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Bill Gross: "The Cult Of Equity May Be Dying, But The Cult Of Inflation May Only Have Just Begun"

Tyler Durden's picture





 

Want to buy stocks on anything than a greater fool theory, or hope and prayer that someone with "other people's money" will bail you out of a losing position when the market goes bidless? That may change after reading the latest monthly letter from Pimco's Bill Gross whose crusade against risk hits a crescendo. Yes, he is talking his book (and talking down his equity asset allocation), but his reasons are all too valid: "The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well. I “tweeted” last month that the souring attitude might be a generational thing: “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.”.... 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."

So what is a cult chasing figure supposed to do? Well, the cult of equities may be over. But the cult of reflating inflation is just beginning: "The primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. The easiest way to produce 7–8% yields for bonds over the next 30 years is to inflate them as quickly as possible to 7–8%! Woe to the holder of long-term bonds in the process! Similarly for stocks because they fare poorly as well in inflationary periods. Yet if profits can be reflated to 5–10% annual growth rates, if the U.S. economy can grow nominally at 6–7% as it did in the 70s and 80s, then America’s and indeed the global economy’s liabilities can be “reflated” away. The problem with all of that of course is that inflation doesn’t create real wealth and it doesn’t fairly distribute its pain and benefits to labor/government/or corporate interests. Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades. Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other Euroland countries may dominate the timescape. The cult of equity may be dying, but the cult of inflation may only have just begun."

What is Bill Gross really saying? Simple: that pressing CTRL-P for an electronic currency is really, really easy and will be even easier in the future once it becomes a quarterly, monthly, weekly, daily, hourly habit. And it will work in an interrelated relativistic system, until one day it doesn't, and all faith in fiat goes out of the window. Then he who laughs last will be he who has no fiat currency in their disposal. Finally, since we have hit the exponential phase in the terminal CTRL-P experimentation, the time until said even will not be long.

From Bill Gross:

Cult Figures

  • ? The long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return since 1912. 
  • The legitimate question that market analysts, government forecasters and pension consultants should answer is how that return can be duplicated in the future.
  • Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.

? The cult of equity is dying. Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of “stocks for the long run” or any run have mellowed as well. I “tweeted” last month that the souring attitude might be a generational thing: “Boomers can’t take risk. Gen X and Y believe in Facebook but not its stock. Gen Z has no money.” True enough, but my tweetering 95-character message still didn’t answer the question as to where the love or the aspen-like green went, and why it seemed to disappear so quickly. 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. Hadn’t history confirmed it? Jeremy Siegel’s rather ill-timed book affirming the equity cult, published in the late 1990s, allowed for brief cyclical bear markets, but showered scorn on any heretic willing to question the inevitability of a decade-long period of upside stock market performance compared to the alternatives. 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.

Got Stocks?
Chart 1 displays a rather different storyline, one which overwhelmingly favors stocks over a century’s time – truly the long run. 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. Had they been alive in 1912 and lived to the ripe old age of 100, they would have turned what on the graph appears to be a $1 investment into more than $500 (inflation adjusted) over the interim. No wonder today’s Boomers became Siegel disciples. Letting money do the hard work instead of working hard for the money was an historical inevitability it seemed.

Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)? The commonsensical “illogic” of such an arrangement when carried forward another century to 2112 seems obvious as well. If stocks continue to appreciate at a 3% higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world! Owners of “shares” using the rather simple “rule of 72” would double their advantage every 24 years and in another century’s time would have 16 times as much as the skeptics who decided to skip class and play hooky from the stock market.

Cult followers, despite this logic, still have the argument of history on their side and it deserves an explanation. Has the past 100-year experience shown in Chart 1 really been comparable to a chain letter which eventually exhausts its momentum due to a lack of willing players? In part, but not entirely. Common sense would argue that appropriately priced stocks should return more than bonds. Their dividends are variable, their cash flows less certain and therefore an equity risk premium should exist which compensates stockholders for their junior position in the capital structure. Companies typically borrow money at less than their return on equity and therefore compound their return at the expense of lenders. If GDP and wealth grew at 3.5% per year then it seems only reasonable that the bondholder should have gotten a little bit less and the stockholder something more than that. Long-term historical returns for Treasury bill and government/corporate bondholders validate that logic, and it seems sensible to assume that same relationship for the next 100 years. “Stocks for the really long run” would have been a better Siegel book title.

