Bill Gross, co-chief investment officer for the fixed income mutual fund shop PIMCO, released his August investment outlook which is causing a bit of a stir. In it, he destroys the assumption that the long term real return of 6.6% on the S&P is sustainable. On bonds, he also rips (“wink, wink”) into this asset class by saying that the returns of the recent past are done and that investors should “continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.”
I’ve linked to Gross’ outlook here (PIMCO August Investment Outlook). As usual, it’s very well written. In fact, it should be a mandatory read for a government forecaster, actuary, or pension fund manager. Gross makes salient points as to why the expectations for long term performance across the equity and fixed income spectrum should be dampened. However, anyone managing money today–or at any time within the next decade–should treat this letter with a level of confusion, indifference given past success with grandiose forecasts, and curiosity about its intent.
Please allow me to expand:
Confusion: it’s not that financial markets or even that Gross’ thought process was confusing in some way. For the former, investors and readers of financial market information (updates, forecasts, blogs, etc.) all know that markets are in fact complex. For the latter, investors would agree that Gross is a brilliant money manager and market prognosticator. And we readers of financial markets have actually come to expect nuance and divergent opinion on the market’s movement given the high level of complexity. But we also demand something very simple. We demand actionable information from the material that appears on our screens. That has become a universal standard whether the reader of these financial market opinions is an institutional portfolio manager or a retail investor with an E-Trade account. This is what I find missing within the context of Gross’ piece. What, for example, are the implications for portfolio management today if inflation is about to run rampant? Are we to believe that PIMCO’s Total Return Fund is now overweight TIPs? Or maybe, we are to believe that he is now short Treasuries like he was the case last summer? There is a lack of transparency here that leaves us confused. And if today’s reader of any financial market outlook is unclear on how to act, then the value of that opinion is greatly diminished.
Indifference: furthermore, should we even bother to care about such a long term grandiose forecast given his track record with some of these calls in the recent past. For example, last year there was the short Treasury call, imperfectly timed. And who could forget when the phrase “New Normal” was coined? The following is a portion of a piece that I wrote during the fall of 2010 about Gross’ “New Normal”:
Pacific Investment Management Co (PIMCO), which oversees the world’s biggest bond mutual fund, said in March/April of 2009 that rising government deficits and regulation would hold gains in equities and bonds below historical averages. This type of environment would be, as Bill Gross of PIMCO called it, a sort of “New Normal”. A balance sheet growth recession where the U.S. consumer is saddled with too much debt and can’t spend, housing is weak and headed south, and the Fed is monetizing a massive deficit, which, eventually someday “will come home to roost.” In PIMCO’s own words during 2009 about the New Normal, investors should concentrate on “return of capital” rather than “return on capital”. In other words, an adherence to this philosophy would have one ditch stocks in exchange for bonds. To this day, PIMCO continues to aggressively promote the concept of the New Normal. How has the New Normal forecast been working out? A 90% rise in the stock market over that time period pretty much sums up the answer…it hasn’t.
Intent: In that same piece I wrote in 2010 (you can link to the full portion here: JC Investment Management on Bill Gross’ New Normal), I questioned the motivation of PIMCO in creating an atmosphere of fear mongering around the stock market. PIMCOs profits would certainly soar if investors were to ditch stocks in exchange for bonds. This time around, Gross does take a whack at bonds. But even a novice in PR will know that the headline story today and tomorrow will be how Gross thinks that stocks will be a terrible long term investment.
It’s unfortunate that these issues overwhelm what is an adept and revealing analysis on some of the strong headwinds that exist for financial markets.