Emails of the day 1 to 3
"I wondered if you read this short article by Bill Gross.
"He makes some salient points which I find difficult to argue. Perhaps a good contrary indicator as is this."
"I was delighted to see your buddy Michael Jones' (of Riverfront) response to the latest bit of product selling by Pimco's Bill Gross, (who writes the worst items in the investment field as a result of his infatuation with the metaphor. Did he actually pass Creative Writing 101?)."
"Pimco's Gross: Death of Equities is Imminent
"Whatta buy signal"
David Fuller's view Thanks for the links above. For the record, I have not yet had the pleasure of meeting Michael Jones. However, I like his reports and I have known his colleague Rod Smyth for many years.
Having now read Bill Gross' latest Investment Outlook (here is a PDF), I actually think it is one of his most interesting letters.
Many people have focussed on his opening sentence: "The cult of the equity is dying." This may be provocative but I think what he says about bonds is much more of a contrary indicator, given the flood of money into that sector. Here is Bill Gross' conclusion:
Reflating to Prosperity
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 7-7% yields for bonds over the next 30 years is to inflate them as quickly to 7-8%! Woe to holders of long-term bonds in the process! Similarly for stocks because they fare poorly as well in inflationary periods. Yet if profits can be reflated to 5-10% annual growth rates, if the U.S. economy can grow nominally at 6-7% as it did in the 70s and 80s, then America's and indeed the global economy's liabilities can be "reflated" away. The problem with all of that of course is that inflation doesn't create real wealth and it doesn't fairly distribute its pain and benefits to labor/government/or corporate interests. 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. Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other countries may dominate the timescape. The cult of equity may be dying, but the cult of inflation may only have just begun.
My view - I agree with the bond portion of this paragraph. Western countries would obviously like to see more GDP growth but the debt overhang and deleveraging process predictably make this very difficult. Consequently, Fullermoney has long maintained that western policymakers would ultimately inflate their way out from under an increasingly onerous debt burden.
The obvious implication is that a timebomb is ticking beside today's record low long-dated government bond yields. However, the digital timing display is not observable so none of us actually know when the detonation will occur. Nevertheless, Mr Bernanke's reflationary efforts, which are in the process of being emulated by Mr Draghi, should ensure that the west experiences a much shorter deflationary period than we have seen with Japan. Meanwhile, Japan is realigning the BoJ with inflationists as the monetary hardliners retire.
What are the implications for equities?
There are risks for stocks in Bill Gross' scenario of 7-8% long-dated government bond rates above. However, equities are a much better hedge against inflation than bonds, not least where companies are able to raise prices while also limiting wage costs through globalisation. The Autonomies are obvious candidates and their profits growth will be enhanced by the new generations of consumers with disposable income in the China-led growth economies.
For other points favouring equities I defer to Michal Jones' excellent report below.