Bill Gross, the $747 billion bond man, declares the death of equities
Filed under: Economy, People, Investing
Stocks are dead for the rest of your life. That's the gist of my exclusive interview with the head of PIMCO Total Return -- the biggest bond fund you've never heard of. But you should know PIMCO because its chief, Bill Gross, is one of the world's most powerful bond investors.
Last September it looked like he was "helping" the U.S. government by advising it to put Fannie Mae and Freddie Mac into conservatorship. While this wiped out stockholders, Gross's Fannie/Freddie bonds were boosted by the U.S.'s decision. In addition to running a $747 billion asset management firm, Gross's PIMCO advises the U.S. on its $251 billion commercial paper program and its $500 billion fund to buy mortgage-backed securities. Gross shared his economic outlook with me yesterday in an exclusive interview -- and he's not optimistic.
I've never met Gross so it came as a complete shock when I received an e-mail from him yesterday morning. I was quoted in the latest issue of Fortune suggesting that he might be too powerful for the U.S.'s good. How so? Because he's such a big buyer of government debt -- which it's selling in huge quantities to finance various bailouts -- that he could use his leverage to threaten to walk away unless the U.S. sells to PIMCO at a favorable price.
On Monday I gave a TV interview in which I suggested that the U.S. might consider avoiding this potential problem by giving PIMCO's advisory contracts to another firm that does not have the potential conflict between buying U.S. debt and advising the government.
Gross saw the interview and e-mailed me. I replied by telling him that I had some questions about PIMCO and his views on economic prospects. I found his answers informative and insightful and he agreed to let me post on his economic outlook which is very grim for those who believe that stocks outperform bonds. In Gross's view, the current economic contraction is killing the animal spirits that drive risk taking and that's contributing to the death of equity capitalism as we've come to know it.
As Gross told me, "things will never be the same. Risk taking has been destroyed and any animal spirits must come from Washington. Global growth rates -- low, low, low -- asset classes will be readjusted for that outlook. That is -- stocks will be more of a subordinated income vehicle as opposed to a 'stocks for the long run' growth vehicle."
This argument is great for bond fund managers such as Gross since it would tend to drive people out of stocks and into bonds. But his point about stocks as a subordinated income vehicle is interesting. If I understand him correctly, he views stocks as the bottom of the liquidation hierarchy -- meaning that if a firm files for bankruptcy, all the other stakeholders -- such as bondholders, lenders, and preferred stock holders -- get their money before the common shareholders see a dime.
This is why so many common shareholders are getting wiped out. And in Gross's view, growth prospects are so dim that there is no point in owning stocks since common stock investors will not benefit when there's no economic growth. Moreover, they'll be last in line for any dividends that might be available.
Meanwhile, Gross has an interesting analysis of how we got into this mess. He attributes it to too much borrowing, weak regulation and greed. He also thinks that the U.S. is going to have to come up with as much as $5 trillion to fill the capital hole in the banking system.
As Gross said, "The cause of the current situation was too much leverage leading to over consumption which was facilitated by lax regulation and good ol' fashioned greed. Human nature will never change but our institutions will. Not sure policymakers understand what needs to be done -- there still is a $4 trillion to $5 trillion capital hole that needs to be filled but politics may inhibit necessary action. Bernanke and Co. get it though and have more freedom and flexibility -- they are independent -- for now."
These are sobering thoughts from one of America's most powerful financial minds. My hunch is that over the medium- to long-run, we'll revive capitalism through venture-backed technology innovation. But I am not sure how soon that will happen. Meanwhile, what do you think of Gross's comments? Do they make you want to sell stocks?
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.
Fed stalls on Chinese bank deal, costs taxpayers $1.7 billion
Dell in a handbasket: Should founder Michael Dell resign?
TARP saved the banking system, but failed at everything else
Reader Comments (Page 1 of 8)
2-26-2009 @ 11:27AM
Turiddu said...
My comment is short and simple:
I am 72 years old I have lost all hopes and savings.
I have learned that
Capitalism = Comunism
Both are nasty Evil. No heart, nor soul.
Reply
2-26-2009 @ 3:31PM
ImpeachCongress said...
Hopefully, at 72, you weren't heavily invested in equities to begin with and were sitting on a nice chunk of savings in cash and CD's?
2-26-2009 @ 11:41AM
Tom said...
Peter: your post gave me a sinking feeling in my gut. I was thinking bonds were dead long term as an asset class due to massive expected inflation and widespread currency debasement.
However, if debt investors can force a company into bankruptcy, the common shareholders get wiped out, and
the debtholders walk away with the company.
So in the long run, I don't know which class gets dead first....
Reply
2-26-2009 @ 4:44PM
wthattny said...
I think you've got it right. Neither are good investments right now. Even taking bets on inflation are risky due to the possibility of a long deflationary period. I suggest gold, food, and fuel.
2-26-2009 @ 11:40AM
Stan said...
Sounds a bit self-serving and to declare equities dead is an over simplication of the place of equities serve in the world economy. But what do I know?
Reply
2-26-2009 @ 11:55AM
CaroleAnn said...
You either have the stomach for risk or you don't. If you don't then just accept that you don't and put your money into laddered CDs and forget about it, sleep well and move on. If you are a risk taker and you are young enough to make more money over the course of your working life if you happen to lose it all now, then go for it and don't freak out if the worst happens. Or you be a small risk taker and put 30% in the market and 70% in laddered CDs. If the market moves up, you'll benefit and if it crashes or stagnates, you'll still be okay.
