Overvalued]

Stress testing a portfolio against all of these scenarios is not paranoid–it’s prudent. These scenarios are the reason we founded Commodity HQ, and indeed, I’m confident we’ll have a lot of ground to cover over the next five years. Don’t just take my word for it–ask Bill Gross.

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Disclosure: The author is long gold and silver.

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Commodity HQ is not an investment advisor, and any content published by Commodity HQ does not constitute individual investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities or investment assets. Read the full disclaimer here.

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