Gross: Bond Bull Is Ending

PIMCO “bond king” Bill Gross says that the bull market in bonds is ending. Gross tells Bloomberg that, without additional quantitative easing, he thinks treasury bonds will decline in yield as the economy slows, which will push credit spreads higher. He sees a 12-month period ahead where combined treasury, corporate, and high yield bonds “don’t move much”. Gross also says the stock market has been rising in part because of economic improvement, and in part because of the “Bernanke put” — the belief that Ben Bernanke and the Federal Reserve will continue to bolster stocks over the long haul. Gross says there’s “a lot of money chasing a lot of risk, and in some cases it may be justified.”

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Gross on the “Credit Supernova”

In his latest Investment Outlook, PIMCO’s Bill Gross says that the U.S. is heading toward a “credit supernova”, with exponentially rising amounts of credit leading to an eventual implosion of deleveraging.

Gross says that over the years, the U.S. has used more and more credit to produce less and less growth. In the early 1970s, credit outstanding in the U.S. totaled $3 trillion, he says. “Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result.

The zero-bound interest rates of the past few years, Gross says, are making the “magic” of credit creation turn destructive. “Net interest margins at banks compress; liabilities at insurance companies threaten their levered equity; and underfunded pension plans require greater contributions from their corporate funders unless regulatory agencies intervene,” he says. “What has followed has been a gradual erosion of real growth as layoffs, bank branch closings and business consolidations create less of a need for labor and physical plant expansion.”

Gross acknowledges that his supernova analogy is “more instructive than literal. The end of the global monetary system is not nigh.” But the point, he says, is that more and more credit is being put into speculation instead of productive innovation. He says a time may well come when “investable assets pose too much risk for too little return”, which would lead to major credit contraction.

That doesn’t mean investors should throw in the towel, Gross says. But he thinks they should plan accordingly. His advice: “Seek inflation protection in credit market assets/ shorten durations; increase real assets/commodities/stable cash flow equities at the margin; accept lower future returns in portfolio planning.”

 

Gross’ Forecasts for 2013

PIMCO’s Bill Gross says the “New Normal” should continue in 2013, and he expects both stocks and bonds to return less than 5% for the year. Gross also sees unemployment staying at 7.5% or higher during the year, and thinks gold will rise. He also discusses the fiscal cliff bill, and says that the drawn-out, contentious process of creating it “reaffirmed [members of Congress'] ineptitude”.

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Gross Talks Debt, Asset Allocation

PIMCO’s Bill Gross says that if the U.S. doesn’t reverse its big deficits and rising debt, it “could resemble Greece within a decade.”

In an interview with U.S. News & World Report, Gross also says he doesn’t think the “New Normal” will end anytime soon. “Don’t think that anytime soon we’re going back to the ‘old normal’ because these cycles of de-levering are biblical in nature,” he says. “An investor probably has to look forward to higher inflation. Slower growth and higher inflation — that’s not a positive, by any means. Individuals would want it to be just the reverse. The de-levering and the check-writing on the part of central banks, that’s really what produces the situation.”

Gross reiterates his belief that, in this climate, investment returns won’t match those we’ve seen in previous times. He is finding opportunities in higher-growth countries like China, Brazil, and Mexico. He says that when looking for stocks, he personally targets those with dividend yields of 3% or 4%. He says that an investor who is 30 years old should have about 80% of their portfolio in dividend-paying stocks and the other 20% in bonds; the percentage of bonds should rise as you get older, he adds.

Gross Talks Stocks, Bonds, Gold & Inflation

PIMCO bond guru Bill Gross says that both stocks and bonds are a bit “bubbled” because of the Federal Reserve’s policies, but that high-quality dividend-paying stocks should perform better than bonds over the long haul. Gross tells CNBC’s Futures Now that he also thinks gold and real assets are offering good long-term protection against inflation, which he sees ahead for the U.S.

 

Gross: Close the Gap, or Become Like Greece

PIMCO bond guru Bill Gross says the U.S. needs to close its “fiscal gap” quickly, or risk a Greece-like debt crisis.

In his latest investment commentary, Gross says that he doesn’t think “Armageddon is … around the corner. I don’t believe in the imminent demise of the U.S. economy and its financial markets.” But, he says, he’s afraid. He points to reports from the International Monetary Fund, Congressional Budget Office, and Bank of International Settlements that all paint a dark picture for the U.S. debt situation. “What they’re saying is that when it comes to debt and to the prospects for future debt, the U.S. is no ‘clean dirty shirt’”, Gross asys. “The U.S., in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth. Uncle Sam’s habit, say these respected agencies, will be a hard (and dangerous) one to break.”

On average, Gross says, the three studies suggest the U.S. must cut its fiscal gap — which unlike the “deficit” includes future estimated entitlements like Medicare and Social Security — by 11% of GDP over the next five to 10 years. That means spending cuts and taxes of $1.6 trillion per year — about four times what the failed Congressional Super Committee was considering.

Gross says that if the U.S. doesn’t get things under control, it risks losing its status as the top destination for global capital and could undergo irreparable harm. “Unless we begin to close this gap, then the inevitable result will be that our debt/GDP ratio will continue to rise, the Fed would print money to pay for the deficiency, inflation would follow and the dollar would inevitably decline,” he says. “Bonds would be burned to a crisp and stocks would certainly be singed; only gold and real assets would thrive.”

