Bill Gross: Double Digit Stock and Bond Returns are a Thing of the Past

Via Bloomberg TV:

Bill Gross of PIMCO spoke to Bloomberg Television’s Stephanie Ruhle, Adam Johnson and Alix Steel on “Lunch Money” today, reiterating comments in his monthly outlook that the age of credit expansion that led to double digit returns is over.  Gross said, “Those days are over…Pension funds and individuals and investors that expect 10% consistent returns to pay those bills are going to be disappointed.”

Gross also said that the price of gold “will be higher than it is today and certainly a better investment than a bond or stock, which will probably return only 3% to 4% over the next 5 to 10 years.”

Gross On whether investors should be putting any money into funds at all or whether they should go for the lowest price option and buy the S&P:

“Certainly, from the bond standpoint, let’s be clear in terms my cult of equity—it is really a diminished or dying cult of both bonds and stocks from the standpoint of a belief that they can return 10% types of returns to pay their bills, to pay for education, to pay for retirement. Those days are over if only evidenced by the bond market in the U.S. only yields 1.75%. How can you produce a 10% type of return historically that we have seen for the past 20 years to 30 years at 1.75% yields? It really cannot be done. Similarly, if equities are related to bonds and attached or conjoined at the hip in mathematical terms, then you would expect equities as well to produce less than 10% returns going forward. So pension funds and individuals and investors that expect 10% consistent returns to pay those bills will be disappointed. When we expect 2% to 3% return from bonds and 4% to 5% from stocks, if younger investors want to invest in stocks with that 4% to 5% expectation, then we suggest they do it.”

On what PIMCO is buying now:

“With reflation as the odds on probability, it is clear that the world is in a deflationary, reflationary type of mode and does not know which way to go. If central banks are successful in terms of reflating, if Bernanke is successful in terms of a new QE, then an investor should be focused on reflationary assets, such as commodities and gold to the extent that they reflect future inflation. On the bond side that would be inflation protected securities such as tips or even floating rate securities that don’t have a fixed coupon and stocks as well. Stocks that in some cases can keep up with inflation and are not buffered by a head wind in terms of those higher inflationary rates which in historical terms, has occurred. But stocks are not a bet either. It’s just that all of them, as a category, cannot produce the returns that investors have grown used to.”

On whether the U.S. is falling back into a recession:

“I don’t think so. I think Bernanke has been successful up until this point. 2% is the number plus or minus in terms of real growth and it appears we are right about that level now. We do have some dramatic fiscal cliffs and some dramatic changes perhaps in terms of fiscal attitudes going forward and fiscal budgets and so those in combination with the weakened effects of monetary expansion in the U.S., with the weakened effect of QE1, QE2, Twist and now QE3, it will be difficult to stimulate the real economy in the U.S. At a faster rate than 2% and perhaps even less if we have that fiscal cliff in December or January of 2013.”

On the ECB’s bond-buying proposal:

“The market awaits a 24-hour from now announcement in terms of what it might be and even then, conditioned upon some rulings from the constitutional court in Germany on the 12th. In any case, it appears, based upon unofficial leaks, that the program will be limited to one- to-three-year bonds. This pertains to the reflationary aspect that I tweeted—ultimately it will lead to an expansion of the ECB’s balance sheet. Currently, it is at $4 trillion. We don’t know how much it will expand, but nonetheless, a $4 trillion balance sheet that several years ago was $2 trillion or less is doubling in terms of the central bank’s monetary base. We are about to see an expansion of ultimate hundreds of billions of dollars by the ECB which come at some point, has the potential for inflationary aspects.”

On how gold helps investors protect their wealth in times of inflation:


“Gold cannot be reproduced. It can be taken out of the ground at an increasing rate, but there is a limited amount of gold. There has been an unlimited amount of paper money over the past 20 years to 30 years. Now in this period of central bank expansion, whether it is QE1 or QE2 or the LTROs with the ECB or this potential new program which might be announced tomorrow, then central banks are at their leisure in terms of basically printing money. Gold is a fixed commodity. It has a considerable store of value that paper money has not. It is certainly dependent upon the price and it is hard to know if current levels for gold are the appropriate price. But when a central bank starts writing checks and printing money in the trillions of dollars, it is best to have something that is tangible and cannot be reproduced, such as gold.”


On whether the gold trade is too crowded:


“I don’t think so. Central banks got out of the gold trade a few years ago. Just recently, they are coming back into that market. Central banks have trillions of dollars of reserves. We’re talking about China. We’re talking about Brazil. We’re talking about Mexico, countries that have earned a surplus of reserves and they have choices in terms of how to invest them. Would they want to invest them in a 1.55% 10-year treasury or in something that is more tangible that they cannot be fooled with in terms of the marketplace? And so central banks are coming back into the market. You see some diminished demand from countries such as India, which is suffering in terms of its economic growth. So there is a yin and a yang there. But I think for the most part it is not a crowded trade yet even though the price has accelerated in recent quarters and recent years.”


