The Ignorant Investor

Bill Gross of PIMCO is a very well respected bond fund manager. According to the Wall Street Journal, in a recent speech on the future investing climate. . .

Mr. Gross laid out a gloomier view of the U.S. economy than he has presented recently in his closely-read monthly commentaries. Of late Mr. Gross has professed a mostly neutral stance, pointing to an equally-matched tug of war between inflationary forces like lower interest rates and rising prices for assets like real estate and disinflationary forces like the rising use of cheap overseas labor and the aging of the U.S. population. (Disinflation refers to a reduction in the rate of inflation.)

The article goes on to say that forces that Gross believe fueled modest inflation, like fiscal policy and rising real-estate values, have now waned. So Gross sees inflation dropping to as low as 1% from its current level of about 2.5%. The result will be lower corporate profits, stock-price appreciation and fixed-income yields, which may in turn lead to a recession and/or a slowdown in the real estate market that's helped to drive the economy forward.

The upshot: Mr. Gross believes investors should prepare for an environment over the next three to five years where stocks, bonds and real estate plod along, producing average annual returns of 4% to 5%.

Gross says he's reduced his fund's holdings of TIPS- though not abandoned them- as the prospect of high inflation has receded. This is obviously a good plan if inflation doesn't rear back up. If.

The kicker is here, which I'm a little proud to say matched my own thoughts from a month or two back: