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April 01, 2009 at 04:00 AM
[This is the first installment of a new monthly feature in Investment Advisor. Longtime advisor, deal-maker, and alternative-investments observer Jeff Joseph will explore in the Venture Populist the world of private investment, and where those vehicles fit into an advisor's investments quiver. This month, he nails his private investing thesis to IA's door.]
That stark assessment in the headline above is a prediction from Bill Gross.
Cynics may argue that Gross could have opined about a year ago, while there were still some horses left in the barn, and yes, there is that “conflict of interest” of buying U.S. debt while advising our government as it embarks on the mother of all spending spree, but still, does he have a point?
Yes, according to venture capitalist Peter Cohen of Peter S. Cohen & Associates, who cornered the bond king for an exclusive interview, “the current economic contraction is killing the animal spirits that drive risk taking, and that’s contributing to the death of equity capitalism as we’ve come to know it.”
The Gross outlook is very grim for those who expect stocks to ultimately regain their historical performance advantage over bonds. “Things will never be the same. Risk taking has been destroyed…asset classes will be readjusted for that outlook, that is, stocks will be more of a subordinated income vehicle as opposed to a ‘stocks for the long run’ growth vehicle.”
Common shareholders are seeing their values eroding because of their subordinated position relative to debt in the liquidation hierarchy, because when a company files for bankruptcy, all of the other stakeholders–such as bondholders, lenders, and preferred stock holders–get their money before the common shareholders see a dime.
That may be the case for some time to come, but as sure as Truman defeated Dewey, common stock returns will eventually trump bonds. But in the indiscernible interim lies the rub. The inflation, interest rate, and default risk has not been greater in years. Bonds are about as unattractive as stocks for the intermediate-term.
So where will growth-minded investors find compelling asymmetric return opportunities amidst the new world disorder?
