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Bill Gross' 2015 Outlook: "The Good Times Are Over, The Time For Risk Taking Has Passed"
From Bill Gross' 2015 Investment Outlook
"Ides"
A January Investment Outlook should normally be filled with recommended “do’s and don’ts,” “picks and pans” and December 31, 2015, forecasts for interest rates and risk assets. I shall do all of that as usual when I travel to New York City for the annual Barron’s Roundtable in a few weeks’ time. That is always an opportunity for me to engage in verbal jousting with Marc Faber, Mario Gabelli and the usual bearish forecast from the Gnome of Zurich, Felix Zulauf. So I’ll leave the specific forecasting for a few weeks’ time and sum it up in a few quick sentences for now: Beware the Ides of March, or the Ides of any month in 2015 for that matter. When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over.
Timing the end of an asset bull market is nearly always an impossible task, and that is one reason why most market observers don’t do it. The other reason is that most investors are optimists by historical experience or simply human nature, and it never serves their business interests to forecast a decline in the price of the product that they sell. Nevertheless, there comes a time when common sense must recognize that the king has no clothes, or at least that he is down to his Fruit of the Loom briefs, when it comes to future expectations for asset returns. Now is that time and hopefully the next 12 monthly “Ides” will provide some air cover for me in terms of an inflection point. Manias can outlast any forecaster because they are driven not only by rational inputs, but by irrational human expressions of fear and greed. Knowing when the “crowd” has had enough is an often frustrating task, and it behooves an individual with a reputation at stake to stand clear. As you know, however, moving out of the way has never been my style so I will stake my claim with as much logic as possible and hope to persuade you to lower expectations for future returns over the next 12 months.
My investment template shares a lot in common with, and owes credit to, the similar templates of Martin Barnes of the Bank Credit Analyst and Ray Dalio of Bridgewater Associates. All three of us share a belief in a finance-driven economic cycle which over time moves to excess both on the upside and the downside. For the past few decades, the secular excess has been on the upside with rapid credit growth, lower interest rates and tighter risk spreads dominating the long-term trend. There have been dramatic reversals as with the Lehman Brothers collapse, the Asia/dot-com crisis around the turn of the century, and of course 1987’s one-day crash, but each reversal was met with a new and increasingly innovative monetary policy initiative on the part of the central banks that kept the bull market in asset prices alive.
Consistently looser regulatory policies contributed immensely as well. The Bank Credit Analyst labels this history as the “debt supercycle,” which is as descriptive as it gets. Each downward spike in the economy and its related financial markets was met with additional credit expansion generated by lower interest rates, financial innovation and regulatory easing, or more recently, direct central bank purchasing of assets labeled “Quantitative Easing.” The power of additional and cheaper credit to add to economic growth and financial asset bull markets has been underappreciated by investors since 1981. Even with the recognition of the Minsky Moment in 2008 and his commonsensical reflection that “stability ultimately leads to instability,” investors have continued to assume that monetary (and at times fiscal) policy could contain the long-term business cycle and produce continuing prosperity for investors in a multitude of asset classes both domestically and externally in emerging markets.
There comes a time, however, when zero-based, and in some cases negative yields, fail to generate sufficient economic growth. While such yields almost automatically result in higher bond prices and escalating P/E ratios, their effect on real growth diminishes or in some cases, reverses. Corporate leaders, sensing structural changes in consumer demand, become willing borrowers, but primarily to reduce their own outstanding shares as opposed to investing in the real economy. Demographics, technology, and globalization reversals in turn have promoted a sense of “secular stagnation” as economist and former Treasury Secretary Larry Summers calls it and the “New Normal” as I labeled it as early as 2009. The Alice in Wonderland fact of the matter is that at the zero bound for interest rates, expected Returns on Investment (ROI) and Returns on Equity (ROE) are capped at increasingly low levels. The private sector becomes less willing to take a chance with their owners’ money in a real economy that has a lack of aggregate demand as its dominant theme. Making money by borrowing at no cost for investment in the real economy sounds like a no-brainer. But, it comes with increasing risk in an environment of secular stagnation, demand uncertainty, and with the ROI closer to zero itself than an entrepreneur is willing to bear.
