Bill Gross' Monthly Outlook is a must-read

Posted on July 3rd, 2012

If you don't read the monthly outlook that Bill Gross posts on his PIMCO website, then I would recommend you make it regular reading. I even recommend that you go back and read the last 5 or 6 posts. It is very educational reading. You can find the posts here at this link.

His July post went up yesterday. It focused on the decisions investors make when searching for yield - especially given the context of a world wide debt crisis.  He refers to the concept of investors investing in the 'cleanest' of the dirty shirts. The US and Germany look like the cleanest of the dirty shirts. It is the same analogy of the nicest house in a bad neighborhood - or the tallest midget. It only looks impressive in comparison.

But while the US economy looks good compared to all of its worse off neighbors, Gross points out that the gross federal debt as a percentage of GDP is starting an upward climb that is not sustainable for the long run. The chart is below.

This chart is worrisome. The US faces a fiscal debt cliff - and if it doesn't resolve it, it will impair on our economic growth which will lead to unemployment, inflation, and reductions in government services & spending. If these things occur, the US stock market would easily drop to levels that are half of the levels it sits at today. This is a 3-5 year problem - unless the government takes action and gets the economy growing again. 

When I read all of this, what do I think? Thank goodness I am hedged. If the markets do collapse, my accounts and my client's accounts will be protected - and ready to be reinvested at new lower price levels.

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