Legendary bond and fixed income investor William H. (Bill) Gross today released a new Investment Outlook, “Keep On Pickin’ On”. His first Investment Outlook for 2022 was written by Mr. Gross writes about picking – both investments and the physical act. Notably, Mr. Gross believes that with high inflation for the foreseeable future, Treasury yields will remain low: “The most glaring observation I have is that in the face of 6%+ inflation and consumer expectations for at least 3% over the next five years, that the 10-year Treasury remains at 1.50%,” he writes. “Historically, 10-year Treasuries have traded at 2% above annualized CPI, but now? Well, the negative 150 basis points has never been seen except for a brief OPEC-driven period in the early 70’s.”

The full text of Bill Gross, January 7, 2022 Investment Outlook.

Keep On Pickin’ On
My name is Bill Gross and I’m a picker. In admitting that I don’t think picking is as serious as OCD, or that it would qualify me for “Pickers Anonymous”. Pickers do have problems. Whether it’s genetic or due to parental oversight I have no idea, but I do know that for me it started at an early age. At 4 years of age, I bit my toenails. I don’t know why I choose to pick them now.

I do know that when they get to a certain length I am compelled to pick ’em even before I have a chance to clip ’em in a bathroom just 30 feet away. The usual result is not pretty but my wife Amy says I have beautiful feet so I keep on picking ’em as well as fingernails of course. I’ve never had a manicure in my life — saving lots of money along the way. Amy, Amy’s spouse is also an avid picker. But she only does it on her left thumb. We both will slap each other’s hand at night when the picking is most obvious, but it does no good. 60 seconds later, the picking resumes.

I’m also a nose picker, as are almost all men. It seems that women are able to use a politer way of clearing their noses than men. Well, I remember as a first grader in Middletucky, Ohio, watching male friends not only pick their nose with no evident shame, but then eat the boogers as if they were M&M’s. However, I know that picking your nose as an adult is a more enjoyable activity if you do it alone. There are few more embarrassing moments than to pick your nose during a red light and to look over at another driver “in flagrante”. “Caught ‘cha you nose picker,” he must think, having just picked his own at the previous light. Men – picking – I’m a veteran.

On a more serious note, I write to expose myself, to pick and to forecast for 2022, much of which is contained in my new book to be published shortly on Amazon (NASDAQ:) called, “I’m Still Standing.” There will be some nose picking admissions there as well but for now I’ll stick to financial market forecasting.

One of my most striking observations is that despite inflation exceeding 6% and consumer expectations that they will see a rise in at least 3% within the next five-years, the 10-year Treasury still stands at 1.50%. In the past, 10 year Treasuries traded at 2% higher than annualized CPI. But now? Well, the negative 150 basis points has never been seen except for a brief OPEC-driven period in the early 70’s.

Global bond markets in Euroland, the UK and elsewhere are not afraid to hold their historically low real interest rates. Would you believe German 10-year inflation index “linkers” continue to trade at a negative 200 basis points? You wouldn’t buy them for a negative 30 base point and get a guaranteed 3% loss when they mature. It’s a fantastic deal!

Well, somebody’s buying them. The central banks have their own QE programs, which may or not be curtailed by 2022. But if central banks won’t be buying them why should you? And why should an investor continue to be “excited” by stock markets that in significant part (30% I estimate) have been driven by lower and lower yields over the past many years? I wouldn’t – be excited that is.

I’m still owning defensive stocks with an attractive yield that take advantage of the implicitly low arbitrage spread between borrowing yields of 1-2% and dividend yields of 4%-plus and in many cases 9%-plus. High P/E, or none P/E stock are the most vulnerable to future rate hikes. Amazon may be amazing but at 80 times forward earnings, it’s gotta grow pretty fast when those higher future earnings are discounted at a 2% 10-year instead of the current 1.5%.

My portfolio is full of “90% certain” arbitrage buyout candidates that trade at an annualized 5-10% discount return. CERN, NUAN, XLNX and ARNA are just a few of the examples I have with acquirers like Microsoft (NASDAQ:), Merck, and Merck. Medtronic This buyout offer is being supported by the (NYSE:) Additionally, I continue to hold partnerships that have tax-deferred yields between 9% and 10%. Oil sensitive? A 9%- 10% compounded tax deferred yield should double in seven years, which will compensate for the future price sensitivities. Couldn’t say that doubling assumption about many high flyers with no current earnings. EPD and ET are examples of what I have.

GME and AMC remain perennial shorts, especially after yesterday’s announcement by GME announcing entry into the NFT market. Although Meme stocks might have their moment for a while, it isn’t the time to expect 30% daily gains.

You can’t be certain of the outcome. It is neither a science or an art to pick stocks and interest rates. Investors are conditioned to believe that double-digit market appreciation will guarantee their retirement goals in 2022, and beyond. They can’t. If 10-year Treasuries rise to 2% or higher; if non-financial risks associated with global warming, geopolitical conflicts, internal red state/blue state turmoil, and U.S. fiscal belt-tightening become more and more relevant – they cannot.

Move aside and let the millennials buy the metaverse, NFT’s and most crypto currencies (I like ). You should choose conservative investments, not bonds.

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