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.”

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