Mount Everest may be a symbol of mountainous immobility, but as the deadly Nepal earthquake recently demonstrated, tectonic moves under the surface belie its apparent stability.
In like fashion, Janus Funds bond manager Bill Gross is warning in his latest letter to shareholders that the Himalayan heights that investors have scaled over the course of a 35-year bull market leave no more room to climb.
“Get down off this peak,” Gross warns.
With a mix of humor and morose contemplation of the limited time the 71-year-old money manager has ahead of him, Gross posits that asset prices may also be past 70 in “market years.”
The age of the great bull run beginning in 1981 has induced many widely followed fund managers such as Jeremy Grantham to warn of the poor beast’s exhaustion — having already delivered a “20-banger” to investors who bought in when Treasury rates were at 14.50% and the Dow at 900.
Indeed, many — Gross included — have sounded alarms about low future returns prematurely.
But while the Janus manager cannot pinpoint the exact timing, he dismisses the voices of those who think the return of normalization — defined as 2% growth and 2% inflation — is possible, arguing that such a notion rests of the belief that a global debt crisis can be cured with more debt.
Seven years after the Lehman crisis, the global economy “continues to lever as opposed to delever,” Gross writes.
“Even the three strongest developed economies — the U.S., Germany, and the U.K. — have experienced real growth of 2% or less since Lehman,” he says. “If trillions of dollars of monetary lighter fluid have not succeeded there (and in Japan) these past 5 years, why should we expect [European Central Bank President Mario] Draghi, his ECB, and the eurozone to fare much differently?”
What convinces Gross that the end of the bull market must be nigh is the current trend of central banks driving interest rates into negative territory — as means of stimulating growth amid economic anemia.
“Where can a negative yielding Euroland bond market go once it reaches (–25) basis points? Minus 50?,” he writes. “Perhaps, but then at some point, common sense must acknowledge that savers will no longer be willing to exchange cash euros for bonds and investment will wither.”
The bond manager’s certitude about this stems from his knowledge that “all other financial asset prices are inextricably linked to global yields which discount future cash flows.