 
 
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 perfecta order of finish that I quarrel with, but its 6.6% “constant” real return assumption and the huge historical advantage that stocks presumably command. Chart 2 points out one of the additional reasons why equities have done so well compared to GNP/wealth creation. Economists will confirm that not only the return differentials within capital itself (bonds versus stocks to keep it simple) but the division of GDP between capital, labor and government can significantly advantage one sector versus the other. Chart 2 confirms 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. In addition, government has conceded a piece of their GDP share via lower taxes over the same time period. Corporate tax rates are now at 30-year lows as a percentage of GDP 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.
 
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. 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? They cannot, absent a productivity miracle that resembles Apple’s wizardry.
 
Got Bonds?
My ultimate destination in this Investment Outlook lies a few paragraphs ahead so let me lay its foundation by dissing and dismissing the past 30 years’ experience of the bond market as well. With long Treasuries currently yielding 2.55%, it is even more of a stretch to assume that long-term bonds – and the bond market – will replicate the performance of decades past. The Barclay’s U.S. Aggregate Bond Index – a composite of investment grade bonds and mortgages – today yields only 1.8% with an average maturity of 6–7 years. Capital gains legitimately emanate from singular starting points of 14½%, as in 1981, not the current level in 2012. What you see is what you get more often than not in the bond market, so momentum-following investors are bound to be disappointed if they look to the bond market’s past 30-year history for future salvation, instead of mere survival at the current level of interest rates.
 
Together then, a presumed 2% return for bonds and an historically low percentage nominal return for stocks – call it 4%, when combined in a diversified portfolio produce a nominal return of 3% and an expected inflation adjusted return near zero. The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned. The simple point though whether approached in real or nominal space is that U.S. and global economies will undergo substantial change if they mistakenly expect asset price appreciation to do the heavy lifting over the next few decades. Private pension funds, government budgets and household savings balances have in many cases been predicated and justified on the basis of 7–8% minimum asset appreciation annually. One of the country’s largest state pension funds for instance recently assumed that its diversified portfolio would appreciate at a real rate of 4.75%. Assuming a goodly portion of that is in bonds yielding at 1–2% real, then stocks must do some very heavy lifting at 7–8% after adjusting for inflation. That is unlikely. If/when that does not happen, then the economy’s wheels start spinning like a two-wheel-drive sedan on a sandy beach. Instead of thrusting forward, spending patterns flatline or reverse; instead of thriving, a growing number of households and corporations experience a haircut of wealth and/or default; instead of returning to old norms, economies begin to resemble the lost decades of Japan.
 
Some of the adjustments are already occurring. Recent elections in San Jose and San Diego, California, have mandated haircuts to pensions for government employees. Wisconsin’s failed gubernational recall validated the same sentiment. Voided private pensions of auto and auto parts suppliers following Lehman 2008 may be a forerunner as well for private corporations. 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. There are still tricks to be played and gimmicks to be employed. For example – the accounting legislation just passed into law by the Congress and signed by the President allows corporations to discount liabilities at an average yield for the past 15 years! But accounting acts of magic aside, this and other developed countries have for too long made promises they can’t keep, especially if asset markets fail to respond as they have historically.
 
Reflating to Prosperity
The primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. The easiest way to produce 7–8% yields for bonds over the next 30 years is to inflate them as quickly as possible to 7–8%! Woe to the holder of long-term bonds in the process! Similarly for stocks because they fare poorly as well in inflationary periods. Yet if profits can be reflated to 5–10% annual growth rates, if the U.S. economy can grow nominally at 6–7% as it did in the 70s and 80s, then America’s and indeed the global economy’s liabilities can be “reflated” away. The problem with all of that of course is that inflation doesn’t create real wealth and it doesn’t fairly distribute its pain and benefits to labor/government/or corporate interests. Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades. Financial repression, QEs of all sorts and sizes, and even negative nominal interest rates now experienced in Switzerland and five other Euroland countries may dominate the timescape. The cult of equity may be dying, but the cult of inflation may only have just begun.
 
