Submitted by Edward Harrison of Credit Writedowns.
Hi all. Yves is getting slammed because of her book project, so I am stepping in with a few additional posts over the next few days. I may have a few investment posts (which Yves usually avoids) to run by you.
Below is the first investment-oriented one, a post I wrote yesterday at Credit Writedowns. The overall gist of it is that there has been a huge run-up in asset prices due to the unprecedented stimulus around the world. Riskier assets like lower rated corporate bonds and junkier equities have outperformed during this rally. The question now is whether this rally has legs or whether it will fall apart or resume after a correction.
As for Gross, he is certainly talking his book (he is a bond man). Also, I have been looking for a link to Bill Gross’s equity comments during the last bull market rally in 2002-2003. If memory serves me correctly, he was bearish but wrong. If anyone has a link, please post it.
Your thoughts and comments are appreciated. Below is the original post.
Bill Gross is a bond man. In fact, he is often called the “Bond King” because Pimco, the organization where he is founder and Co-Chief Investment Officer, is the largest bond fund in the world. In Bondland, what Gross says has a lot of weight.
And Gross has been talking about a “new normal” of deleveraging, deglobalization and reregulation. In his view, this means weak consumer demand counterbalanced only by heavier government intervention, leading to slow growth for the foreseeable future (See my post ‘Gross: The new normal for “the next 10 years and maybe even the next 20 years”’). In essence, he sees a scenario that is bullish for bonds (especially longer duration types like the 10-year and the 30-year) but not particularly bullish for shares.
But, Gross is also reducing risk. There has been a huge run-up in corporate bonds, especially in high yield bonds. And Gross believes now is the time to take profits and reduce exposure to riskier assets, a view he first put forth in his monthly newsletter at the beginning of July (see my post, “Bill Gross: the new normal means investors should shun risk”). And Gross is re-balancing his portfolio quite heavily to reflect this “glass half-empty” bias. His portfolio has its heaviest concentration in five years of Treasuries, considered the U.S.’s risk-free financial assets.
Linked here is a video of Gross talking on CNBC along with two other market experts, Bob Doll and Dan Tishman, regarding their view of the economy and financial markets (I am having trouble embedding here so I have to link back to the original post). Gross goes as far as to say point blank that one should sell equities and other riskier assets like high-yield bonds.
Before you watch the video, be aware that two other formerly bearish analysts, Richard Bernstein and Jim Grant, have flipped to bullish recently. Gross mentions Grant by name and disagrees with his take on the economy, calling it “disingenuous.” Articles by or on Bernstein and Grant’s view’s are below.
This is the third in a series of posts about reducing risk. See also:
Related articles
From Bear to Bull: James Grant on Recession and Recovery – Jim Grant, WSJ.com
Bernstein: Best Value In Junky Names – CNBC.com
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Thanks for the piece, it was excellent as always.
Several years ago, before the bull runup in equities, Gross somewhat famously (for those of us who care) predicted Dow 5000 in a Barrons semi-annual roundtable interview (I can’t recall what year exactly but it was pre-2007 I believe).
He was woefully wrong for quite some time, but last fall he almost got his redemption. This could be in the “clock is right twice a day” category, but he was somewhat prescient on the imbalances in the economy and their eventual toll.
I heard Jim Grant speak in 1998 at an investors conference. He was a big time interest rate bear, predicting dramatically rising rates. That call didn’t really work out. ;)
Both these guys are smart, articulate and successful. My hat is off to both. But both are showmen and entertainers, first and foremost. And they both prove that even smart guys don’t know what the heck is going on most of the time.
That was the reference I was looking for. if I find a link, I will add it to the post.
Thanks.
Look in the PIMCO content archive, which has Gross’s monthly commentaries going back to 1999: http://www.pimco.com/LeftNav/ContentArchive/Default.htm
Here’s his very bearish (on stocks) view in Sept. 2002. http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2002/IO_09_2002.htm
He posted that commentary seven years ago with the Dow at 8,500. If you would have followed his advice you would have missed out on huge gains that followed over the next five years. However, assuming you’re not a great market timer, today your gains, with reinvested dividends included along with the spectacular rebound of the past six months, would probably be poorer than if you’d had just purchased 10 year treasuries.
Gross’ argument then really wasn’t wrong, so much as it was general. The wisest valuation arguments can look completely ridiculous when capital markets go bonkers, which is pretty much always.
But in fact, he did pretty well, in retrospect. Equities certainly didn’t deliver better returns since that was written, with the SPX turning out about 2.9% mean annual nominal dividend yield over the last 7 years, by my count. The 7 year was yielding 3.6% when that was written. And both are an embarrassment compared to the CPI.
That brings us to another thing Gross highlighted: realistic real yields. Real yields have been declining pretty rapidly over the last 30 years, and extrapolation of the trend would put a negative real yield as today’s equilibrium. The 2.odd% real yield from medium-duration TIPS is very attractive by that benchmark.
And, if you’re a deflationary heretic who disagrees with Harrison and Faber by denying the power of printing money, nominal yields of 3.4% on the 10 year are quite generous. So, FD, I’m still totally allocated to long Treasuries, but a little less comfortable having Gross aboard my ship. :D
This is a flight to safety and is consistent with the view, which also happens to be mine, that the sucker rally in the stock market is now mature and will tank in the not too distant future.
http://www.dailyfinance.com/2009/02/26/bill-gross-the-747-billion-bond-man-declares-the-death-of-equ/
terrible recent trackrecord