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Published: September 23, 2010
"Bill Gross's PIMCO made an $8.1 billion wager,"
Bloomberg
news reported last week.
Bill's bet is simple: He's betting inflation will return to the
U.S. in the next 10 years. And he's willing to risk billions on
the idea.
Bill Gross is known as the Bond King. He's probably the most
famous and successful bond-fund manager in history. He manages
the PIMCO Total Return Fund -- the world's biggest bond fund,
with a quarter-trillion dollars in assets. It makes sense to pay
attention to Bill's bets...
Bill is betting on inflation. Actually, more specifically, Bill
is betting that DEFLATION won't happen.
Today, I'll show you why Bill's bet is a smart one. And I'll
show how to make your own bet on this idea. But first, let me
explain what exactly Bill is up to...
The mechanics of Bill's bet are a bit complicated. In short, he
took the other side of a bet on deflation.
Bill received $70.5 million now... If deflation occurs over the
next 10 years (if the consumer price index is lower in 2020 than
it is today), Bill is on the hook for up to $8.1 billion. If
deflation does NOT occur, he simply gets to keep the upfront
$70.5 million.
"We think the possibility that the U.S.
goes 10 years with stagnant or falling prices is remote," a
PIMCO portfolio manager told Bloomberg news.
Fears of deflation have increased dramatically this year. We've
seen a huge shift in the mindset of the U.S. consumer. We've
gone from a "conspicuous consumption nation" to a nation of
savers. Deflation is simply defined as "falling prices" -- and
the U.S. consumer has surely seen that... Exhibit "A" is the
price of their home.
But Bill has an ace in the hole for PIMCO's anti-deflation
bet... Ben Bernanke.
Bernanke is the chairman of the U.S. Federal Reserve. He is a
student of the Great Depression. And he is determined to prevent
the destructive deflation we saw in the 1930s from happening
again today.
In a now-infamous 2002 speech, he said:
...The U.S. government has a technology, called a printing
press (or, today, its electronic equivalent), that allows it to
produce as many U.S. dollars as it wishes at essentially no
cost... Under a paper-money system, a determined government can
always generate higher spending and hence positive inflation...
...Prevention of deflation remains preferable to having to cure
it. If we do fall into deflation, however, we can take comfort
that the logic of the printing press example must assert itself,
and sufficient injections of money will ultimately always
reverse a deflation.
Bill Gross has made a career out of taking calculated risks. A
bet on inflation, when Ben Bernanke is at the helm of the Fed,
seems like a smart one. While the fears of deflation are high,
the chances of sustained deflation are slim in a paper-money
society.
If the Fed does "crank up the printing press," the simple
investment you want to hold is gold. The Fed can print dollars,
but it can't print gold.
Gold is particularly attractive today... Since the Fed has cut
interest rates essentially to zero, gold is more attractive than
money in the bank... You earn zero percent on your cash in the
bank, and earn zero percent on your gold. You don't give up any
"opportunity cost" -- you don't give up any interest on your
cash -- by holding gold today.
If you believe Bernanke is telling the truth -- and the U.S.
government will print money as needed to prevent deflation --
you should hold at least some of your savings in gold instead of
paper money. You'll be on the same side of the bet as the Bond
King.
--Steven Sjuggerud
Editor
Daily Wealth
Note: This article originally appeared on
Daily Wealth |