William H. Gross
Managing Director

 

 


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Tue, 07/31/2012 - 07:36 | Link to Comment francis_sawyer
francis_sawyer's picture

all Ponzi's eventually come to the same ending...

Tue, 07/31/2012 - 07:42 | Link to Comment FEDbuster
FEDbuster's picture

Zimbabwenomics, bitchez!!!

Tue, 07/31/2012 - 07:58 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

Zombieconomics.........or.......trying to do math on bathsalts.

 

Tue, 07/31/2012 - 08:59 | Link to Comment The Monkey
The Monkey's picture

Talk about a binary trading situation over the next few weeks. Either jump on the inflation bandwagon, or short everyone else that did so pre-emptively!

Only fool's rush in.

Tue, 07/31/2012 - 08:46 | Link to Comment e_goldstein
e_goldstein's picture

When does Gideon Gono receive his Nobel prize for economics?

Tue, 07/31/2012 - 09:31 | Link to Comment phalfa5
Tue, 07/31/2012 - 08:21 | Link to Comment LMAOLORI
LMAOLORI's picture

 

Are fiat currencies headed for a collapse?

snip

" As the investment world eagerly awaits more stimulus, a debate on a previously unthinkable topic has started to emerge - can fiat currencies survive round after round of debasement? "


"Every single fiat currency in history has collapsed, this time will be no different."

http://www.moneycontrol.com/news/features/are-fiat-currencies-headed-forcollapse_737206.html

 


Wall Street Now Almost Certain Fed and ECB Will Act

http://www.cnbc.com/id/48409582

http://media.cnbc.com/i/CNBC/CNBC_Images/header/dotdot2.gif); height: 2px; line-height: 2px; font-family: Arial; font-size: 20px; font-weight: normal; text-align: left; background-repeat: repeat no-repeat;">

Tue, 07/31/2012 - 09:13 | Link to Comment bank guy in Brussels
bank guy in Brussels's picture

Fabulous piece of analysis by Bill Gross ... At its heart talking about how workers have been totally ravaged, and how basically it will be very tough to make any money investing for the rest of our lives ...

Key sentences from Gross' article ... with the background of referring to Prof. Jeremy Siegel's famous charts showing how stocks have been a 'great long-term investment' over the past century ... and Gross both answering the question of how stock shares could grow 6.6% while GDP only grew 3.5% ... and also showing how that era is OVER ... with the expected returns of the future being something like ZERO after inflation.

Gross writes:

«  ... 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. ...

... In addition, government has conceded a piece of their GDP share via lower taxes over the same time period. Corporate tax rates are now at 30-year lows as a percentage of GDP 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. ...

... Together then, a presumed 2% return for bonds and an historically low percentage nominal return for stocks – call it 4%, when combined in a diversified portfolio produce a nominal return of 3% and an expected inflation adjusted return near zero. ...

... The [Jeremy] Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned. ... »

Tue, 07/31/2012 - 07:36 | Link to Comment Its_the_economy...
Its_the_economy_stupid's picture

Holt Shite, BAtMan! 

Get me to the coin store fast, Robin!

Tue, 07/31/2012 - 08:33 | Link to Comment 1000pips
1000pips's picture

same ole doom and gloom, yet more rolls royce's and mega yachts are being sold than ever.  just look around-look at the rich, like Gross; they are saying one thing, yet doing and living completely opposite.  Hell, even Kyle Bass has a 40,000 sq ft house. 

The point is, Fiat ain't going nowhere, and the Euro is still being used today.  Don't fall for this 'end of the world' bull shit.  Just make alot of money and enjoy yourself--before your too old and jaded.

Tue, 07/31/2012 - 07:39 | Link to Comment bigwavedave
bigwavedave's picture

if the old fart would retire someone younger could have a job. same goes for all the other geriatric pundit scumbags.

Tue, 07/31/2012 - 07:47 | Link to Comment Dr. Sandi
Dr. Sandi's picture

Fuckin' deep thoughts for fuckin' deep times.

Tue, 07/31/2012 - 08:00 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

Current times.....cause we really don't want to think about the future.

 

The next bailout will come.....don't worry.

