Tuesday, July 31, 2012

BILL GROSS SIGNALS THE DEATH OF EQUITIES

THE CULT OF EQUITY IS DYING: BILL GROSS

Bill Gross has done it once again, the co-founder and co-chief investment officer of the world's bond fund  PIMCO has said that it is time to write the obituary for stock investing and stocks are no longer an asset to have and to hold. . Long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. Gross, whose Pacific Investment Management Co has $1.82 trillion in assets, took particular issue with the noted economist Jeremy Siegel. According to him the long-term history of inflation adjusted returns from stocks shows a declining 6.6% real return to which he adds that higher risk is usually, but not always, rewarded with excess return.

ANY MERIT IN INVESTING ?

Gross goes on to add that a presumed 2% return for bonds and an historically low percentage nominal return for stocks – call it 4%, when combined in a diversified portfolio produce a nominal return of 3% and an expected inflation adjusted return near zero. The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned. In his April investment letter, Gross struck a similar tone on total return expectations. Gross then said investors should get used to smaller investment returns because of slower global growth and as the financial services industry continues to deleverage, or reduce its reliance on derivatives and borrowed money to generate higher returns. This time around, Gross said at their currently low interest rates, investors should expect "mere survival" from their bond investments.

WORK HARD FOR YOUR RETURNS

Gross argued that with dwindling returns on stocks and bonds individuals will have to work longer to save for their retirements. "If financial assets no longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money," Gross wrote.

IS BILL GROSS A CLOSET BULL ?

Marketwatch's columnist Jonathan Burton in his article signals the possibility that Bill Gross could be a closet stock Bull. Gross' August investment letter is also reminiscent of BusinessWeek's famous "Death of Equities" cover story, which appeared in 1979, just before the start of a big bull market.

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