Pimco's Gross Says Buy Utilities

PIMCO’s chief Bill Gross puts out a regular letter in which he shares his investment advice with the public. Invoking the memory of Will Rogers, a Depression-era comic, Gross describes the recent upheaval in the financial markets as a period where investors needed to concern themselves with the return of their money, rather than return on their money.  After sharing an amusing (if not somewhat disturbing) story of having his wife emptying their bank accounts at the height of the crisis, Gross argues that it is time for investors to concern themselves with the problem of earning some return again.  

While teeing up his argument, Gross takes a knock at the peculiar crowd of people who are grumbling about some new asset bubble.  Since their crisis lows, nearly every asset has experienced an impressive rally.  Among the most impressive of these have been gold and emerging markets assets (the currencies, bond, and stock markets).  These big movements have drawn the ire of a crowd of skeptics that highlight insufficient improvement in underlying fundamentals.  Gross makes two good counter-points.  The first is that even with the recent rally in price, we still have a long way to go before we regain pre-crisis highs.  More importantly, the current priority of the FED is to reflate the economy.  In order to achieve that goal it is necessary to keep short-term interest rates low, with any potential bubbles arising being a secondary consideration.

Gross concludes with some practical advice for average investors.  The advice is based on two big assumptions.  The first is that the next decade or so will be defined by a “new normal”, in which investors should expect considerably lower returns.  The second is that large sections of the economy will be burdened by regulation, so that banks and auto companies become utilities rather than full-fledged private entities.  Given these two conditions, Gross argues that investors should just go out and buy shares in utility companies, because soon enough you will not have many other choices.

Garrett W. McIntyre