Thursday, 22 May 2008

PIMCO: Lies, Damn Lies and Inflation

"The U.S. government has been understating inflation, which has led investors to misprice stocks, bonds and real estate, noted bond- fund manager Bill Gross said Thursday.

The real problem is not that the government publishes dubious numbers but that investors believe them and make decisions based upon them, he said.

"A readjustment of investor mentality in the valuation of all three of these investment categories -- bonds, stocks, and real estate -- would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate," Gross wrote in his monthly letter to clients of Pacific Investment Management Co., the largest fixed-income money managers in the world.

Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. "Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?" Gross wondered.

Investors are finally waking up to the notion that "U.S. inflation should be and in fact is closer to worldwide levels than previously thought," he said.

"If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation," Gross wrote.

I suppose the same can be applied to Europe and to a greater extent Finland. Those statisticians seem in their laboratory, to have studied mice instead of human, and seems not to have put a foot inside the real world!

What if they really made a mistake and that core inflation is really much higher as they tell us? then you will have a sudden rise of long term interest rates...thus helping banks to repair ther balance sheet??...

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