The Little Book of the Shrinking Dollar: What You Can Do to Protect Your Money Now

Bond King Confessional

Bill Gross head of PIMCO—otherwise known as Pacific Investment Management—runs the world’s largest bond fund.

In February 2011, he eliminated all Treasuries from the portfolio, only to miss the biggest Treasury rally since 2008. While he issued a mea culpa and added Treasuries back into the portfolio to the tune of 30 percent, he’s making some pretty exciting claims about the new normal going paranormal.

He calls the world we’re now in bimodal, and the things happening in Euroland are pure Ponzi scheme.

Italian banks fo°r instance are using LTRO (long-term refinancing operation) to issue state-guaranteed paper to get funds from the European Central Bank. Then they take the proceeds and put it into their own Italian bonds.

So Gross recommends only the cleanest dirty-shirt sovereign debts. What that means is that you want the cleanest balance sheets you can find. Go out as long as you can, since the yields on anything less than five years are practically nil. Going out long toward the 10-year range should be a better guard against that scourge: inflation.

Now comes the big catch: When the return on money becomes close to zero on the face of things—but negative in real terms—normal market functions may break down.

Right now we’re seeing tens of thousands of layoffs in the banking sector. Banks have thrown branch expansion into reverse. Why? Because at near-zero levels they’re still not making a good profit!

It’s the result of life at the zero bound. Banks no ...