PIMCO’s Gross cautions against inflation and credit ‘ocean’

NEW YORK, Tue May 1, 2012 – Central bank policies will induce growth in developed countries this year but will create inflationary risks down the road, Bill Gross, founder and co-chief investment officer of PIMCO, said in his regular monthly letter to investors.

In the outlook, entitled “Tuesday Never Comes,” Gross highlighted how stimulative central bank policies have created an “ocean” of credit and said that the credit acceleration will produce economic growth this year for developed countries while also creating structural risks and rising inflation.

Specifically, commenting on the Federal Reserve, Gross said central bankers in the United States appear to believe that markets will buy future Treasuries at low yields “because the private market’s ‘stock’ of Treasuries has been depleted.”

Overall, Gross’ investment outlook was little changed from prior monthly investor letters or comments he has made on numerous recent television appearances.

He reiterated that investors should target bonds “in the five-year range” and stocks that pay dividends around three to four percent. He also recommends real assets and commodities.

“In 2008, central bankers never really knew how much debt was out there, and to be honest, they don’t know now,” Gross said.

He likened the efforts of the Fed to stimulate demand for Treasuries to wine drinkers, who have been sipping “rare vintages,” and now the cellar is almost empty. The Fed’s hope, Gross said, is that other “wine lovers will now be forced to restock their cellars to get a historically comfortable inventory.”

But the manager of the world’s largest bond fund, the PIMCO Total Return Fund, said he personally favors beer to wine.