Pimco's Gross Predicts 'Paranormal' Market in 2012

Bill Gross, the manager of the world's largest bond fund, is sounding like a Wall Street ghost-hunter in his latest investment letter.

Source: pimco.com

Calling the current market environment "paranormal," Gross said this year will be characterized by "credit and zero-bound interest rate risk" and fewer incentives for lenders to extend credit.

Gross, who manages Pimco's $244 billion Total Return bond fund, said the financial markets this year will continue to delever, but sees a gloomy future ahead.

"It's as if the Earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half-century," Gross said in an investment letter released on Pimco's website on Wednesday. "Welcome to 2012."

Last year was a humbling one for the Pimco founder, as a bad bet against US Treasurys led to an unusual "mea culpa" letter to investors. Treasurys were the best-performing bond class in 2011.

His fund saw redemptions of $5 billion in 2011, one of the first times investors pulled money from Gross's portfolio.

In the letter, Gross said "paranormal" was a more fitting description for the current economic environment than the phrase "New Normal," coined several years ago by his co-chief investment officer Mohamed El-Erian, to describe a world of low growth and high unemployment. This year, Gross argues that that process will get messier.

"We are left with zero-bound yields and creditors that trust no one and very few countries. The financial markets are slowly imploding — delevering — because there's too much paper and too little trust," he said.

Those factors may lead financial markets to experience "the fat-left-tailed possibility of unforeseen — delevering — or the fat-right-tailed possibility of central bank inflationary expansion."

Gross told investors they should lower their return expectations for 2012, predicting 2 percent to 5 percent returns on investments in stocks, bonds and commodities.