Can Bill Gross re­ally sense the end of secular bull mar­kets (out­side of bonds)?

Financial Mirror (Cyprus) - - FRONT PAGE - By Jon C. Ogg

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 hu­mour 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… Savour 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 nor­mal­i­sa­tion – 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.”

Gross con­cluded: “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. (Source: 24/7 Wall

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