5 Investment Recommendations from PIMCO’s Bill GrossDecember 20th, 2012 by David Waring
For anyone who does not already know, Bill Gross is very active on the @PIMCO twitter account. Last week the subject of his tweets was “5 Ways to Beat the Wealth Tax”. I have included the tweets below as well as a more detailed explanation on the thoughts behind them.
To see a list of high yielding CDs go here.
Gross: Escape the wealth tax tip #1: Buy intermediate Treasuries and roll down a near perpetually steep yield curve.
— PIMCO (@PIMCO) December 11, 2012
What does Bill Gross mean by rolling down the yield curve?
Bill Gross is anticipating the treasury yield curve to remain steep for some time. His view is that interest rates on intermediate term treasuries (those that mature between 4 and 10 years from today) will remain significantly higher than shorter term treasuries. If he is correct, and you buy an intermediate term treasury today, it will increase in value as it moves towards maturity.
When you “roll down the yield curve” you buy an intermediate term treasury and then sell it when it becomes a shorter term treasury. Assuming the yield curve remains relatively constant, the bond will have increased in value during that time, so you benefit not only from the higher coupon that an intermediate treasury pays, but also from the price appreciation as the bond moves towards maturity. For a more in depth explanation of rolling down the yield curve go here.
Gross: Beat the wealth tax Tip #2: 5-10 year TIPS in US and UK. Central Bank inflation targets moving up.
— PIMCO (@PIMCO) December 13, 2012
Why buy 5 and 10 year TIPS in the US and the UK?
Gross: Beat the wealth tax Tip #3: For stocks, focus on steady cash flow/ dividends in an unstable economy.
— PIMCO (@PIMCO) December 14, 2012
Why buy stocks with steady cash flow and dividends?
It seems that even though Bill Gross feels that inflation is going to be picking up, that it will not necessarily be accompanied by higher growth. When you buy the stock of companies with steady cash flows and dividends, you get the best of both worlds. If economic growth remains unstable, then you have a nice dividend paying stock with steady cash flows whose price should not suffer as much as others. If growth does pick up, then these companies should benefit as well.
Gross: Fight the Wealth Tax Tip #4: Invest in developing economies w attractive balance sheets: Brazil,Mexico, best examples. Stocks & bonds
— PIMCO (@PIMCO) December 17, 2012
Why invest in developing economies with attractive balance sheets?
Many developing economies like Brazil and Mexico are in much better fiscal shape than advanced economies like the US. They have not loaded up on debt to anywhere near the extent of advanced economies. They also have much better demographics, meaning their populations are not aging as fast as those in advanced economies like Japan. They are therefore better positioned for growth. For more on this concept go here.
Gross: Investors unite! Beat The Wealth Tax recap: 1 steep curve; 2 TIPS; 3 develping economy growth; 4 stocks w reg cash flo; 5 real assets
— PIMCO (@PIMCO) December 18, 2012
Why buy real assets?
Gross actually forgot to tweet out the 5th recommendation, but he included it in the summary tweet above. He has also talked a lot about this in his monthly investment commentaries. The idea behind this one is very simple: If inflation picks up then this should also mean that prices are going up on real assets like gold and real estate.
Another bond guru Jeff Gundlach shares a lot of these ideas, as well as a few that are not mentioned. For more on his investment ideas go here.