The Grand Scheme of Things

by Dr. Steve Sjuggerud

The Grand Scheme of Things

By Dr. Steve Sjuggerud, President, Investment U

Thursday, January 9, 2003: Issue #203

The Bond King has spoken. Smart investors will position themselves accordingly

Managing over a quarter Trillion dollars, Bill Gross may be the most influential investor on the planet. The money he manages is bond money, not stock money. By virtue of averaging double-digit annual returns in bonds for decades, Gross has become known as "The Bond King." It's obvious he's gotten the "big picture" right for a long time.

Earlier this week, the Bond King laid out his views on the big picture as it stands right now. He called this commentary The Grand Scheme of Things, and it's available in full at In short, Gross' Grand Scheme of Things says that interest rates will rise, and that it'll be tough to make money in bonds - particularly U.S. government bonds.

If he's right, it will certainly affect our investments. So today, let's take a look at a few quotes from his Grand Scheme of Things commentary and see what lies ahead

A Few Words From The Bond King

"The economic world's disparate interests are currently aligned because it has a common enemy: deflation Japan, Europe and the U.S. may be employing rather similar strategies at different times but they do so independently in order to defend their own economic interests"

"Together, these disparate steps represent a grand scheme to defeat the deflationary Dragon now represented by China but created by globalization, high debt, and ongoing demographics, tilted against consumption."

So what will the governments do? Everything possible to prevent deflation and that means creating inflation to offset it

"Every weapon in the global arsenal will be fired [by governments] to prevent declining prices

"The Grand Scheme of Things points towards "reflation" over the next several years and higher [interest] rates."

Sounds like complicated stuff, but it's just The Bond King trying to figure out the world here.

What he's really saying is that governments see falling prices (deflation) as a bad thing, upsetting the natural order of global economics. Governments see falling prices as such a bad thing, in fact, that they will do whatever it takes to prevent falling prices.

The ultimate result of these government efforts will be higher interest rates, Gross says.

What To Do If The Bond King Is Right

If Gross is right, and interest rates rise, you don't want to be overloaded in bonds. This is because when interest rates rise bond prices fall.

Of course, if interest rates are rising, you don't want to be overloaded with stocks either, as history shows us that stocks do poorly in rising interest rate environments.

So for safe investments, you're stuck with short-term investments until the interest rate rise is over.

The safest way to guarantee you'll make a decent return on your safe money regardless of what happens (inflation or deflation) and to guarantee that you'll have money to invest at a higher rate when (if) they get here is through the I-Series savings bonds I talked about in Investment U E-Letter #200 The Only Truly Guaranteed Investment.

Hey, 4.08% on I-Series Savings Bonds now doesn't sound that exciting. But at least it's a positive return A small positive return may just beat stocks and bonds in coming years.

If you're willing to take some risk, the best place you can be is in high-yield corporate bonds, I believe. Sounds counter-intuitive, I know. But high-yield bonds have done exactly the opposite of what bonds have done over the last five years (high-yield bonds have lost money while you've made money in every other type of bond). In fact, the last time we had recession-like conditions (1990), investors in high-yield bonds doubled their money over the next three years.

And yes, I do believe that the extraordinarily high interest rates on high-yield bonds can fall while interest rates on government bonds rise.

I'm sorry to be the one to report that The Grand Scheme of Things, according to The Bond King, is not good news. But it's better to at least be aware of the thinking of the people who have succeeded for decades, than to go on your gut feeling. What often "feels" right is actually the exact wrong thing to do.

Good investing,


Today's IU Crib Sheet

  • Higher interest rates. If The Bond King's Grand Scheme of Things is right, that's what we can expect. And if true, bonds and stocks generally both do poorly under rising interest rates. Time to consider other alternatives. The safest play might be I- Series savings bonds. You can learn more about them by clicking on this link. (

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