Reply
2-28-2009 @ 9:57PM
joe said...
CaroleAnn - It's not about risk tolerance, it's about paying attention to potential upside and downside.
Gross is saying there's virtually no upside and generous downside to common stocks. General economic indicators are in agreement with that. So, investing in them would be less risky than stupid.
2-26-2009 @ 12:22PM
rolando diaz said...
I'm 53 years old and a financial adviser. One thing I've learned in this life is that you never say never.
Reply
2-26-2009 @ 10:39PM
greg belter said...
NEVER?
2-26-2009 @ 12:14PM
Marlin Dill said...
I am 83 and have taken the adivce of hign rated financial advisors for years. They have all been incorrect as we see.
I do not expect stocks to recover in my life time. What is in store for us retirees? No stimlus plan to help us. I recommend that all banks andcompanies be alowed to fail and then we can start over again.
Reply
2-26-2009 @ 1:03PM
MICHAEL KRIGSTEIN said...
BEING THAT THE BANKS ARE RECEIVING A TRILLION DOLLARS, THEY HAVE NO INCENTIVE TO ATTRACT NEW DEPOSITS.
BECAUSE OF THIS, THE INTEREST RATES ARE CRIMINALLY LOW.
SENIORS LIVE ON INTEREST INCOME (BESIDES SS WHICH CANNOT PAY ALL THE BILLS).
SENIORS ARE TAKING A 50 TO 75 % HIT ON THEIR INCOME BECAUSE OF THE DECREASED INTEREST RATES.
NO ONE IS ADDRESSING THIS.
THE SENIORS NEED A BAILOUT.
PS. I AM NOT A SENIOR.
ALSO, FOR SURE EQUITY INVESTING IS DEAD.
I KNEW THIS A YEAR AGO LAST DEC. WHEN I WAS LUCKY TO GET TOTALLY OUT OF THE MARKETS WITHOUT TAKING ANY LOSS. ( MONEY PUT INTO CD'S).
YOU CAN'T TRUST THE MARKETS.
THEY ARE MANIPULATED BY GREED AND ALWAYS WILL BE.
I TOLD MY WIFE THAT IF I EVER THINK ABOUT GOING BACK INTO THE MARKET SHE CAN HIT ME TO KNOCK SOME SENSE BACK INTO ME.
Reply
2-27-2009 @ 9:51AM
janie said...
Mike, Hi I am a senior and yes I am very upset with what is happening with the stocks? Wow many years back I had the chance to buy into it . now i know I did wrong all I had is gone . I would like to know what is going to happen with seniors pensions? We already pay tax each year now I was told they are going to up it again do you know any thing about this. With all that is going on I never hear the word Seniors mentions We were at least i thought we were the back bone of this country wow were we wrong ... Looks like the lazy ones that dont want to work but sit home and grab we will be paying for again what do you think? Thanks for caring Jane
2-26-2009 @ 5:00PM
Bill Stern said...
Gross' bond funds did not do well. PYN, for instance, dropped more than the S&P.
Reply
2-26-2009 @ 1:20PM
Jim Roberts said...
What a crock! Risk for reward is a human motivation that will never die. It's in the genes.
Sure, in a recession, shares of many firms will atrophy along with their earnings.
However, if you buy only dividend paying stocks of solid firms with little debt and recession proof products or services, you'll fare well.
These firms will survive, and their stocks will provide yields better than any bond, albeit not without risk.
But then without risk; there's no reward
Reply
2-26-2009 @ 4:55PM
wthattny said...
Bonds are risky too. Current T-bills pay very low interest. When interest rates rise, the value of existing T-bills will fall. Bonds of all types can have negative returns.
2-26-2009 @ 1:19PM
Larry said...
In order for Gross's statements to be true, "greed" has to die also. And as everyone knows, greed will never die. It'll be back, thus equities will be back. Only question is when!?
Reply
2-26-2009 @ 5:05PM
randyman said...
that and the fact that humans have short memories will prove Bill Gross wrong in the near to mid term.
2-26-2009 @ 1:21PM
Jeff said...
I am in my mid-40's. Due to legal problems, etc I missed out on the growth of the late 90's and did not get back in until the 0's. I think over the long run, stocks will make a comeback (maybe tempered a bit). There are still going to be companies inventing, building, selling, etc. Not every company is run on credit only. Not every company will be forced into bankruptcy. While, I may not be adding to my current holdings for awhile as I am in a pay down debt phase, I do still plan on it in the future. Gross's comments do seem self-serving.
How would Buffet react?
Reply
2-26-2009 @ 1:23PM
james said...
everyone wants to help out the people that got us into this mess. the good ole usa survived the great depression and we will survive this. stop the stopgapping and let these companies/banks fail and lets get on with our lives or whats left of them. but it really is time to make the financial system pay for their total mismanagement and greed. then regulate the hell out of them - then maybe they will act as responsible adults. if not then throw them all in jail - enough is enough.
Reply
2-26-2009 @ 7:45PM
Fran said...
I agree let them fail. They would have failed already if were not for the government bailout. Then companies and banks that are more responsible with their money would take their place. The mighty will fall. The meek will rise.