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, wider credit spreads and strong balance sheets will offer more return as well as protection from dollar depreciation as U.S policy makers 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 in November, 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 last month.

David Fuller's view If it is fiscal prudence you want, look East, not West. This theme is likely to be with us for quite a few years because it is not easy for a country to dig its way out of spiralling debt when voters elect politicians who offer short-term 'caring' solutions to long-term problems of competitiveness, leading to high unemployment.

Here is how Bill Gross describes it in his latest Investment Outlook:

Americans, unlike their developed world counterparts, have been eating their fill lately, and supping at the dinner table laden with pork and tax breaks for all. Unequivocally, we have been playing the part of the female mantis, munching on the theoretical heads of future generations, while paying no mind to the wretches that will eventually be called upon to pay the bills.

So how can investors deal with this in the markets?


Here is a brief summary of my personal strategy:

I continue to prefer equities to bonds, including for income, favouring Fullermoney themes. If an allocation in bonds is required for some reason, which it is not in my instance, my preference would be for the debt of fiscally sound emerging (progressing) Asian economies. I regard short US long-dated Treasuries as the latest Fullermoney secular theme. In recent months I have been shorting these via spread-bets in US 30-year Treasury futures (weekly & daily) on a Baby Steps sell-high-buy-low basis. For anyone who does not wish to trade, I would consider the ProShares UltraShort 20+ Year Treasury (TBT US) ETF, also discussed last Friday, and the Rydex Series - Inverse Government Long Bond Strategy Fund (RYJUX US). These can be traded on a buy-low-sell-high basis, or treated as buy-and-hold investments while medium-term uptrends persist.


 

Here is Bill Gross' report: Off With Our Heads! He is at his colourful best in this issue. It reads like a powerfully written summary of many Fullermoney investment themes over the last decade.