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Tuesday, October 27, 2009

Bill Gross Predicts Low Inflation for Years

Monday Bill Gross, the manager of the largest US Bond fund PIMCO, said that the end to the Federal Reserve's debt buyback programs could add selling pressure to several credit markets, including U.S. Treasuries but he sees inflation remaining low for many years.

Quotes from a good Reuters article about Bill Gross:
"It's obvious that the programs in the United States, the Federal Reserve buyback programs ... those purchases and that purchasing power will cease within the next three to four months," Gross told CBC News Network.

"So, to the extent that that's gone, then perhaps the upward influence in terms of those longer-term Treasuries will be felt more strongly in the next several quarters."
Translated: Less demand for US Treasuries means interest rates will go up. Higher rates mean bonds and bond funds will lose some value. If rates go up a lot, perhaps due to high inflation or a dollar that continues to lose value, then foreign investors will be less inclined to purchase our debt, further pushing rates higher.

But Gross predicts very little inflation going forward:
"There's substantial excess capacity not just in terms of production but certainly in terms of employment," he said.

"That excess capacity will reduce the potential for inflation. We see inflation at zero to 1 percent for a number of years going forward."
IF I thought inflation would hold between zero and one percent for the next three years, then I'd believe US Treasuries, GNMA bonds and bond funds not indexed to inflation look like a good investment.

Mr. Gross is compensated for managing bond funds so it is in his best interest for everyone to think bond funds are a good investment.

Also, I believe Mr. Gross is a long-time democrat who supports spend, spend,spend and borrow, borrow, borrow here in CA and now in the US of A. He may not believe deficit spending leads to inflation because it weakens the US dollar which makes importing manufactured good and raw materials more expensive. Perhaps he believes our collective salaries will drop faster than the cost to import commodities and manufactured goods will go up.

Gross also said he believes emerging economies will grow faster than the U.S.
"The emerging world, whether it's in Asia, Australia or other associated countries, will do much better from the standpoint of growth, and that's where money should eventually move to. It moves there because of higher profits and it moves there actually because of higher real interest rates."

U.S. Treasury Rates for 10/27/09

TERM
MATURITY
DATE
CURRENT
PRICE/YIELD
3-Month01/28/20100.07 / .07
6-Month04/29/20100.17 / .18
12-Month10/21/20100.38 / .39
2-Year09/30/201199-31+ / 1.01
3-Year10/15/201299-12+ / 1.58
5-Year09/30/201499-17½ / 2.47
7-Year09/30/201699-05½ / 3.13
10-Year08/15/2019100-23 / 3.54
30-Year08/15/2039102-11+ / 4.36

(current Treasury rates at a Glance )

A share of Intel pays a 2.90% dividend and benefits from overseas growth with a product few can afford to compete with. I own Intel (INTC charts). Intel's dividend is better than a 5-yr treasury and Intel will benefit from emerging growth. Unlike a US treasuries, Intel will probably continue to raise its dividend.

I bought Intel for my personal account at a split adjusted price of $3.67 back in April 1993, 16.5 years ago. Today's dividend of $0.56 is like getting 15.3% on my original purchase. Unlike a US Treasury bond that returns the original investment when it matures, Intel is worth 545% more than what I paid for it. That is why I buy good stocks in growth industries for long-term inflation protection you don't get with Treasuries.

Disclaimer: I own Intel in my personal portfolio and I cover it in "Kirk Lindstrom's Investment Letter" (Free Sample) where I buy and sell it when price targets are reached.

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