In his recently released investment outlook, Bill Gross, once known as the “bond king”, warned that buying US government debt is all but certain to be a losing bet and lambasted the asset class that made him famous. He’s literally talking trash about the bond market.
According to Gross’ outlook, bond prices are at their peak with no place to go but down and the funds that buy them belong in the “investment garbage can.” It’s not the first time that the veteran investor has expressed his bearish position on government debt, but given the recent taper talk by the Fed, there is a renewed urgency for investors to heed his message.
He highlighted that the Fed has bought 60% of net issuance by the US government over the past year and he pointed out: “With quantitative easing about to reverse, it’s more than obvious that the $120bn-a-month Federal Reserve deluge will probably end sometime in mid-2022 given inflation at greater than 2% and economic growth prospects remaining optimistic. How willing, therefore, will private markets be to absorb this future 60% in mid-2022 and beyond?”
These comments attracted a lot of attention by the financial press and might have come as a surprise to mainstream investors, who still view government bonds as a safe asset class, despite the poor returns of the last years. However, for us at BFI, it has been clear for a long time that it will be crucial for investors in the coming months and years to adapt their strategies and to diversify away from purely traditional and conventional investment vehicles.
As we highlighted in our Special Report, On the Brink of a New Era, portfolios focusing only on stocks and bonds will face formidable challenges going forward and are very likely to underperform. Instead, investors need to adapt to the new realities, and they need to do so quickly and effectively, by allocating more to alternative and real assets. This strategic shift will be necessary to counter imminent threats like inflation, monetary policy, and fiscal excesses, as well as regulatory and tax risks.
For conservative investors and savers looking to preserve their wealth over the long term, strategies that worked well in the past have been rendered untenable by the new realities in the global economic landscape and in the monetary policy front. They will need to adapt and adjust their plans and allocations to reflect these changes and seriously consider relying more on real assets and alternative investments.