The Madness of Bill Gross

For a guy who is a professional investor, Bill Gross doesn't seem to believe much in the power or efficacy of markets. In his always entertaining monthly note to clients, the Pimco bond manager—probably the world's most influential—lays out an elaborate theory about how U.S. government statistics understate inflation by at least 1 percent a year and how that mismeasurement has fooled investors for decades. (For Gross, the troubles all go back to—of course—Richard Nixon!) The implications, according to Gross:

If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation.... A readjustment of investor mentality in the valuation of all three of these investment categories—bonds, stocks, and real estate—would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% or more in U.S. stocks and commercial real estate.

Me: I have blogged numerous times about why I think the government has been overstating inflation for decades, not understating it. (The Gross Conspiracy does play into its author's Democratic leanings. If he's right, then the past quarter century has been one of the worst since the Great Depression.) But I am more interested in Gross's idea that Mr. Market can be fooled for decades about such a crucial economic indicator. Does he really think investors have been duped since the Nixon era about what their real rate of return has been? Literally breathtaking...