Heading into 2012, PIMCO’s Bill Gross sees a world of “fatter tails” and “great risk” for global economies and financial markets.

“In the face of a delevering zero-bound interest rate world, investors must lower return expectations,” Gross writes in his latest commentary on PIMCO’s site. “2–5% for stocks, bonds and commodities are expected long term returns for global financial markets that have been pushed to the zero bound, a world where substantial real price appreciation is getting close to mathematically improbable. Adjust your expectations, prepare for bimodal outcomes. It is different this time and will continue to be for a number of years. … The financial markets and global economies are at great risk.”

Gross says financial markets “are slowly imploding — delevering — because there’s too much paper and too little trust.” While some segments of the global economy, like U.S. and European households, have delevered, “credit as a whole remains resilient or at least static because of a multitude of quantitative easings in the U.S., U.K., and Japan,” Gross says. He says a “tidal wave of QE” is coming out of Europe, in disguise. It is occurring through “LTRO (three-year long term refinancing operation), which in effect can and will be used by banks to support sovereign bond issuance.” Italian banks, for example, “are now issuing state guaranteed paper to obtain funds from the European Central Bank and then reinvesting the proceeds into Italian bonds, which is QE by any definition and near Ponzi by another.”

Gross sees on one hand a potential for major inflation because of the continued quantitative easing by central banks. But on the other hand, he says there is also a major danger of delevering. A big part of the reason, he says, are zero-bound interest rates. With yields so low, banks have trouble capitalizing on interest rate spreads, he says, and the combination of low yields and credit risk are a toxic mix that gives people little reason to give banks their money. And, he says, “When the financial system can no longer find outlets for the credit it creates, then it de-levers.”

Gross expects the Federal Reserve will discuss a sort of stealth quantitative easing program at its January meeting. If that doesn’t work, then he foresees a “QE3”. He thinks that with such divergent outcomes possible for the market — i.e., major delevering or major inflation — investors should hedge their bets until things become more clear. He gives his tips for bond and stock investing. Among them: Equity investors should “favor higher yielding companies in sectors with relatively stable cash flows: Electric utilities (yes they appear overbought), big pharma and multinationals should head your shopping list.”