Bull Versus Bear: Bill Gross and Jeremy Siegel Duke it Out
In many ways this is the ultimate bull versus bear debate. On one side you have Bill Gross, the legendary bond investor who founded PIMCO and has amassed a fortune during one of the greatest bull runs in the history of bonds. Clearly, he’s talking his book most of the time so it’s safe to say he has a bias towards bonds over stocks. And in the other corner you have one of history’s all-time great buy and hold advocates, Jeremy Siegel of Wharton. Both men were on CNBC to discuss their long-term outlook for the equity markets.
Gross recently stated that the cult of equity was dying and that the 6.6% rate of return we’ve seen since the 1920′s was likely too high going forward. He made some controversial statements comparing GDP growth to the market’s total return in which I believe he erroneously neglected to subtract consumption of dividends. Regardless, his bearish equity stance was made plenty clear in his investment letter released recently. Seigel corrected his error saying there were many things wrong with Gross’s statements and goes on to supply historical evidence.
Gross makes his case that expectations going forward need to be muted. On Bloomberg Gross even said “he’s obviously pushing at windmills in my opinion and he belongs back in his Ivory Tower.” Here’s full back and forth:
Source: CNBC
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.
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thanks for the recap, mr cullen.
would have been more helpful if you’ve given your take on each of their positions.
reddweb, here’s Mike Norman(chief economist at Thomas James, former S&P analyst) -click for actual data & charts showing how wrong Bill Gross is:
http://mikenormaneconomics.blogspot.com/2012/08/did-bill-gross-just-make-worst-call-of.html
Did Bill Gross just make the WORST CALL of all time?
“Bond King” (Ha!!) Bill Gross of Pimco is at it again with what could end up to be his greatest BAD CALL of all time.
Remember last year when he said that Treasuries were going to collapse once the Fed stopped their QE 2 program? And his now infamous tweet, “Who’s going to buy them now?” which exposed his utter lack of understanding of how rates are set. His massive short Treasury position that turned out to be a HUGE loser. (MMT had it right on the money!)
As an aside, Paul McCulley, who used to be Pimco’s chief economist until two years ago when he retired, understood the monetary system and was probably the brain behind much of Gross’s success because now that he’s gone, Gross is pretty much on the wrong side of everything. But I digress…
Well, here’s Gross’s latest call. In a piece he wrote on the Pimco website he said…
“The cult of equity is dying.” (Calls equity investing a CULT???? This guy is off the deep end.)
My guess is this could end up to be the greatest bad call since the 1979 Business Week cover that proclaimed “The Death of Equities.” (Even sounds similar.) Just for fun, have a look at how this whole, “death of equities” thing played out.
Business Week August 1979 cover
Take a look at Pimco Total Return vs. the Agg. He’s been a great bond manager.
I’ve been following this loosely. The only thing I’ve taken away is that I’m fairly unimpressed with either side’s debate skills.
Neither of these guys has any past success in predicting the stock market, so why pay any attention? Siegel is always bullish, so his views are worthless. Gross flips from bullish to bearish and on average seems to do no better than chance.
Cullen:
Here’s an interesting table that goes to Gross’ error.
Go to page 114, table B102, which is the macro balance sheet of US nonfinancial corporate business, here:
http://www.federalreserve.gov/releases/Z1/Current/z1.pdf
2012 Q1:
Total corporate non-financial assets $ 15 trillion
Net worth $ 17 trillion
What that says in a very ball park fashion is that cumulative corporate investment (i.e. non-financial assets) is roughly equal to stock market value for this sector.
What Siegel said is that the 6.6 per cent total return included equity value appreciation plus dividends.
But dividend reinvestment programs in aggregate account for a very small amount of stock issued by corporations. So you can pretty much exclude dividends as being embedded in that $ 17 trillion number, meaning that most dividends at the macro level are not reinvested in the stock market or used by corporations for investment.
What that says combined with the above is that the dividend return component is pretty much excluded from the $ 17 trillion number above.
It’s the $ 17 trillion number that’s kept pace with cumulative investment of $ 15 trillion above. And $ 15 trillion as cumulative investment is what you’d expect to see keep pace with the general growth of the economy.
In other words, you can expect the dividend return component to be in addition to the economic growth rate. So you can expect stock market total returns to be in addition to the economic growth rate – FOREVER.
So that’s the error Gross made.
Same idea as included in your post as “he erroneously neglected to subtract consumption of dividends”.
It’s OK to argue that stock market returns might be lower for a while, but not using the argument he did.
It’s a pretty fundamental point, and it is indeed a gross error.
Most dividends are consumed,and are not used to purchase new equities? I beg to differ. In the vast majority of Brokerage accounts, dividends automatically go into the sweep or cash account. Usually this cash ends up being reinvested at some point, even if it is on a delayed basis. Most dividend income is earned by the wealthiest 5%, and in most cases these wealthy families are not using it to consume, rather they are reinvesting it and growthing their wealth.
That may be true at the micro level, but it is not true at the macro level. To confuse the two is an example of fallacy of composition, which is another way of explaining the error that Gross made.
The dividend reinvestment you are referring to is mostly the reinvestment of dividends in stock that is already outstanding. That has no implications for real economic investment by corporations, because they are not issuing new stock and they are not raising new money for new investment.
At the margin, most of the dividend investors you’re referring to are buying stock in the secondary market. Somebody else sells them the stock, and uses the proceeds for consumption. So dividends are used in consumption at the macro level – if not at the micro level of the dividend recipient. Cullen’s statement is correct in the macro sense, which is the perspective that matters in comparing Siegel’s correct analysis with the error made by Gross.
The macro fact is that most dividend income is not reinvested back into corporations, and therefore has no effect on real economic investment. The exception to this is dividend reinvestment plans, which only account for a very small amount of dividend income at the macro level.
The other exception for purposes of this discussion would be dividends invested in new stock issues, but considering the relatively small role dividend income would play in that, as well as the small role new issues play relative to macro level growth in retained earnings and new economic investment, this is pretty minor noise.
Thanks JKH. Traveling right now, but I’ll take a look a little later.