PIMCO’s Bill Gross is underwhelmed by the deal hammered out in Washington to cut government spending and raise the borrowing capacity of the United States, saying it does not make a “significant dent” in the deficit.
In his monthly investment outlook newsletter, Gross, who runs the world’s largest bond fund, said: “Even though the U.S. has managed to avert a debt crisis and perhaps a ratings downgrade, there remains a stain on our reputation, a scarlet ‘A’ for budgetary ‘Abuse,’ that will not disappear.”
Gross, whose $243 billion Total Return Fund held 8 percent in U.S. Treasuries and Treasury-related securities at the end of June, said much more deficit reduction is required. He added that “the fun times are over,” even as signs of relief over a deal being reached are “heard across the global financial markets.”
The deficit-cutting deal passed by the House of Representatives Monday evening will likely clear the Senate in a vote Tuesday, just hours before the Treasury’s authority to borrow funds runs out.
If approved by the Senate in a noon EDT vote, President Barack Obama would sign the bill into law shortly afterward.
“Nothing in the congressional compromise reached over the weekend makes a significant dent in our $1.5 trillion deficit,” Gross wrote in his widely followed newsletter, published on the Newport Beach, California-based firm’s website.
“Trillions of further spending cuts, and yes trillions of tax hikes, are necessary to stabilize our “official” debt/GDP rates.
PIMCO is forecasting economic growth closer to 2 percent rather than 3 percent, making it more difficult to grow the country out of its deficits.
“So reduce that $66 trillion if you care, but the subjective remainder still hangs over financial markets like a Damocles sword,” Gross wrote.
Gross said investors should look at countries that have “cleaner ‘dirty shirts’ and higher real interest rates: Canada, Mexico, Brazil and Germany come to mind.”
The focus for equities and fixed-income investments should be “shaded” away from U.S. dollar-based indexes and toward developing nations with stronger growth prospects.
“Purchase commodity-based real assets before reserve surplus nations do. And above all, don’t be lulled to sleep by congressional lawmakers that promise a change in Washington,” Gross said.
The Total Return Fund is up 4.30 percent year-to-date, after returning 8.84 percent in 2010. Gross helps oversee $1.28 trillion in assets as co-chief investment officer at PIMCO. He increased the fund’s stake in non-U.S. debt in June to 13 percent from 10 percent.
