Gross says economy, deficit, fiscal cliff to dominate with Romney or Obama win

Bond manager expects 4%-5% stock returns, 2%-3% bond returns ahead

Oct 25, 2012 @ 2:51 pm (Updated 2:59 pm) EST

stocks, bonds, bill gross, fiscal cliff

Pacific Investment Management Co.'s Bill Gross said structural headwinds will dominate the economic debate no matter who wins the U.S. presidential election.

“The structural headwinds in terms of economic growth, the budget deficit, the fiscal cliff” will dominate political discourse, Gross, who runs the world's biggest bond fund, said in an interview on Bloomberg Television's “In the Loop” with Betty Liu. “It means lower growth. The structural issues are really related to an excessive amount of debt, an excessive amount of leverage that's been built up over 10 or 20 years.”

Markets suggest that a victory by Mitt Romney will be better for equities because taxes on dividends and capital gains won't be going up as much as under a second Barack Obama administration, Gross said. Marketable U.S. government debt has grown to $10.75 trillion from $4.3 trillion in 2006.

Stocks will likely gain about 4 percent to 5 percent annually going forward, while bonds may return about 2 percent to 3 percent, he said. The Standard & Poor's 500 Index of stocks has appreciated 15 percent this year. Treasuries have risen 1.66 percent during that span, according to Bank of America Merrill Lynch index data.

“Investors, as they grow older, are more inclined to purchase bonds instead of stocks,” Gross said.

Fund Holdings

Gross reduced his holdings of Treasuries for a third consecutive month in September to the lowest level since last October on concern record U.S. debt will lead to inflation.

The proportion of U.S. government and Treasury debt in the $278 billion Total Return Fund (PTTRX) dropped to 20 percent of assets from 21 percent in August, according to latest available data on the Newport Beach, California-based company's website. Mortgages remained his largest holding at 49 percent.

The fund gained 12 percent over the past year, beating 96 percent of rival funds, according to data compiled by Bloomberg. It has returned 8.5 percent over five years, topping 96 percent of comparable funds.

Republican nominee Romney has said he disagrees with the Federal Reserve's unprecedented measures to stimulate the economy and would replace Chairmen Ben S. Bernanke. Suggestions that Republicans would pursue “tight money” policies is likely little more than political rhetoric, Gross said.

“Republican have never really been a tight-money party,” he said. “To think that Republicans would be favoring tight money, I think is an election-year type of proposition.”

Quantitative Easing

Democrat President Jimmy Carter appointed Paul Volcker, known for taming inflation in the 1980s, as Fed chairman, while Republican President Richard Nixon abandoned the gold standard in the 1970s, Gross noted. Bernanke was appointed by Republican President George W. Bush.

The Fed has sought to drive down unemployment by keeping its target rate for overnight loans between banks between zero and 0.25 percent since December 2008 and purchasing $2.3 trillion of securities in two rounds of a monetary policy known as quantitative easing.

Frustrated by the slow pace of the recovery, the central bank announced Sept. 13 that it would likely keep rates at a record low and also said it would inject more money into the economy by purchasing $40 billion of mortgage bonds per month in a third round of QE.

--Bloomberg news--