And so the miracle of the debt supercycle meets a logical end when yields, asset prices and the increasing amount of credit place an unreasonable burden on the balancing scale of risk and return. Too little return for too much risk. As the real economy of developed and developing nations sputter, so too eventually do financial markets. The timing – as mentioned previously – is never certain but the inevitable outcome is commonsensically sound. If real growth in most developed and highly levered economies cannot be normalized with monetary policy at the zero bound, then investors will ultimately seek alternative havens. Not immediately, but at the margin, credit and assets are exchanged for figurative and sometimes literal money in a mattress. As it does, the system delevers, as cash at the core or real assets at the exterior become the more desirable holding. The secular fertilization of credit creation and the wonders of the debt supercycle may cease to work as intended at the zero bound.
Comprehending (or proving) this can be as frustrating as understanding the differences between Newtonian and quantum physics and the possibility that the same object can be in two places at the same time. Central banks with their historical models do not yet comprehend the impotence of credit creation on the real economy at the zero bound. Increasingly, however, it is becoming obvious that as yields move closer and closer to zero, credit increasingly behaves like cash and loses its multiplicative power of monetary expansion for which the fractional reserve system was designed.
Finance – instead of functioning as a building block of the real economy – breaks it down. Investment is discouraged rather than encouraged due to declining ROIs and ROEs. In turn, financial economy asset class structures such as money market funds, banking, insurance, pensions, and even household balance sheets malfunction as the historical returns necessary to justify future liabilities become impossible to attain. Yields for savers become too low to meet liabilities. Both the real and the finance-based economies become threatened with the zero-based, nearly free money available for the taking. It’s as if the rules of finance, like the quantum rules of particles, have reversed or at least negated what we historically believed to be true.
And so that is why – at some future date – at some future Ides of March or May or November 2015, asset returns in many categories may turn negative. What to consider in such a strange new world? High-quality assets with stable cash flows. Those would include Treasury and high-quality corporate bonds, as well as equities of lightly levered corporations with attractive dividends and diversified revenues both operationally and geographically. With moments of liquidity having already been experienced in recent months, 2015 may see a continuing round of musical chairs as riskier asset categories become less and less desirable.
Debt supercycles in the process of reversal are not favorable events for future investment returns. Father Time in 2015 is not the babe with a top hat in our opening cartoon. He is the grumpy old codger looking forward to his almost inevitable “Ides” sometime during the next 12 months. Be cautious and content with low positive returns in 2015. The time for risk taking has passed.
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NYSE Margin debt has rolled over. This happened 2 other times in the last 25 years: 1999 and 2007
http://www.goldsqueeze.com/analysis/nyse-margin-debt-to-gdp-continues-to...
We de-risked some folks
The filament finally ignites in the light-bulb head.
Come on Bill, I need me another taste of that good market crack, just one more taste......
wtf, as if...."Central banks with their historical models do not yet comprehend the impotence of credit creation on the real economy at the zero bound.'
of course they do.
yes of course.... he is not saying bonds for the long haul "High-quality assets with stable cash flows"
"NYSE Margin debt has rolled over. This happened 2 other times in the last 25 years: 1999 and 2007"
Margin debt rolled over from a high in 1998, and rolled over from a fairly high level in 2011 as well.
I am not bullish here, but "the safe time to short" is notoriously hard to find.
What? No war stories?
That's one of the best yet.
You need to overlay the dollar price of gold and then you will see a BIG difference between 1999, 2007, and what is happening now.
The previous two times saw a down turn in the stock market. I hate to say this but it looks like this shit will get more crazy before it bursts. Stocks have to turn decidedly down to crush those on margin, right?
isnt gross a contrarian indicator and bitter old man?
Everybody is leveraged to the hilt, no place left to go but down.
And yet credit MUST EXPAND. So what is the next trick that kicks the can and fools us? Derivatives on the derivatives, and hypothecating what is already hypothecated. The financial scams won't be allowed to end, because they can't.
After the inevitable market correction, buy TBTF banks, oil majors and MIC. Tax payers will always be forced to keep them afloat.
Not so, when on margin any decline must be met by increased funding or sell of asset at the close of trade regardless the price. Been there, done that, not fun.
Bill Gross - "I gots mines."
But Janet just keeps printing the money, how can the profits end?
Kramer says it is the best time to buy!
