(Citywire) - Like all investors, Bill Gross is worried about inflation. But it’s far from his only macro concern as we head into 2022.
In an exclusive interview with Citywire, the Pimco founder and former CIO, shared his biggest worries for the coming year and some details about his own portfolio positioning, which – yes – includes an update on those meme stocks that bagged him a cool $10m earlier this year.
Top of his list of worries going into next year is the concept of ‘fiscal drag,’ the effect of the Federal Reserve removing the financial stimulus it unleashed on markets in response to the outbreak of Covid-19.
Gross believe that this is not a risk that has been given enough attention by markets or the media.
‘We will see the stimulation turn into a drag and we will need another injection over the next 12 months,’ he told Citywire. ‘It’s funny, because it is definitely a calculation that most people don’t understand; I haven’t seen a single article on the idea of fiscal drag.’
‘We have had more and more money come in, but what happens six to 12 months down the road? It will gradually turn into a drag as the trillions of dollars of support is reduced down to zero.’
The topic of inflation could not have garnered more headlines, but Gross believes it should be top of mind for investors.
‘We have seen the CPI move to a relatively high level compared to the last five to 10 years and that will have knock-on effects for the supply-side linkage,’ he said.
He said he had witnessed the current bottlenecks in supply chains during a mixer near Catalina.
‘I was at a networking event two or three weeks ago and you could see just offshore towards Catalina – an island off the coast of California – there were 20 or 30 tankers just lined up. It was a pretty dramatic visual of what was going on and the fact that these ships simply couldn’t get in. They were anchored there with no place to go,’ he said.
Gross added that inflation could lead to interest rates rising to 3% or 4% in 2022, a move that would then hit company earnings.
‘For many companies, they can pass on the cost of that inflation but in some cases they can’t, which will narrow margins,’ he said.
Popcorn plays
So what has Gross being doing with own portfolio over 2021 and how is it positioned going into next year?
In February, he told Citywire how he had netted $10m from betting on the video game store GameStop, which had become a meme stock due to its following among readers of the Reddit forum r/wallstreetbets.
He has also invested in cinema chain AMC, which is also popular with retail investors despite questionable fundamentals, and recently added to both positions.
‘I also held onto GameStop and AMC for a long, long time and I even added recently on volatility. We saw some big upside there,’ he said.
‘AMC is effectively a popcorn company, which is almost half of its revenues, and box office numbers have risen. They have even talked about a dedicated popcorn business spinoff that can be bought with cryptocurrency, but that’s their call.’
Away from these meme stocks, Gross said he has invested in natural gas pipeline partnerships.
‘We were able to allocate to some admittedly decent companies - some BBs and in some cases BBB, but nonetheless we have achieved an annual 10% to 11% - which benefited both from the correlation to oil prices and the tax-deferred nature of the derivatives,’ he said.
Overall, Gross said he has largely focused on high-yielding stocks that have a defensive edge to them. He named tobacco as a profitable yet unfashionable market – which he previously championed in market outlooks – while also highlighting real estate investment trusts and jewelry as areas he likes.
These investments are mainly made through his personal accounts and the allocations of his charitable foundation.
Gross spoke to Citywire at the start of December when the omicron variant of Covid-19 was not as widespread as it is today, but even then the one-time ‘bond king’ was wary that equity markets had little room left to run.
‘I sense a sort of market top, which is through both cyclical and growth stocks, as it seems they are a little bit tired.’
By Chris Sloley
