NEW YORK (CNN/Money) -
Bill Gross has added his voice to the growing throng of market observers who see inflation on the rise.
In his latest monthly missive, the bond manager, who oversees $350 billion in assets for Pimco, said the stage has been set for higher prices and recommended that investors act accordingly.
A fed funds rate at 1 percent, massive current account and budget deficits, high levels of household debt, lower tax rates, a falling dollar, rising commodity prices, and costly Medicare reform are all pointing the way to a revival of inflation. But the Fed, intent on not letting the economy falter, does not appear eager to put the screws on.
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"'Damn inflation, full speed ahead,' Greenspan has said in both action and word. I think an investor should believe him and invest accordingly," wrote Gross.
Inflation won't raise its head right away, Gross reckons, because there's still too much slack in both production capacity and the labor market for that happen.
"But 1 percent short rates, a 10 percent plus annual decline in the dollar, hundreds of billions of guns and butter, and Hummer and Humvee deficits are powerful medicine. Investors need only IMAGINE the inflationary impact of such events a few years hence to place the majority of their chips on the inflationary as opposed to the deflationary side of the table," Gross wrote.
Given that markets try to anticipate, Gross thinks that, for investors, the time to move is now. He continues to recommend, as he has for months, moving into Treasury inflation-protected securities, or TIPS, which offer a fixed rate of return over inflation. Gross has indicated that Pimco has been a steady buyer of TIPS.
Gross also recommends buying foreign currencies along with overseas bonds and equities, all of which would see positive translation effects on a falling dollar. Yields on many overseas bonds, Gross pointed out, are higher, offering better rates of return than their U.S. counterparts. Overseas stocks carry lower valuations than U.S. shares.
Real estate should fare well, because real assets maintain their value in an inflationary climate. By the same token, commodities (which benefit further from a declining dollar) should also do well.
Welcome to the chorus, Mr. Gross
Worries have been mounting that the Fed, in its battle against deflation, may have gone so far as to let the inflationary genie out of the bottle.
Commodity prices have been rising. Gold, a well-worn inflation indicator, recently tripped above $400 an ounce.
Oil is above $30 a barrel and looks like it will stay there -- in part because OPEC is worried over the rise in the dollar. And scrap steel, one of Greenspan's favorite indicators, has been on the rise. Meanwhile, the nation's key read on inflation, the consumer price index, may be understating how much average consumer expenditures have actually risen.
The potential for inflation has some investors thinking the Fed won't be able to hold off on hiking rates for long, and, in fact, it looks like the U.S. central bank won't be the only one tightening the screws over the next year.
Although many economists think a Fed hike won't come too soon, U.S. companies, not taking any chances, are raising money in the bond market now in anticipation of higher rates later.
Higher rates pose risks for the stock market. Some industries, like the automobile sector, could get hurt badly. Homebuilders, on the other hand, may weather the storm more easily than investors think.
Stocks in general may do well to begin with, at least, because money will be flowing out of the bond market.