Bill Gross, the legendary bond investor and head of PIMCO, offers his opinion in the December issue of Investment Outlook. In short, he recommends two things:
#1 Invest in reflatables.
Bill is thinking inflation is inevitable in a few years and thus investors should "place the majority of their chips on the inflationary as opposed to the deflationary side of the table." He further recommends the following asset categories:
1) Commodities and tangible assets
2) Foreign currencies
3) Real estate
5) Global bonds and equities denominated in non-dollar currencies
#2 Invest in securities that borrow at 1% instead of lend at it.
As Fed seemingly adament to keep short-term rates low, it will ultimately foster inflation and thus bond will lose value. The way to profit from it is to make use of the steep positive yield curve by borrowing at the negative short-term rates and invest at higher yields with longer maturity (he mentioned the "6-12 month portion of the yield curve"). Bill also mentioned that it may not be feasible for individual investor to copy this strategy.
At the end of the article Bill also provided some insight on real estate. He believes "a home can be an attractive investment in a reflationary environment" and recommends people to avoid 30-year fixed rate mortgage. He recommends shorter period or ARMs.
In conclusion Bill wrote "[w]hen too much debt infects the heart of capitalism you either default or inflate it away and the latter is by far the easiest (although not necessarily the wisest) policy. Foreign governments and central banks may be willing buyers of bonds in order to support their own economies and the Fed may be a monopolistic mispricer of credit at negative short-term yields, but that is no reason for the knowledgeable investor to play the same game. Investing in “reflatables” and borrowing with conservatism at the short rate are the two best ways to prosper in such an environment."