Canaccord Genuity Morning Coffee on PIMCO’s Bill Gross Monthly Outlook: The Cult? Sea Shells Sanctuary?
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Canaccord Genuity Morning Coffee on PIMCO’s Bill Gross Monthly Outlook: The Cult? Sea shells sanctuary?
In his August "Investment Outlook", PIMCO’s Bill Gross tells us the cult of equity is dying and questions whether historically equity returns can be sustained going forward. Gross noted, “Common sense would argue that appropriately priced stocks should return more than bonds. Their dividends are variable, their cash flows less certain and therefore can equity risk premium should exist, which compensates stockholders for their junior position in the capital structure.” But he wonders how stocks can appreciate at historic rates in an economy where we see GDP growth slowing due to deleveraging. With low bond yields and lower expected equity returns, Gross notes that pensions – who often bank on 7-8% equity returns to fund liabilities – will likely require more capital for funding (or reduced benefits). Bottom line: “if financial assets not longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money, suffer a haircut on your existing holdings and entitlements or both.” How do we regain stronger growth rates for our assets? Gross says “the primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. The easiest way to produce 7-8% yields for bonds…is to inflate them as quickly as possible to 7-8%!” This would obviously have a negative impact on existing bond holders – and equity holders as stocks typically perform poorly in inflationary periods. Gross concludes by saying that “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…The cult of equity may be dying, but the cult of inflation may only have just begun.”
In his August "Investment Outlook", PIMCO’s Bill Gross tells us the cult of equity is dying and questions whether historically equity returns can be sustained going forward. Gross noted, “Common sense would argue that appropriately priced stocks should return more than bonds. Their dividends are variable, their cash flows less certain and therefore can equity risk premium should exist, which compensates stockholders for their junior position in the capital structure.” But he wonders how stocks can appreciate at historic rates in an economy where we see GDP growth slowing due to deleveraging. With low bond yields and lower expected equity returns, Gross notes that pensions – who often bank on 7-8% equity returns to fund liabilities – will likely require more capital for funding (or reduced benefits). Bottom line: “if financial assets not longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money, suffer a haircut on your existing holdings and entitlements or both.” How do we regain stronger growth rates for our assets? Gross says “the primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. The easiest way to produce 7-8% yields for bonds…is to inflate them as quickly as possible to 7-8%!” This would obviously have a negative impact on existing bond holders – and equity holders as stocks typically perform poorly in inflationary periods. Gross concludes by saying that “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…The cult of equity may be dying, but the cult of inflation may only have just begun.”
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William H. Gross, Pacific Investment Management Company, LLC (PIMCO), Dividend, Canaccord GenuitySign up for StreetInsider Free!
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