PIMCO:Markets Telling Investors To Drop Dead

Toward the end of Bill Gross’ latest is the following;

In the meantime, they are faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less. There is no 8% there for pension funds. There are no stocks for the long run at 12% returns. And the most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living. Stan Druckenmiller is leaving, and with good reason. A future of low investment returns, and a heap of trouble for those expecting more, is what lies ahead.

If we were watching television one of the anchors might say “wow, now I’m depressed” which is of course is the completely wrong way to come at this. Market results and market predictions should not trigger any emotional response. Most of the time the market goes up and sometimes it goes down and the thing is the vast majority of market participants realize this (it might make sense to distinguish market participants from 401k participants).

Another reason not to be depressed, besides it being illogical (if you even agree with Gross) is that what he is writing about has already happened. He mentioned 2% growth rates, well for the last ten years stocks have had negative growth rates (so to speak). The first time the SPX touched 1147 (yesterday’s close) was in July 1998. As far as 8% pension returns, that obviously is a huge obstacle with very little visibility for 8% being reliable anytime soon–you probably read that pensions cannot reduce their growth assumptions because that would increase the extent to which they are underfunded. As far as bonds yielding 2.5%, yields have been low for a while now even if not this low.

Whether you believe in the new normal, as they coin it, or not it is not that new actually. Crappy results for US stocks is certainly not new yet, repeat stats coming, Brazil managed to go up 300% in the oughts, many others went up more than 100% and some of the “laggards” outperformed the US by 50-75% during that decade. The world in those countries went on without us. Additionally there were plenty of US stocks that are far from obscure that did just fine as well. Deere (DE), a name I’ve never owned, was up 169% in the decade, Conoco Phillips (COP) was up 123% and obviously Apple was up a bazillion percent.

If the malaise continues for several more years, like another seven, there will be plenty of countries, stocks and themes that do just fine. The solution, same as yesterday, requires more work. A big focus of this site and the way we manage is that over a period of years finding the right countries and themes can add value versus thinking in terms of months where anything goes.

As far as standard of living, this site has been far from alone in pointing out that retirement as it has been thought of before has changed for most people. Less leisure however can hopefully mean a greater sense of purpose for most people.

Short post, tricky medical call with the Fire Department last night that jacked up my normal routine.

13 Comments

  1. Mebane Faber has a quote up today wherein Ken Fisher calls the concept of a new normal “idiotic.”

    It’s just mind-numbing that Gross and (worse) El-Erian keep beating this drum. What happened to the insightful thinking in “When Markets Collide?” Just a guess, but I doubt that Steve Jobs agrees with Gross.

    Call me naive, but I don’t think 8%is that hard. The most important word in your post today is thinking, Roger. Thanks for doing it.

    Reply
  2. not sure if “new normal” is idiotic but it is not the only part of the landscape

    Reply
  3. Gross and El-Erian are not idiots.

    Ken Fisher has 35 billion under management and can not say I will not be able to make money for my customers over the next decade. He will always project growth ahead.

    Enjoy this cyclical bull market because this decade will not be wonderful IMO

    SEG

    Reply
  4. Roger,

    You are saying buy themes that will out perform – OK

    Easier to say than to do. Probablly even harder for your readers than you. Last time I requested your performance you were out performing the market – so congratulations

    But your out performance was not enough to provide the types of returns people expect/need/want. I do not mean to be to difficult, because considering the market you had to deal with you did well.

    It will not be easy and large out performance is unlikely. This probably gets us back to living below our means.

    Reply
  5. in all of these posts i talk about there needing to be more work than before–ie not easy as you say.

    living below our means is always a good idea of course.

    seeking out the right countries and themes is anyone’s best chance, IMO.

    I would submit for further thought (and maybe a separate post) that the decline in the US market over the last ten years has made it easier to outperform for people willing to find healthier countries and important themes.

    interesting to contemplate.

    Reply
  6. Aside from the pure investment standpoint, what IS disheartening is the fact that the U.S. is no longer the leader in the world and is no longer the main economic engine going forward.
    That said, you are correct Roger, the future lies in other countries that are making progress.

    Reply
  7. When Gross says 12% returns for a stock isn’t in the cards, he probably means the markets.

    Roger is probably right that there are countries, themes, and companies that will certainly perform better than Gross’ belief. However, they will be difficult to find. I think that folks shouldn’t expect the double digit returns they got in the 80s and 90s. They still expect to see those returns though. The market will train them. Just as soon as folks accept lower returns and give up on the markets, we will enter the next secular bull.