Bill Gross writes like some leader of a cult or a sect. Zero bound? From his Newport Beach mansion, sitting on money sacks, Gross is lecturing us common folk with his godly pronouncements. It used to be, a top guy gets canned, he or she opens up a consulting business and fades into obscurity unless there is a state governorship that can be bought. Just exit stage right, goombah Gross. If you must, write a book that wll end up on the remainder desk of one of the few remaining physical bookstores around.
Translation; "Buy my paper, it's better..."
Kill al these useless fucking shills already. Nothing changes otherwise.
I think it is simply, nothing changes.
"Debt supercycles in the process of reversal are not favorable events for future investment returns."
Translation:
"Debt" = My assets
"Super" = Be impressed now
"Cycle" = I have no idea when it will happen
"Process of" = Something happening, beyond your intelligence
"Reversal" = Someone gets screwed
"Not favorable" = Do not expect anything
"Event" = That time when you realize the money is gone
"Future" = When I am not here
I bet Gross gets high
Bullish !
Sprint sucks donkey balls.
The Bond King has come a long way since "shorting" treasuries 3 years ago
Some of Gross forecasts have been completely inaccurate, among the worst one were in 2013 -
He said that in 2013, stocks would return less than 5%. Actual: Dow up most since 1995, S&P up 29.6%
In 2013 he also said that gold would go up. Actual: Gold down 28%. Worst year since 1981.
That silly, misguided investment billionaire.
Yet, during that time he made money becuase he correctly bought agency bonds that he knew the fed would take out of circulation. He has never been a stock or PM investor. Only bonds.
Don't do as a billionaire says, do as he does.
The good times are killing me...
https://www.youtube.com/watch?v=GZ6c-6NhZgk
Hmmmm, Bill is recommending treasuries. I may have to reconsider my one handle on the ten year.
stand firm ... yields are going MUCH lower (deflation at hand)
I know, I was being facetious.
They have a cream for that now.
Is it called KY?
Not yesterday. Prices for food are still going through the roof.
That's not including all the taxes.
There is no problem with liquidity either.
I'd stay long credit writedowns and defaults....
50 billion is the first number I've heard in the energy patch...
Maybe it's time to invest in something that can't be conjured.
The only risk is being short when Yellen announces QE4...
... there's no end in sigh ...
"If real growth in most developed and highly levered economies cannot be normalized with monetary policy at the zero bound, then investors will ultimately seek alternative havens."
yeah, well nothing that price won't fix
hard to grow when asset prices are too the moon ... if you want growth then prices MUST come down (and debt holders getting wiped out in the process? ... too bad) ... need to start from a lower sustainable level
DJI trading direction affected by this article?
http://finance.yahoo.com/video/large-corporations-paying-off-al-04405273...
what a fucking joke
(OT: Chart of the moment might be the 10 year yield at 1.964 taking out the 10/14 low as the thundering herd of equity owners run for cover):
http://www.investing.com/rates-bonds/u.s.-10-year-bond-yield-advanced-chart
Thanks for the Public Endorsement of "Extraordinary Popular Delusions c. 2014", Bill.....
Ante Up the $ 100 Million or cause it to be so, and we can get started.......
Yellen will just print moar money out of thin air to offset ex-Pimpco bond Strategist.
We have new fools believing minimum wage increase will jump start this ecomony. That’s until, Kimberly Clark takes the cardboard roll out of toilet paper and jacks up the price. Use your peanut wage increase wisely.
Removing product cost has a backlash..
My yields have been getting lower and deflation is at hand.
My maturaties are onset. My young wife up and left me.
My mind relies on google and I can still play in the band.
Amkonymous
/Humor
Gross is 102 years late. The good times were over in 1913.
Risk? What risk...
Reminds me of the Merle Haggard song -
"I wish a buck was still silver. It was back when the country was strong...."
http://www.youtube.com/watch?v=sxLtXJzo3Ew&list=RDsxLtXJzo3Ew
“...each reversal was met with a new and increasingly innovative monetary policy initiative on the part of the central banks that kept the bull market in asset prices alive”
Given on-going Neo-Con Washington Consensus aggression, the now joining economy of China/Russia has options. They may interdict, especially as WW3 is primarily economic. These economic externalities means higher risk than normal for the West, thus tipping US/West over into a heavy Bear market. The Russian Bear and Chinese Dragon may act together or independently:
Russia can act: They just tell European banks they cannot pay back loans as the West has “wrecked” their economy, especially with the Saudi Oil pumping rate designed to drop oil prices. Thinly capitalized EU banks then fall apart. Also, Russia can claim NATO aggression, which means that Russia is in its rights to no longer supply Natural Gas to Europe.
