PIMCO bond guru Bill Gross says the “cult of equity is dying”, and that future stock returns cannot be as high as they’ve been historically.
In his latest investment commentary, Gross notes that stocks have gained 6.6% annualized after inflation for the last 100 years, while GDP has increased by 3.5%. Gross says a big reason for that was “that real wage gains for labor have been declining as a percentage of GDP since the early 1970s, a 40-year stretch which has yielded the majority of the past century’s real return advantage to stocks. Labor gaveth, capital tooketh away in part due to the significant shift to globalization and the utilization of cheaper emerging market labor.” Government has also “conceded a piece of their GDP share via lower taxes over the same time period,” he says, “and it is therefore not too surprising that those 6.6% historical real returns were 3% higher than actual wealth creation for such a long period.”
Gross thinks stocks should continue to outperform bonds over the next 100 years, given the equity risk premium. But 6.6% real annualized returns can’t continue, Gross says. “If labor and indeed government must demand some recompense for the four decade’s long downward tilting teeter-totter of wealth creation, and if GDP growth itself is slowing significantly due to deleveraging in a New Normal economy, then how can stocks appreciate at 6.6% real?” he asks. “They cannot, absent a productivity miracle that resembles Apple’s wizardry.”
Gross hypothesizes that bonds could return about 2% and stocks 4% going forward for a 3% nominal return — and a 0% real return. And that, he says, will have major repercussions for pension funds and investors in general, and therefore on the economy. “The commonsensical conclusion is clear: If financial assets no longer work for you at a rate far and above the rate of true wealth creation, then you must work longer for your money, suffer a haircut on your existing holdings and entitlements, or both,” he writes (his emphasis added).
Gross says the government will likely try to inflate its way out of the situation, which could lead to major inflation — and spell very bad times for bonds. “The cult of equity may be dying, but the cult of inflation may only have just begun,” he says.