Bill Gross is Making Waves About Stocks and Bonds Demise

By on July 31, 2012

The long-time money manager hailed as the “King of Bonds,” PIMCO’s Bill Gross has made news with his latest “Investment Outlook” letter to investors. Gross proclaims “the cult of equity is dying.”

Citing the historical real returns of 6.6% that stocks achieved since 1912, Gross writes that a duplication of these returns will be difficult to replicate. In fact, Gross points out that over the past 30 years, “long-term Treasury bonds have been the higher returning and obviously ‘safer’ investment than a diversified portfolio of equities.”

The argument Gross makes about stock’s future returns being lower is that in the past they have resembled a Ponzi scheme, since stocks have gone up at a much faster rate than the overall economy (GDP). Gross refers to Jeremy Siegel’s views in the book “Stocks for the Long Run,” reasoning that it should perhaps be called “Stocks for the really long run.”

Gross makes a compelling case that wages and salaries have been declining as a percentage of GDP, which has been a boon for corporate profits and unlikely to provide a commensurate boost in the future. The only way profits can continue to surge is through “a productivity miracle that resembles Apple’s wizardry,” as Gross puts it.

If stocks don’t look as attractive in the past, investors won’t find their future returns in the bond market either, Gross explains. Where, as Gross points out, the Barclay’s U.S. Aggregate Bond Index – a composite of investment grade bonds and mortgages – today yields only 1.8% with an average maturity of 6–7 years, by his estimation, it will be problematic for investors to achieve normal returns from bonds.

Gross concludes his letter (which includes a few nice charts) with a discussion of the challenges policymakers face as they attempt to create economic growth. He believes there will be efforts made to re-ignite inflation in order to reflate away liabilities, which in the end, doesn’t create any real wealth or just distribution of pain and benefits.

Although Gross is somewhat of a legend in financial circles, he hasn’t always been right. He erred in calling a top in Treasury bonds last year (link).

Source: PIMCO August 2012 Investment Outlook

One Comment

  1. Eliot

    August 8, 2012 at 1:19 pm

    Gross needs to re-check his numbers per Blodgett. Seems he forgot something.

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