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Bill Gross: forget history, the cult of equity is dying
by Atholl Simpson on Aug 01, 2012 at 00:01
The bell is tolling for equities, Bill Gross believes, and he says historical evidence has given an inflated view of their potential for returns and skewed investors’ outlook.
In his latest market commentary, the world’s biggest bond manager who runs the $260 billion PIMCO Total Return Bond fund, says equities' long-term inflation-adjusted returns show a fading return rate and governments could soon turn to inflationary measures to boost returns.
‘The cult of equity is dying,’ said Gross.
‘Several generations were weaned and in fact grew wealthier believing that pieces of paper representing “shares” of future profits were something more than a conditional IOU that came with risk.’
But times have changed, said Gross, saying Jeremy Siegel's book ‘Stocks for The Long Run’ published in the 1990's encouraged investors to invest in equities at the wrong time.
‘Now in 2012, however, an investor can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. In turn it would show that higher risk is usually, but not always, rewarded with excess return.’
‘This long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return (known as the Siegel constant) since 1912 that Generations X and Y perhaps should study more closely.’
Siegel constant a 'historical freak'
The outspoken bond manager said common sense would argue that appropriately priced stocks should return more than bonds.
‘Yet despite the past 30-year history of stock and bond returns that belie the really long term, it is not the future win/place perfect order of finish that I quarrel with, but its 6.6% “constant” real return assumption and the huge historical advantage that stocks presumably command.’
'The legitimate question that market analysts, government forecasters and pension consultants should answer is how that 6.6% real return can possibly be duplicated in the future given today’s initial conditions which historically have never been more favorable for corporate profits.'
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