Bill Gross on the problem with bonds

If you take virtually any other long-term bull market in US history, one consistent thing is that bond yields rose along with stocks. As markets and the economy got hotter, so did inflation.

This time, inflation has stayed low. That's doubly good for stocks because 1) cheap corporate borrowing 2) it doesn't entice asset managers to buy bonds.

Bill Gross touches on that second theme in his Investment Outlook released today.

"Prior market tops (1987, 2000, 2007, etc.) allowed asset managers to partially 'insure' their risk assets by purchasing Treasuries that could appreciate in price as the Fed lowered policy rates. Today, that 'insurance' is limited with interest rates so low," he writes.

In the current system, he argues that chasing carry and taking an unacceptable level of risk is the only way to make money and that timing the exit is "critical for surviving in a new epoch." He also warns that we may be approaching a turning point.