China can act: The Bullion Futures market keeps getting hammered with Shorts. It is obvious the Bullion Banks, led by the FED, are dumping shorts onto market during normally quiet trading activity. While FED is shorting bullion, China then dumps their TBILLs. In response FED creates massive amounts of dollars to buy Chinese Tbills. China now holds massive amounts of dollars, and then dumps their new dollars in the currency market. This makes the dollar collapse. FED works feverishly with central banks around the world to do currency swaps to mop up dollars, but it is too little too late. They cannot do the swaps because exchange rate is destroyed due to volume of dollars. Excess dollars then chase after bonds, whose interest rates rise dramatically. This then reverses derivative contracts putting banks on the hook to pay out derivative money they don’t have. Then the bankers try to do bail-in’s, and then Western population revolts in fury, as their savings were swapped for bank stock. Average working people, who are voters, have dollars that are simultaneously disappearing from life savings, and have also rapidly lost purchasing power in markets.
MEFOBILLS
just an interjection in your narrative, if excess dollars chase after bonds then bond yields go down, not up. never mind, your on a roll
Mr. Gross, are you fishing for intelligent perspectives from people who don't lick your boots?
I used to read Mish's blog back in 2007-2010, I have read ZH from 2010 to present. There has never yet been a minus by any assets class I hold. Read and learn, it works. Beware any main stream media, you know who they are, the ones who urged you into NASDAQ using dollar cost averaging strategies.
To sum up: There's too much debt everywhere, so do the safe thing and buy more debt.
Call me cynical.... but what if...
Bill Gross is no doubt one of the more revered public figures in the finance sector. He rubs shoulders with some of the most powerful elites in politics and finance. If he's already got the inside wink and nod of upcoming QE4, he could be talking down the markets by sparking fear so he can buy the fucking huge dip and make a FORTUNE when his buddies at the fed roll out QE4 (which he already had a heads up on).
Again, I know it's super-cynical... but just goes to show what most of us here think: The markets are all rigged and the powerful players are all in bed together.
'The time for risk taking has passed', my ass, Mr. Gross. When this
house-of-cards implodes the United States of America will launch
World War Three to de-risk their certain demise. Neo-Liberalism advocates risk taking no matter what the costs are in the long run.
If risk taking time has passed it would be prudent to defund the CIA, and the MIC, as well as Congress, and the White House whores that
facilitated this global horseshit.
You guys kill me. Gross is a self made billionaire, and yet you are all smarter than he is, lol.
Even more ridiculous, I am willing to bet most (all) of you were believing in pm's and commodities, shorting stocks, peak oil, and shorting the dollar.
feckin hilarious.You all are definitely smarter than Gross and deserve to have his money. ROTFLMAO.
My local major-city newspaper has an article on a family of five (mom, dad, three kids), who are paying 1200 DOLLARS a month for their health care plan through Premera. Under what conditon, on the face of this planet, should any family be charged 1200 DOLLARS a month for a healthcare plan?
My first child (1981) cost a total of $600, which included all prenatal and postnatal for mom and baby. My second child (1987) cost $900, including all prenatal and postnatal for mom and baby. At the time, the premiums were running around $35 a month. Now, there are just a very few reasons for this ridiculous rise in costs:
1. We are paying health care for multiple nations: every illegal that is here shows up at the hospital for free care
2. Every green card holder, who can get here and take an American job, has health care, which puts OUR OWN on medicaid, rather than being a job holder and having employment healthcare. For anyone who says we can't educate our own? Stop giving Any college slots to foreigners; More than one-third of undergraduate positions are given to foreigners in order to create golden parachutes for the College Presidents, professors who retire at twenty years when they are Still barely fifty (ever see pics of profs from the old days? always white haired and very old, cause you had to get to at least 65/70 to retire) AND at graduate level MORE THAN one-half of graduate education,Phd, MD and Masters slots, are given to foreigners rather than are own.
