Bill Gross is one of the premier bond investors. He's especially well known for his understanding of interest rates. Bloomberg got him on air to talk about latest actions by the Federal Reserve Bank.
The Fed pointed out that the 2% inflation target is something it would like to approach but it is not a cap. The Fed has been undershooting it for years so I believe this implies that we shouldn't be surprised if they overshoot it for years. That's my take.
Gross believes that if inflation goes to 2.1% or 2.2%, it is not bothersome. An inflation target of 2% has always been a target for the Fed. It has been interpreted narrowly in the last 12 months.
Gross thinks the Fed can't be too agressive with the rate because the rest of the world is in a low inflation environment. The European Union can't get out the 1.5% zone probably because its currency has been so strong. The U.S. economy will be stronger going forward with the tax cuts and the deficit.
The dollar rally of late has been surprising to most. It's really only a 3% to 4% increase.
The dollar rose because the market started anticipating that the Fed's actions would be much tighter. However, if The Fed accelerates while Draghi and Kuroda maintain their excessive monetary policy, the dollar will rally and that will threaten the fragile global recovery.
Where to find value
Gross isn't very bullish on anything. To quote him verbatim:
There is value in cash. That's a stretch ofcourse. 3 month Libor is on 2.35%. It keeps you on pace with inflation but it doesn't go down. Bond market is down. Stocks are flatlining. Is it a value? It is a safe short time haven. We will see where things end up from there.
The Fed is undertaking quantitative tightening. Gross asks whether that is significant as if he doesn't know. It is certainly different. He expects the 10-year to meander around 2.80% to 3.1% or 3.15% yield. There is a hibernating bear market in bonds. The bear is awake but not really growling.
How Gross positions
Gross apparently only really likes cash, making up 33% of his portfolio, but let's see what's in his portfolio. It turns out he has cut out all duration risk from his portfolio. It is effectively negative. This seems to indicate that he expects the Fed to hike faster than widely anticipated. Gross is making up for the duration shortfall in returns by venturing out towards more credit risk. The portfolio has an average credit quality of only BB.
Data: Morningstar
Gross biggest position is an equity. He's holding Time Warner (TWX, Financial) which is being taken over by AT&T (T, Financial) in a contentious merger that the government is trying to block. It is a popular M&A event among famous value investors. I happen to own this position, as well. This is a vertical merger and historically these very rarely get blocked while there is significant upside if ultimately it isn't blocked.
Disclosure; long TWX
