News & Analysis
Bill Gross Sees Gloom and Doom, But There's Something He's Not Saying
Bond King Bill Gross: We're Witnessing the Death of Equities ... The bond king says stocks are dead. Bill Gross, Pimco's co-founder and co-chief investment officer, says stock investors should think again about the age-old "buy-and-hold" investing mantra. He says consistent, annual returns are a thing of the past. "The cult of equity is dying," Bill Gross wrote in his August Investment Outlook. "Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors' impressions of 'stocks for the long run' or any run have mellowed as well." – WSJ
Dominant Social Theme: Everything is really bad. We need a global currency.
Free-Market Analysis: Wow. Sounds like a historical kind of statement until you realize it is Bill Gross who is responsible for marketing all sorts of bond funds for giant PIMCO, including funds that purchase inflation-adjusted instruments like TIPS.
Gross is just talking up his book, but it's still an eye-opening declaration. The comments are in a sense heretical within an industry that rarely makes such definitive statements.
If Gross had said that stocks are not a promising purchase at the moment, or that the financial cycles indicated a need for fixed income instruments, this would have been a recognizable position.
But Gross went well beyond that. He basically indicated that an entire sector, one that Wall Street has flogged for 50-some years, is finished. It's a win-win for both the writer, who gets to write an article with a blaring headline, and for Gross, who gets to sound irreverent and tough-minded about his business.
Here's some more from the article:
Gross points out stocks have averaged a 6.6% annual gain on an inflation-adjusted basis since 1912. But he labels that rate of return as an "historical freak" that isn't likely to be duplicated anytime soon, due to slowing economic growth around the globe ...
Gross wonders how stocks can keep appreciating at a 6.6% annual rate in this "new normal" economy, in which GDP growth remains stubbornly low. U.S. second-quarter GDP, reported on Friday, grew at a meager 1.5% rate. That growth rate is well below historical standards, and is partly why the unemployment rate remains stuck above 8%.
"The legitimate question that market analysts, government forecasters and pension consultants should answer is how [a] 6.6% real return can possibly be duplicated in the future given today's initial conditions which historically have never been more favorable for corporate profits," Gross says. He says it cannot, "absent a productivity miracle that resembles Apple's wizardry."
In addition to being pessimistic on stocks, Gross is also down on bonds. "What you see is what you get more often than not in the bond market, so momentum-following investors are bound to be disappointed if they look to the bond market's past 30-year history for future salvation, instead of mere survival at the current level of interest rates," Gross says.
With lower expected returns for stocks and bonds, the average American is the big loser in this new investing environment.
In the article, cleverly, Gross doesn't posit any solution to his pessimism. But as we've already pointed out, Gross is a bond-fund drummer and it is obvious, if one keeps this in mind, that he is setting up his next sale.
With equities out of play in a high inflation/high rate environment, and individual bonds as well, Gross is hoping his bond funds might start to look better and better. That's because large bond funds can purchase higher-paying instruments as they are issued out into the market.
Bond funds can in a sense average up, shedding losers as they pick up higher-yielding securities. Bond-holders of bonds already issued into the market may suffer, but bond fund floggers like Gross should benefit from moderately higher inflation.
Gross – as canny as he is – is probably just laying the groundwork for a concerted sales effort to take place over time. For now, Gross is willing to make blunt statements that boost his credibility as an honest commentator.
The article further contributes to Gross's credibility by purveying his comments that central banking pump priming will not prove effective this time around.
Neither a QE3 nor ECB President Mario Draghi's intention to buy government debt directly will have the desired effect, he states.
"Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades," Gross says.
"Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other Euroland countries may dominate the timescape ... The cult of equity may be dying, but the cult of inflation may only have just begun."
Gross is in a sense purveying what we would call a dominant social theme of the power elite, that the economic situation is grim and getting grimmer. But Gross is also priming his own sales argument, and here he is not being so forthcoming.
Gross knows that as price inflation heats up, central banks will be placed in a very bad situation. Rates will have to be raised quite high, and bond funds may not be the ideal vehicle to deal with what is probably going to take place. It will likely be a lot worse than the 1970s.
Conclusion: Gross has used his prestige to make some telling and truthful points about investment instruments, especially equity. But he has not told the whole story by any means...