Bill Gross: A "Bear Market Manager"

As I have written before Bill Gross is a man capable of moving markets. Gross spoke at PIMCO's annual secular forum about his view of market trends over the next 3-5 years. The main theme that the markets (and the media) picked up on was that Gross -- a longtime treasury bull -- has now donned a new cap and is calling himself a "bear market manager." This shift is largely due to his expectation of continued rapid 4-5% global growth and increased inflationary pressures from commodity prices and rising wage costs in emerging markets. He has raised his 10-year treasury yield target to 4-6.5% from 4-5.5% which is a significant change for a firm who's total return strategy profited greatly from over 20 years of price appreciation and yield.

Where does Gross see opportunity in a secular bear market for bonds? Well maybe we should start with where he doesn't see opportunity:

"Credit markets, high yield markets, and volatility itself, all are compressed to near historic lows and suggest that at this point, taking major risk positions in order to be like Yale or a Harvard certainly wouldn’t be justified.

It does not make sense for PIMCO to be buying even investment-grade corporates at 30 to 35 basis points over LIBOR. The spreads are too narrow and the risk of a cyclical correction is too great."

Okay, we get it, we've been saying for years that the global liquidity boom has compressed risk spreads. So if risk isn't where to capture return where can return be obtained? Gross' answer: shorten duration, get emerging market currency exposure and heighten commodity exposure. This makes sense! The large US trade deficit, a declining appetite for treasuries and years of global 5% growth are putting downward pressure on the dollar. As demand increases on everything from oil to corn to soybeans to copper, commodity exposure will be crucial. Investors who hold too many assets denominated in US dollars and have failed to allocate a portion of their portfolio to commodities and TIPS will suffer if inflation ticks up and the dollar weakens further.