On his gold price target for medium-term:


“I am not a gold bug. I am just suggesting that gold is a real asset and will be advantaged if the Federal Reserve or the ECB central banks start to write checks in the trillions. So what my objective is, I am not sure. I just think it will be higher than it is today and certainly a better investment than a bond or stock, which will probably return only 3% to 4% over the next 5 to 10 years.”


On whether he has a different game plan for an Obama victory vs. a Romney victory:


“I don’t think so yet. We are talking about that in the investment community in terms of how to how to play this. Obviously the polls are 50/50 so it is hard to make a bet one way or the other. I think coming out of both Republican and Democratic parties, in terms of the ultimate outcome, will be some type of tax reform that levels the playing field and perhaps promotes some productivity going forward. The important point in January or February of 2012 will be how both of these parties come together to address the deficit. If it stays at 8% to 9% going forward, that leads to Fed QEs and Fed purchases and ultimately higher reflation going forward. We will be watching carefully the aftermath of the elections and how these parties come together in terms of fiscal policy going forward. It will be critical.”


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:

  • Aileron

    And Bill’s backpedaling begins …

  • Jenkins

    Gross doesn’t come across as very cerebral, here or otherwise, compared to the expectations one might have for someone in his position.

  • Cowpoke

    Can anyone explain to me why this man has made Millions/Billions and is a Bond King?

    The reason I ask is because for the last 3-4 years, all I have seemed to read about this man is that he keeps ending up on the wrong side of the trade and doom and gloom end of world stuff. I don’t know much about his work, but what I see posted here at the P.C.. It seems to me that perhaps he made his fortunes in the bond mkt by dumb luck and when the bond vigilantes have not arrived to destroy the Green Back he is perplexed.

    I would think a man of his prominence would have a better grasp of how our monetary system functions as MR. Roche has been so kind to share with us.

  • Chris H

    Start reading his investment outlooks and see if you change your mind. He has a very well developed world view backed up by a very large research staff. You may disagree with him but it’s hard to argue with his long term success.

  • Cowpoke

    Well he’s slamming Stocks here:

    And Wheres QE 3? He said it would be back ON after 2 months of weak employment data:

    Missed that one.

    The list can go on and on..
    I am starting to get the impression that Gross was simply a Broken clock that got stuck at the right time and place in fiscal policy history and it was more dumb luck than a deserved Financial Wizard Crown.

    JMO, based on the many articles of I have read here and the seen things he has postulated not come to fruition.

    Just some Thoughts.. :)

  • Johnny Evers

    Hey, Cowpoke. … He had a very good run for 20-some years, in the great bull market in bonds. I feel for him now. He can’t close the Pimco shop and buy commodities, which would be the logical thing to do considering his take on the market.
    As Taleb might say, as an investor he is not very robust.

  • Cowpoke

    Great Point!! J.E. He seems to have hitched his horses to the “Fiscal” side of the financial wagon instead of the “Monetary” Side.
    OR at least not recognized (due to myopic investor focus) the differences as the economic winds of change have blown.

  • Alberto

    Gross is right on many things but is generalizing too much. I believe that the age of 10% stock return is finished IF we consider the average return of any of the main indexes. This means that lazy money managers and follow the herd private investors will have a hard future. And this is good not bad. For too much time investing in stocks was an easy dull thing to do. Buy a basket of stocks and stop. End of the story. But there will be great success stories in stocks expecially in those sectors that are NOW oversold because people are too dull to understand the real possibile long term returns in the sectors of the future and because they just pretend a great return now. It’s time to return to good habits of price discovery and to the spirit of Graham and the other few great long time investors. But this means study, study and study again. If, for example, solar is an important piece of our energy future this doesn’t mean that whatever company is good, but one or more of them will be the GE of the future, while most of the others will go bankrupt. This also mean that most of the ETF or funds are not the solution because they are too passive. Only the fittest will survive.

  • BHB

    Well said Alberto! I am starting to get tired of pundits saying stocks or bonds will return or won’t return this and that percent for x amount of years. Careful fundamental analysis in search of individual equities can yield fantastic returns in any market. However, the majority of investors are in mutual funds with hundreds of stocks and ETF’s that track indexes so they will perform like the market and a low return market is quite possible with much deleveraging needed. Regardless, a good money manager can always dust off the gem that was left in the corner of the garage sale and sell at a higher price down the road.

  • Chris H

    I meant to read his investment outlooks directly on his site Again, he could be wrong but he isnt a guy that just says stuff without having the research to back it up. Predicting the future is not an easy thing to do, especially when you have real money on the line. He is not just a pundit but an actual investor.