Bill Gross may have a new employer in Janus Capital Group Inc. (NYSE: JNS), but he has kept up with his monthly outlook reporting just like he did for years as the bond king for Pimco. Gross always has some financial market humor mixed in with the commentary, and many investors would point out that his observations are him talking about his own investment book. Others would say that Gross may have an in on bonds, with little value in his opinions in other markets.
So, what does one think when Gross is saying now in his outlook, titled “A Sense of an Ending,” that the bull market supercycle for both stocks and bonds and is winding up?
To give the warning additional bite and resonance, Gross included a Julian Barnes quote: “There is accumulation, there is responsibility; after these, there is unrest — great unrest.” Gross talks about turning 70, having a sense of an ending — “Death frightens me …”
Again, Gross can use analogies and references that may be very real but that have loose ties to financial markets. To requote a full Gross outlook makes little sense, and it offers little value. But to draw out the gems that Gross has pertaining to the markets does make more sense. Here are some of those points:
Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date… Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.
Policymakers and asset market bulls, on the other hand speak to the possibility of normalization – a return to 2% growth and 2% inflation in developed countries which may not initially be bond market friendly, but certainly fortuitous for jobs, profits, and stock markets worldwide…QE’s and now negative interest rates that bubble all asset markets.
But for the global economy, which continues to lever as opposed to delever, the path to normalcy seems blocked. Structural elements – the New Normal and secular stagnation, which are the result of aging demographics, high debt/GDP, and technological displacement of labor, are phenomena which appear to have stunted real growth over the past five years and will continue to do so.
Where can a negative yielding Euroland bond market go once it reaches (–25) basis points? Minus 50? 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… Once an investor has discounted all future cash flows at 0% nominal and perhaps (–2%) real, the only way to climb up a yet undiscovered Everest is for earnings growth to accelerate above historical norms.
When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.” We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion. A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm.
The successful portfolio manager for the next 35 years will be one that refocuses on the possibility of periodic negative annual returns and miniscule Sharpe ratios and who employs defensive choices that can be mildly levered to exceed cash returns, if only by 300 to 400 basis points. My recent view of a German Bund short is one such example. At 0%, the cost of carry is just that, and the inevitable return to 1 or 2% yields becomes a high probability, which will lead to a 15% “capital gain” over an uncertain period of time. I wish to still be active in say 2020 to see how this ends. As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.
Gross is still referred to as the bond king. As far as how well his views will be on other asset classes and markets, we will leave that verdict or opinion up to you.
Gross’s full commentary is here.