    However, I don’t see this happening until our debt levels are brought down to reasonable levels. Until then, it will be tough sledding, except for countries and companies with solid balance sheets.

    Reply
  8. Ken Fisher promises a lot but look at his actual returns from Morningstar. 3yrs -8.35 5yrs 1.29 10yrs 2.46. These are for his world allocation, including emerg markets, fund PURISIMA-PURIX that he manages. His sales people promise great returns for min $500k investment but if he cant deliver on this $380 million fund over the last 10 -15 yrs good luck to any sucker that gets taken in by his team. He is full of horse manure. Follow his perma bull BS at your own peril. Sorry Roger if I got carried away. Luv your posts.

    Reply
  9. I am a newbee and have done a lot better than Ken Fisher.
    Congrad, Roger, for beating the market.
    Jeff from Milan, Italy
    Roger, thanks for this website, Financial knowledge is cumilative and we sure are accumulating a bunch – Thanks – Jeff

    Reply
  10. Roger
    The problem is that most of us invest for retirement with limited choices in 401K plans where most funds are similar to the broad indexes. We cannot pick the best sectors or countries.

    We have broad bond funds, broad international and us stock funds and maybe reits.

    What can the average investor do but save more?

    Reply
  11. what about aggressively lobbying your HR about adding choices. one client i help out with his 401k has access to funds for Canada, Latam, and Asia.

    what about lobbying your HR for moving the whole thing to a discount brokerage such that you have your own brokerage account. Schwab offers this, I believe it is called a PCRA account.

    Reply
  12. Agree with the comment on Ken Fisher. I was contacted by his team 8 years ago and, of course, received copies of all his famous Forbes calls in the late 90’s and early 00’s. I decided to go it alone as I could live with my mistakes but not his. Thank heaven. His organization is nothing more than a marketing machine and his credibility has gone down the tubes with Bill Miller’s. For him now to question a “new normal” concept is laughable as he was run over big time in this bear market and did not take any defensive measures when he could have.

    Reply
  13. How can anyone not say that the market is a crapshoot. No one can predict where the market will be tomorrow or in a decade. We can make reasonable assumptions, that’s all. Advisors that predict the DOW at 1000 or 30000 would like your money to manage, collect their fees, and then go and retire while you are left in the dust.

    The mantra today is “trend following”. That will be in affect until it isn’t.

    Reply

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PIMCO:Markets Telling Investors To Drop Dead

Toward the end of Bill Gross’ latest is the following;

In the meantime, they are faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less. There is no 8% there for pension funds. There are no stocks for the long run at 12% returns. And the most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living. Stan Druckenmiller is leaving, and with good reason. A future of low investment returns, and a heap of trouble for those expecting more, is what lies ahead.

If we were watching television one of the anchors might say “wow, now I’m depressed” which is of course is the completely wrong way to come at this. Market results and market predictions should not trigger any emotional response. Most of the time the market goes up and sometimes it goes down and the thing is the vast majority of market participants realize this (it might make sense to distinguish market participants from 401k participants).

Another reason not to be depressed, besides it being illogical (if you even agree with Gross) is that what he is writing about has already happened. He mentioned 2% growth rates, well for the last ten years stocks have had negative growth rates (so to speak). The first time the SPX touched 1147 (yesterday’s close) was in July 1998. As far as 8% pension returns, that obviously is a huge obstacle with very little visibility for 8% being reliable anytime soon–you probably read that pensions cannot reduce their growth assumptions because that would increase the extent to which they are underfunded. As far as bonds yielding 2.5%, yields have been low for a while now even if not this low.

Whether you believe in the new normal, as they coin it, or not it is not that new actually. Crappy results for US stocks is certainly not new yet, repeat stats coming, Brazil managed to go up 300% in the oughts, many others went up more than 100% and some of the “laggards” outperformed the US by 50-75% during that decade. The world in those countries went on without us. Additionally there were plenty of US stocks that are far from obscure that did just fine as well. Deere (DE), a name I’ve never owned, was up 169% in the decade, Conoco Phillips (COP) was up 123% and obviously Apple was up a bazillion percent.

If the malaise continues for several more years, like another seven, there will be plenty of countries, stocks and themes that do just fine. The solution, same as yesterday, requires more work. A big focus of this site and the way we manage is that over a period of years finding the right countries and themes can add value versus thinking in terms of months where anything goes.

As far as standard of living, this site has been far from alone in pointing out that retirement as it has been thought of before has changed for most people. Less leisure however can hopefully mean a greater sense of purpose for most people.

Short post, tricky medical call with the Fire Department last night that jacked up my normal routine.

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