In his April market commentary on PIMCO’s web site, bond guru Bill Gross says that we’ve entered a new world of economics and investing, one in which “there should be no doubt that the bull markets as we’ve known them are over and that the revolution is on. Investing is no longer child’s play.”
Gross says that the future of investing will depend on the future of the global economy, and the future global economy “will likely be dominated by delevering, deglobalization, and reregulating. … We do not envision a mean reversion, cyclically oriented future, but instead a new world where players assume different roles, and models relying on bell-shaped/thin-tailed outcomes based on historical data are less relevant. Historical models look backward while modern-day finance is being fast forwarded and reconstituted almost as we speak.”
Gross says that the current environment has challenged notions of how investors can make money. “Stocks for the long run? Home prices that cannot go down? The inevitable levering of asset structures to double or quadruple returns relative to risk-free assets? These historical axioms must now be questioned,” writes Gross. For the past 10, 25, and 40 years, total returns from bonds have exceeded those for common stocks, Gross explains, adding that Case-Shiller stats show that home prices have barely kept up with inflation for the last century.
Moving forward, Gross sees a world in which investors “would likely stress the bird in the hand – as opposed to the one in the bush; stable and secure income – as opposed to uncertain capital gains; a government-regulated utility model – as opposed to innovative yet risky venture capital investments. … A return to an era reminiscent of the first half of the 20th century is not unimaginable where stocks were viewed as subordinated income producers with yields exceeding their senior bond companions on the liability ladder.”
Among the other predictions Gross has for the future are a weakening dollar, and trouble for emerging/developing areas that were boosted up by lax credit standards, like Eastern Europe. As for stocks, Gross says investors should remember that “rewards spring from beginning prices and valuations that correctly anticipate the global economy’s future growth path and volatility. In terms of that old maxim ‘buy low – sell high,’ this means at the minimum that an investor during this period of re-rating must ‘buy low.'”
Gross says investors should favor stable income rather than speculative growth or the subordinate liability structures of most private market balance sheets, and “shake hands with the government”, as PIMCO has done recently in snatching up investments that are or likely will be backed by the feds.
Finally, Gross says we are “children of a bull market” — but that part of that bull market environment was driven by leverage, deregulation, and globalization, trends that are reversing. “We now must view ourselves as chastened adults, forced into acknowledging a new reality that is dependent upon bear-market delevering and debt liquidation to deliver us to our new and ultimate restructured destination – wherever it lies,” he says. But Gross also cautions against overly negative thinking. “Much like Irving Fisher’s ‘permanently higher plateau’ of prosperity that was quickly turned on its head in 1929, those who would forecast a ‘permanently lower valley’ of despair might similarly be off the mark,” he says.