Gross: Follow the Fed and ECB

Bill Gross says PIMCO’s strategy is pretty simple: Buy what the Federal Reserve and other central banks are buying.

“We continue to anticipate what the Fed is buying,” Gross recently told CNBC. “They’ve told us they will buy $40 billion to $70 billion of agency mortgages every month until the cows come home. It pays to own these mortgages even though they’re overvalued.”

Another area PIMCO is looking, thanks to central banks: Spanish and Italian bonds. “[The European Central Bank] told us they are going to buy Spanish and Italian 1- to 3-year debt should those countries apply for a rescue,” he said, adding that he thinks the ECB will be buying Spanish bonds in two to four weeks.

 

 

 

 

 

 

Bond Guru Offers Counterpoint to Inflation Argument

Jeffrey Gundlach thinks interest rates will soon rise, but, unlike fellow bond guru Bill Gross, he doesn’t think inflation is upon us.

Gundlach, in a web seminar, recently said that a paradigm shift has occurred in the past five years or so, according to AdvisorOne. “Over the majority of the [past three decades or so] we’ve seen a benign inflation period characterized by stable to falling interest rates,” he said. “It’s quite likely interest rates will now rise and boost the returns of government instruments.” But, he added that inflation can’t occur without corresponding increases in median household income, and he says that is falling, AdvisorOne reports.

But Gundlach is concerned about global food price inflation. “Believe it or not, food is the real concern, especially in developing countries,” he said. “In these areas, 40% of a person’s income will typically go toward food. If it goes high higher, it will have an outsize impact, and riots and other forms of civil unrest could occur.” He also discusses debt, saying that developing nations are “now better fiscal stewards than developing countries”.

Gross on the Problem with Low Interest Rates

PIMCO bond guru Bill Gross is standing by his comments that the “cult of equity is dying”, saying that near-zero interest rates are stunting lending and growth, and leading to lower returns for both stocks and bonds.

“Last month’s “dying cult of equity” Investment Outlook elicited a lot of excitement, but somehow failed to impress readers with its main point: Returns from both stocks and bonds will be stunted,” Gross writes in his September Investment Outlook (his emphasis added).How could one argue otherwise on the bond side with investment grade bonds yielding only 1.75%? How could one argue otherwise for stocks under the assumption that bond and stock returns were at least in part mathematically conjoined at the hip? How could one argue otherwise when it is obvious that boomers and X’ers, Y’s and Z’ers are likely to be disenchanted for their own good reasons for years? How could one argue otherwise when it is apparent that stock market trading has been taken over by machines — that HAL rules the stock exchange roost and does a bad job of it at that?”

Gross says that the current lack of lending from big banks isn’t just due to consumers being constrained. It’s also due to the fact that low interest rates make loans less profitable for banks.

So, what to do? “If I were an individual investor, I would do this: Balance your asset mix according to your age. Own more stocks if you are young, but more bonds if you are in your 60s, like myself,” Gross says. “If you choose an investment advisor, a mutual fund, or an ETF, make sure that your fees are minimized. After all, if overall returns average 3-4% annually how can you possibly afford to give 100 basis points of it back? You cannot. And be careful. The age of credit expansion which led to double-digit portfolio returns is over. The age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price — both stocks and bonds.” (His emphasis added.)

 

 

GMO: Death of Equities “Greatly Exaggerated”

Bill Gross’ claim that the cult of equities is “dead” has generated a lot of response recently, and now Jeremy Grantham’s GMO has entered the fray, countering many of Gross’ key points.

“Disappointing returns from equity markets over a period of time should not be viewed as a signal of the ‘death of equities,’” Ben Inker writes in a white paper on GMO’s web site. “Such losses are necessary for overpriced equity markets to revert to sustainable levels, and are therefore a necessary condition for the long-term return to equities to be stable.”

While Gross has said that stock market returns can’t continue to run significantly higher than gross domestic product, as they’ve done over the past century, Inker says otherwise. “GDP growth and stock market returns do not have any particularly obvious relationship, either empirically or in theory,” he writes. “Stock market returns can be significantly higher than GDP growth in perpetuity without leading to any economic absurdities.”

Inker says the market has been in a “healing process” since reaching absurd valuations in the early 2000s, and thinks there’s still more healing to be done, which means equity returns will be disappointing for a few more years. But over the longer term, he thinks equities should still produce strong returns. “Whether GDP growth in the U.S. and other developed economies is going to be slower in the future is not, in and of itself, a reason to expect a lower return to equities,” he says. “Likewise, the fact that historic equity returns have been higher than GDP does not mean that the equity market has been some sort of long-term Ponzi scheme.” He says equities are “an ugly asset class — one that is more likely than almost any other to lose investors a significant amount of money at those times when they can least afford it. That is, in a way, their charm. It is why equity is such an appealing form of capital for companies. It is the reason why equities have been priced to deliver good returns historically. And it is the reason why we believe equities are very likely to be priced to deliver strong returns into the indefinite future.”