Gross predicts "paranormal" market activity in 2012

NEW YORK Wed Jan 4, 2012 2:37pm EST

William Gross, Manager of the world's biggest bond fund at Pacific Investment Management Co. (PIMCO) participates in the Obama administration's Conference on the Future of Housing Finance in the Cash Room of the Treasury Building in Washington, August 17, 2010.  REUTERS/Jason Reed

William Gross, Manager of the world's biggest bond fund at Pacific Investment Management Co. (PIMCO) participates in the Obama administration's Conference on the Future of Housing Finance in the Cash Room of the Treasury Building in Washington, August 17, 2010.

Credit: Reuters/Jason Reed

NEW YORK (Reuters) - Bill Gross, the manager of the world's largest bond fund, is sounding like a Wall Street ghost-hunter in his latest investment letter.

Calling the current market environment "paranormal," Gross said this year will be characterized by "credit and zero-bound interest rate risk" and less incentives for lenders to extend credit.

Gross, who manages PIMCO's $244 billion Total Return bond fund, said the financial markets this year will continue to delever but sees a gloomy future ahead.

"It's as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century," Gross said in an investment letter released on PIMCO's website on Wednesday. "Welcome to 2012."

Last year was a humbling one for the PIMCO chief, as a bad bet against U.S. Treasuries led to an unusual "mea culpa" letter to investors. Treasuries were the best-performing bond class in 2011.

His fund saw redemptions of $5 billion in 2011, one of the first times investors pulled money from Gross's portfolio.

In the letter, Gross said "paranormal" was a more fitting description for the current economic environment than the phrase "New Normal," coined several years ago by his chief co-investment officer Mohamed El-Erian to describe a world of low-growth and high unemployment. This year, Gross argues that process will get messier.

"We are left with zero-bound yields and creditors that trust no one and very few countries. The financial markets are slowly imploding - delevering - because there's too much paper and too little trust," he said.

Those factors may lead financial markets to experience "the fat-left-tailed possibility of unforeseen - delevering - or the fat-right-tailed possibility of central bank inflationary expansion."

Gross told investors they should lower their return expectations for 2012, predicting 2 percent to 5 percent returns on investments in stocks, bonds and commodities.

(Reporting By Katya Wachtel; editing by Jeffrey Benkoe)

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Comments (10)
diluded0000 wrote:
Bill, are you reading this? I have money in your PIMCO bond fund, and seriously hope you can get your head around better predictive data than “the earth now has two moons”. That just sounds delusional.

Jan 04, 2012 1:56pm EST  --  Report as abuse
USAPragmatist wrote:
@Diluded, I would take your money out if I were you.

Jan 04, 2012 2:11pm EST  --  Report as abuse
MhD wrote:
I too have money with your PIMCO bond fund and have to agree with @diluded0000. Changing times indeed, but the expectation is that you devise a better strategy than ‘hold on to your hat and don’t expect much’.

Jan 04, 2012 2:30pm EST  --  Report as abuse
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