NEWPORT BEACH, CA ( TheStreet) -- Investors should recognize the cost of America's trillion-dollar annual deficit and seek emerging market bonds and stocks and currency exposure other than the dollar, according to Bill Gross, managing director of the largest bond fund, Pimco.

In his latest investment outlook, the bond fund manager laments the lack of fiscal discipline among politicians and citizens as they continue to focus on current consumption. "The American hegemon knows no limits, it seems, when it comes to spending other people's money for their own consumption. Unlike Euroland or the United Kingdom, which appear to have gone on an extreme fiscal diet, the American answer to a bulging waistline is always 'mañana,'" he says.
Bill Gross
Bill Gross

Americans are "doomed to be mantis-like -- some of us eating, some of us being eaten, but none quite aware as to why we are at the dinner table in the first place," writes Gross. "Americans, unlike their developed world counterparts, have been eating their fill lately, and supping at a dinner table laden with pork and tax breaks for all. Unequivocally, we have been playing the part of the female mantis, munching on the theoretical heads of future generations, while paying no mind to the wretches that will eventually be called upon to pay the bills."

He says that investors are inclined to remain oblivious to the U.S deficits so long as the stock market moves ahead and job growth continues. But the costs, he warns are aplenty.

American wages will lag the rest of the world as policy stimulus focuses on current consumption as opposed to making the economy globally competitive. The dollar depreciation from burgeoning annual deficits will sap the purchasing power of U.S. consumers.

Long-term bondholders will "lose their heads", writes Gross, sticking to his mantis metaphor, as reflationary policies will lead to higher inflation. And as the trillion-dollar deficits add up, the debt could become unmanageable like it has in Greece and Ireland.

"An astute mantis-like investor must defer immediate gratification, make a 180˚ turn from that sexy looking female with those long green legs (long term bonds) and mend his ways fast!," he writes. He suggests focusing on "safe spreads" including emerging market corporate and sovereigns with higher initial real interest rates and wider spreads and choosing floating over fixed interest obligations.

For stock investors, Gross still advocates developing over developed countries. " If the U.S. must pay an eventual price for mindless deficit spending, then find countries and currencies that appear to have their act under control: Canada, Brazil, and yes even Mexico with its drug related violence. Mexico has a net national savings rate that exceeds our own by 20% of GDP."

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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