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Bill Gross: ‘The good times are over’

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“Beware the Ides of March,” a seer warned Julius Caesar, who was assassinated that day, and while bond manager Bill Gross does not provide an exact date, he is warning that the demise of three-decade-plus market supercycle is shortly forthcoming.

“Beware the Ides of March, or the Ides of any month in 2015 for that matter,” writes Gross in his January monthly investment outlook.

“When the year is done, there will be minus signs in front of returns for many asset classes,” adds the manager of the Janus Global Unconstrained Bond Fund (JUCTX). “The good times are over.” 

It is not only Caesar who was exposed to danger on that fateful day but the market emperor, if you will, that is wearing no clothes, according to Gross, who says investors should have low expectations of future asset returns.

Gross bases his forecast on the “debt supercycle” model, of which Martin Barnes of the Bank Credit Analyst and Ray Dalio of Bridgewater Associates are also proponents.

Based on economist Hyman Minsky’s notion that “stability ultimately leads to instability,” the model holds that the economic cycle always tends toward excess, both on the upside and downside.

Gross argues that the market has been tending toward the upside for decades now, and that even dramatic reversals such as the Lehman collapse, the dot-com crisis or the 1987 Black Monday crash are notable for the relentless credit-driven recoveries that followed them.

“Each downward spike in the economy and its related financial markets was met with additional credit expansion generated by lower interest rates, financial innovation and regulatory easing, or more recently, direct central bank purchasing of assets labeled ‘Quantitative Easing,’” writes Gross.

While investors might assume that monetary policy might be capable of sustaining prosperity, the Janus manager says that eventually zero-bound (or even negative) yields eventually fail to stimulate economic growth.

That occurs when corporate leaders use nearly free money to buy back their own shares rather than invest in the real economy, where structural changes seem to signal a secular decline in consumer demand.

Gross has described those structural changes, starting in 2009, as “the New Normal,” a period during which the unfavorable demographics of an aging population and the ruthless efficiencies of technology and globalization make lack of demand the economy’s dominant theme.

At economies sputter, financial markets eventually follow, as investors perceive “too little return for too much risk,” Gross says.

That prompts a flight to safety favoring cash, real assets — or “figurative and sometimes literal money in a mattress,” he quips.

For these reasons, monetary policy is becoming impotent.

“It is becoming obvious that as yields move closer and closer to zero, credit increasingly behaves like cash and loses its multiplicative power of monetary expansion,” he writes.

At this late stage of the debt supercycle, finance breaks down:

“Asset class structures such as money market funds, banking, insurance, pensions, and even household balance sheets malfunction as the historical returns necessary to justify future liabilities become impossible to attain. Yields for savers become too low to meet liabilities. Both the real and the finance-based economies become threatened with the zero-based, nearly free money available for the taking,” Gross bracingly warns.

Beyond the gloomy soothsaying, the Janus bond manager offers some practical, even somewhat encouraging advice.

Rather than run to their mattresses, investors can content themselves with “low positive returns” and be happy if they can avoid “some future Ides of March or May or November 2015.”

How so?

By investing in “high-quality assets with stable cash flows,” including “Treasury and high-quality corporate bonds, as well as equities of lightly levered corporations with attractive dividends and diversified revenues both operationally and geographically.”

The bottom line in Gross’ analysis is that “debt supercycles in the process of reversal are not favorable events for future investment returns.

“The time for risk taking has passed,” he concludes.

In an earlier new year investment presentation in which Gross and other Janus managers participated, the bond manager was similarly risk averse:

“With much of the benefit from loose monetary policies already priced into the markets, a more conservative investment approach may be warranted by maintaining some cash balances,” Gross said. “Be prepared for low returns in almost all asset categories.”

 

See also:

6 top tax changes for 2015

10 big economic predictions for 2015

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