Tags: Pimcos Gross US May Lose Top Rating on Mindless’ Spending

Pimco's Gross: US May Lose Top Rating on 'Mindless’ Spending

Wednesday, 05 January 2011 10:14 AM

Pacific Investment Management Co.’s Bill Gross said investors should favor emerging-market corporate and sovereign debt as “mindless" U.S. deficit spending may result in higher inflation, a weaker dollar and the eventual loss of America’s AAA credit rating.

Buying debt in emerging-market countries with higher real interest rates and wider credit spreads will offer more return as well as protection from dollar depreciation as U.S policymakers run up record deficits at the expense of economic growth, Gross, the manager of the world’s biggest bond fund, wrote in his monthly investment outlook.

“The problem is that politicians and citizens alike have no clear vision of the costs of a seemingly perpetual trillion dollar annual deficit,” Gross wrote in a note on Pimco’s website today. “As long as the stock market pulsates upward and job growth continues, there is an abiding conviction that all is well and that 'old normal' norms have returned. Not likely. There will be pain aplenty.”

The U.S. deficit was $150.4 billion last month, exceeding the median estimate of economists surveyed by Bloomberg News, compared with $120.3 billion in November 2009, according to a Treasury Department budget statement released in Washington.

The extension of tax cuts that President Barack Obama signed into law will expand the federal budget deficit to $1.34 trillion for fiscal 2011, Credit Suisse Group AG strategists estimated on Dec. 7. Obama announced a day earlier an agreement with congressional Republicans to extend tax cuts enacted under his predecessor, George W. Bush.

‘Fear the Consequences’

“All investors should fear the consequences of mindless U.S. deficit spending.” wrote Gross, a co-founder and co-chief investment officer at Pimco.

Stimulus measures that have been designed to maintain current consumption instead of working to make America a more competitive nation in the long run will be a drag on real income growth as reflationary policies set in, Gross wrote.

Pimco raised its forecast for U.S. growth next year as policymakers pump a “massive amount” of stimulus into the economy after the Obama tax plan was approved. The accord also calls for extending unemployment insurance for the long-term jobless and cutting the payroll tax by $120 billion for one year.

The economy is likely to grow 3 percent to 3.5 percent in the fourth quarter of next year from the same period of this year, Pimco Chief Executive Officer Mohamed El-Erian said in a telephone interview on Dec. 9. That compares with Newport Beach, California-based Pimco’s previous estimate for 2 percent to 2.5 percent growth, and the 2.2 percent gain forecast for this year by the International Monetary Fund.

The $250 billion Total Return Fund managed by Gross posted an 8.74 percent gain in the past year, beating 75 percent of its peers, according to data compiled by Bloomberg. The one-month performance is a loss of 0.04 percent, trailing 44 percent of competitors. Pimco is a unit of Munich-based insurer Allianz SE.

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Pacific Investment Management Co. s Bill Gross said investors should favor emerging-market corporate and sovereign debt as mindless U.S. deficit spending may result in higher inflation, a weaker dollar and the eventual loss of America s AAA credit rating.Buying debt in...
Pimcos Gross US May Lose Top Rating on Mindless’ Spending
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2011-14-05
Wednesday, 05 January 2011 10:14 AM
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