Bill Gross Says U.S. Understates Inflation
Commercial Finance and Lending May 22nd, 2008The manager of the world’s largest bond fond, the Pimco Total Return Fund, says that the methodology the United States uses for calculating its inflation rates results in an understatement by roughly 100 basis points. This results in real GDP growth and real bond yields to be off by a similar amount.
If the calculation was done in conformance with how much of the rest of the world calculates its inflation rate, then not only would bond investors seek higher returns, but property investors would also require a higher return or cap rate when looking at real property investments. A 100 basis point difference in the cap rate represents a significant difference in price and that is where the risk would lie for property owners.
His concern or comments seem to lead back to the diminishing pricing power the U.S. has in the global global market; if investors beging to require higher returns to offset inflation, then there will be few options but to comply.
As always, there is a catch to the theory. Bill Gross is a smart guy and all, but to assume that there has been a mispricing of debt in the markets for decades is, at best, a stretch.
Whether Bill Gross is right or not though, I’m sure anybody who has bought milk or pumped gas lately would argue that inflation is in fact running higher than purported.
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May 22nd, 2008 at 11:11 pm
[...] [Technorati] Tag results for finance wrote an interesting post today onHere’s a quick excerptThe manager of the world’s largest bond fond, the Pimco Total Return Fund, says that the methodology the United States uses for calculating its inflation rates results in an understatement by roughly 100 basis points. This results in real GDP growth and real bond yields to be off by a similar amount. If the calculation was […] [...]