Why? The answer as noted above is easy; colleges are giving their over-staffed and over-paid, retiring and getting fifty years of retirement for twenty years of work, golden parachute benefits and pay.
That is America's downfall.
3. Lest you forget, for all the caterwalling about Aids; the homosexual community has done absolutely nothing to reign in its own. Those who are HIV positive seek out others with whom they can consort, creating round-robin bouts of "other" STDs which must be treated. This leads to drug-resistant gonorrhea with syphllis quickly catching up in the untreatable category. There is also an entire host of accompanying disease that Aids brings, all of which are almost always treated under medicaid. Cost: Recent numbers indicate more than $750,000 per Aids patient. With 1.2 KNOWN Aids cases in the US, figure out that number and that is who we are all paying for.
4. Why isn't tobacco illegal? Failing to make tobacco illegal will be seen as one of the great disgraces of our time. No excuses for it.
5. Welfare creates obesity; the two are intertwined. Stop importing foreigners to take American jobs. For those who say we have always been a nation of immigrants? We also once drove Ford Model-Ts. We are no longer a nation with open land being given a way to those who would work it after placing their "mark" in the ground. (Great Tom Cruise movie about this: Far and Away. Five star movie!)
America needs to stop being liberal stupid cause their ain't no stupid like liberal stupid. It is a pull into the gutter and a path to destruction. No more IMMIGRANTS. We are done full up. Where does the traffic gridlock in LA, Seattle, ect go from here?
Lot of good points but not 4. As a never smoker it has long been obvious to me that, economically, tobacco gets a bad rap. Its users tend to survive OK throughout their working years and then clock out relatively quickly when they get near retirement age. So they contribute a full lifetime to the economy, and they pay egregious taxes while doing so. Compared to non users who like longer on benefits and who are likely to be propped up longer at end of life, tobacco users are net financial contributors.
A number of other drugs that are ostensibly illegal appear to render many of their users unfit for work at a far younger age, to be carried on welfare for most of their life, while those drugs go untaxed, so net effect is a real negative for the general taxpayers.
You're payin for the 40 million illegal beaners muthafukka. Get over it.
It's a tax anyway.
4. Why isn't tobacco illegal? Failing to make tobacco illegal will be seen as one of the great disgraces of our time. No excuses for it.
ISIS got ya covered.
Syria: Isis chief executioner found beheaded with cigarette in his mouth."IS has declared smoking "slow suicide" and demands that "every smoker should be aware that with every cigarette he smokes in a state of trance and vanity is disobeying God"."
http://www.ibtimes.co.uk/syria-isis-chief-executioner-found-beheaded-cig...
Ohhhh I don't know man.... 2015 started out pretty fucking good in my book.
Show your love here for this bankster dick sukker....
https://www.youtube.com/watch?v=ss0tzJuP6VM&feature=youtu.be
Lesson learned Bill. Step down or play with a nail gun.
Sounds like Faber wrote this
Maybe he's a billionaire with a conscience and we should pay attention? Even if he is only right 90% of the time it's good enough for prop trading
Well duh. Read the definition for "investor." Bull markets had better be normal. If bear markets were normal, before long you would arrive at zero, then you can turn the lights out on the civilization as you leave the room.
True that. Since 1980 we've seen the mother of all bond market ramps to keep assets pumped. (That's where the economy will live or die, the bond market not the stock market.)
If the standard length of a Kondratiev long wave is 50 years, counting back from 1980 puts us at the Great Depression. I'm not sure if the emergency breakwaters that the Fed has erected since then have outlasted the impulse or if it is continuing to build on the seaward side.
But that matters less and less as time goes by. Add 50 to 1980, and we're passed the midway point to the next long wave, nominally expected in 2030. If it arrives early and the tides are still high, be prepared to elbow your way past the women and children to get to the boats.
Again, duh.
It is a plain fact of life that you can only invest what you have previously saved. So how can in the world can the road to prosperity consist of artificially supressing the return on savings to zero in order to force capital, that would otherwise be saved and invested with due dilligence, into artificially pumped-up assets?
The answer is simple: IT CAN'T.
Allowing the central monetary planners at Federal Reserve to artificially manipulate interest rates, and thereby the allocation of capital, has been just as bad an idea as allowing the central economic planners in the Supreme Soviet to run the industry of Russia was.