Turns Out, Smart Money Does Know Things

On my 7DS blog, and on AOL, I wrote about the phenomenon of super-rich people paying cash for expensive ($5m plus) homes in California. And I wondered what it is that they knew that the rest of us didn’t. Here’s the post on 7DS, and here’s the one on AOL.

Well, turns out, the rich do know things we don’t. The largest bond fund in the world, PIMCO, is dumping U.S. government bonds:

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.

Apparently, Bill Gross thinks the interest rate is too low on Treasuries given the risks. Risks? Aren’t US Treasuries supposed to be “risk-free”?

Not when you’re running monthly deficits in excess of $220 billion and printing money to deal with it.

Turns out, what Gross is expecting is inflation. He is quoted in a March 4th radio interview on Bloomberg as follows:

Gains in so-called headline inflation matter more for the U.S. economy than Fed Chairman Ben S. Bernanke suggests and rising oil prices may cut U.S. gross domestic product by a quarter to half a percentage point, Gross said March 4 in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“Bernanke tends to think this doesn’t matter — at least in terms of headline versus the core — we do,” Gross said.

I speculated that the reason why the rich were paying cash was that they were expecting significant inflation. The super-rich are far more likely to have access to people like Bill Gross than you and I. Higher interest rates would be the result, and declining value of cash. Since mortgage rates (like all bonds) track US Treasuries, we all can expect higher rates at some point in the near-ish future to compensate for the effect of real inflation.

Turns out, now IS a great time to buy a house. But only with fixed rate loans or with cash. Failing that, gold, ammunition, canned food, and anti-biotics.



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