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PIMCO's Gross warns investors of looming inflation

Bill Gross looks on while playing golf at Pebble Golf Links before the start of the PGA Tour Pebble Beach National Pro-Am in Pebble Beach, C
Bill Gross looks on while playing golf at Pebble Golf Links before the start of the PGA Tour Pebble Beach National Pro-Am in Pebble Beach, C

By Sam Forgione

NEW YORK (Reuters) - Bill Gross, founder and co-chief investment officer of bond giant PIMCO, wrote in his first letter to investors this year that money printing by central banks will lead to a destructive bout of inflation.

Gross, who has criticized the Federal Reserve's purchases of Treasuries and agency mortgage bonds in past letters, wrote in his January investment outlook entitled "Money for Nothin' Writing Checks For Free" that the purchases will lead to a devaluation of currencies and gradually weaker investment returns.

"The future price tag of printing six trillion dollars' worth of checks comes in the form of inflation and devaluation of currencies either relative to each other, or to commodities in less limitless supply such as oil or gold," Gross wrote.

Gross, whose Pacific Investment Management Co. had $1.92 trillion in assets as of September 30, 2012, referred to a speech in 2002 by Federal Reserve Chairman Ben Bernanke in which Bernanke said that the United States could print an unlimited amount of dollars "at essentially no cost."

Gross countered in his letter that the cost will be inflation, which will weaken the returns on long-term bonds and eventually risk assets such as stocks and high-yield bonds, and also hurt businesses.

Gross likened inflation to "dragons" lurking within the "cave" of money-printing programs.

"Zero-bound interest rates, QE maneuvering, and ‘essentially costless' check writing destroy business models and stunt investment decisions which offer increasingly lower ROIs and ROEs," Gross wrote, referring to returns on investment and equity.

Gross' flagship PIMCO Total Return Fund earned a return of 10.36 percent in 2012, besting 88 percent of U.S. intermediate-term bond funds, according to Morningstar. The fund attracted $18 billion in new cash last year, bringing assets in the fund to $285 billion.

According to PIMCO's website, the flagship fund's biggest holdings are in mortgage and Treasury bonds, the securities which the Fed pledged to buy at $85 billion per month last December. The fund had 44 percent of its holdings in mortgage bonds and 23 percent of its holdings in Treasury securities as of the end of November 2012.

Gross recently wrote on PIMCO's twitter account on December 30 that stocks and bonds will return less than 5 percent in 2013.

(Reporting by Sam Forgione; Editing by Gunna Dickson, Gary Hill)

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