Bill Gross is the world's greatest bond investor. But I'm not betting on his latest market call… And you shouldn't either.
Gross is to the bond market what Warren Buffett is to the stock market. Just like Buffett, Gross has managed to trounce his peers for decades even as his assets under management have grown to an incredible size. Gross' firm PIMCO now manages over $2 trillion in assets, making it the world's largest bond investor.
If you had invested $10,000 in Gross' bond fund at inception in 1987, you would have nearly $80,000 today. Remember, these incredible gains were in "boring" bonds – not in stocks.
When the Bond King speaks, I listen. It's hard to argue with his track record. But in this case, I will argue
that personally, I'm not betting against bonds… at least not yet. Here's why…
We're in a unique moment in history – we're seeing a "mini bubble" in central bank powers.
In short, investors believe central bankers – like Ben Bernanke from the U.S. Federal Reserve – have incredible powers to manipulate markets… Investors believe that central bankers can make bond prices go up or down at will.
As long as investors continue to believe that, it becomes true – a self-fulfilling prophecy. The thing is, it's not true… Investors as a whole can move dramatically more money than any government or central bank can. And someday, they will realize that. They'll shift their thinking and that is when interest rates will finally soar.
But I think that day could be a long way away. Central banks can fool people for a very long time, keeping interest rates very low for a very long time and causing crazy booms in stocks and real estate.
Japan is an interesting example of what I mean.
In Japan, interest rates on government bonds are below 1% and stock prices are soaring. Yet relative to the size of its economy, Japan has much more government debt than the U.S. does.
The Japanese government and Japan's central bank have successfully fooled the people of Japan. The bond market has not crashed and the stock market has soared. Bill Gross may be right. The 30-year bull market in bonds may have ended on April 29. He should know – he knows bonds better than anyone on the planet. But I'm not putting any chips on the idea of a bond-market bust. Just to be clear, I'm not betting in favor of bonds either.
Warren Buffett's company Berkshire Hathaway sold $1 billion worth of new bonds last week at its lowest yields ever. Buffett is 'short' the bond market.
Buffett is no dummy about money. He borrowed money for 30 years, at a record-low rate for Berkshire. He's borrowing for the long run because he knows that rates this low likely won't last for 30 years. "Anybody who's borrowing money now should borrow out for a long period of time," Buffett said on Bloomberg News.
By borrowing for 30 years, you are locking in a low rate. If inflation shows its head any time in the next 30 years, you could come out way ahead. Interest rates are so low today, Buffett actually said he feels sorry for bond investors now.
During Saturday's Berkshire Hathaway annual meeting in Omaha, Nebraska, Buffett said he felt sorry for people holding on to fixed-dollar investments. He said holding cash and Treasurys has been 'brutal.'
Buffett and I agree that one of the very best inflation hedges is blue-chip stocks. The Dow Jones index is full of good values in classic names right now. The exchange-traded fund for the Dow (DIA) is trading at a forward price-to-earnings ratio of 13.6. That is cheap!
Instead of bonds, my chips are on the idea that central banks will be able to fool investors for years and keep interest rates low. In that situation, the right trade is to be in stocks and real estate.