PIMCO’s Gross: ‘The Cult of Equity Is Dying’

Latest monthly missive sets off industry firestorm

Bill Gross is causing quite a stir (again). The chairman of PIMCO wrote in his August commentary that, going forward, investors will not experience the annual 6.6% real return on equities that they have seen since 1912. His views set the talking heads on CNBC and other financial networks chattering for most of the day Tuesday.

Bill Gross, Chairman, PIMCO (Photo: AP)“The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of 'stocks for the long run' or any run have mellowed as well,” Gross (left) wrote in the flowery prose that has become his trademark.

Part of the reason might be a “generational thing,” according to Gross. “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.”

Calling the 6.6% real return a "chain letter" and a "Ponzi scheme," he went on to note, “The legitimate question that market analysts, government forecasters and pension consultants should answer is how that 6.6% real return can possibly be duplicated in the future given today’s initial conditions which historically have never been more favorable for corporate profits. If labor and indeed government must demand some recompense for the four decade’s long downward tilting teeter-totter of wealth creation, and if GDP growth itself is slowing significantly due to deleveraging in a New Normal economy, then how can stocks appreciate at 6.6% real? They cannot, absent a productivity miracle that resembles Apple’s wizardry.”

After dismissing the bond market’s performance over the past 30 years as well, he concluded, “The primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. Woe to the holder of long-term bonds in the process! Similarly for stocks because they fare poorly as well in inflationary periods … 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.” 

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Read Reports of 'Death of Equities' Greatly Exaggerated: DFA on AdvisorOne.

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