 

Tue, 07/31/2012 - 07:42 | Link to Comment rbg81
rbg81's picture

The whole bond vs. equity debate has that eerie March 2000 feel to it when no one could imagine that equities could do anything but continue to go up.  Sure, USTs have done great, given the massive, gradual rate decline of the past 30 years.  Problem is that there is no where left to go unless interest rates start going negative (which wouldn't shock me at this point).  USTs are obviously a bubble, but the rates are being kept artificially low by the FED, so its anyone's guess when this bubble will burst.  In addition, for a lot of people, wealth preservation is king, so they will accept low yields for relative safety.  Those who jump on the bandwagon just before it stops get burned.  Take a second look at asset classes deemed "dead" or "dying".

Tue, 07/31/2012 - 07:46 | Link to Comment francis_sawyer
francis_sawyer's picture

all you need to call an end to any Ponzi is for there to be:

~~~

- a sufficient number of bagholders

- sufficiently few who cashed out & left the table long ago

Tue, 07/31/2012 - 07:44 | Link to Comment Nacho Libre III
Nacho Libre III's picture

but the cult of endless blabber goes on and on forever

Tue, 07/31/2012 - 07:45 | Link to Comment orca
orca's picture

Did he really say "the cunt of equity"? Tssss

Tue, 07/31/2012 - 07:45 | Link to Comment buzzsaw99
buzzsaw99's picture

Woe to the holder of long-term bonds in the process!

 

Whatever. He said the exact same thing when the 10y was at 3.5%.

Tue, 07/31/2012 - 07:47 | Link to Comment Vincent Vega
Vincent Vega's picture

I think Bill is correct regarding equities. Bonds may be a different story. Are bond prices artificially inflated, yes. But if yields rose to 7-8% as Gross suggest, tack another $T+ annually to the deficit just in interest payments. Therefore, I believe, the Fed will maintain it's ZIRP indefinately or until the systems implodes...which ever comes first.

Tue, 07/31/2012 - 07:53 | Link to Comment rbg81
rbg81's picture

Agree, that the FED will do everything in its power to maintain the ZIRP.  Without ZIRP, the Federal deficit spins out of control and then things get really interesting.  But, at some point, even the FED may lose control of the situation.  When that happens is anyone's guess.  Until it happens, however, bonds are probably a "safe" investment.

Tue, 07/31/2012 - 14:09 | Link to Comment XitSam
XitSam's picture

Can you time the market to sell your bonds before the Fed loses control? Kudos if you can.

PS. Why do I keep getting Obama ads? I don't mind that he is wasting his money, but they are annoying to see.

Tue, 07/31/2012 - 07:47 | Link to Comment Jason T
Jason T's picture

Japan, US and UK are all running massive twin deficits.. US is over 10%, UK 9.9% and Japan is close to 10% of GDP.. 

these are the countries printing money ... at some point, it's " we don't want the Ben confetti from Washington" or the "confetti from London" or "confetti from Tokyo"

if such a policy of Control-P were to actaully continue.  

Tue, 07/31/2012 - 07:50 | Link to Comment orca
orca's picture

On another note, how he is able to pen hundreds of words on the art of staying solvent without menioning the G word (or the S word for that matter) is beyond me.

Tue, 07/31/2012 - 07:52 | Link to Comment TrumpXVI
TrumpXVI's picture

I agree that the "cult of equity" is dying, but this has very troubling implications.  Because the equity market is what capitalism is ultimately all about.  TPTB cannot and will not allow it to die.  They will FORCE people to support this dying paradigm.

It won't be pretty.  It will be destructive to individual liberty.

Tue, 07/31/2012 - 07:55 | Link to Comment rufusbird
rufusbird's picture

nice rant!

Tue, 07/31/2012 - 07:58 | Link to Comment lordbyroniv
lordbyroniv's picture

comic books, gold, coins, stamps....anything not nailed down.

Tue, 07/31/2012 - 11:28 | Link to Comment Lost Wages
Lost Wages's picture

I'm hanging on to my late 90s UK Drum and Bass vinyl records. Hopefully no one will tell me you can't eat records, because my plan will be for naught.

Tue, 07/31/2012 - 11:38 | Link to Comment ParkAveFlasher
ParkAveFlasher's picture

hard liquor.  don't forget the hard liquor.

Tue, 07/31/2012 - 07:56 | Link to Comment Mad Mad Woman
Mad Mad Woman's picture

It'll be a long time till the US economy sees 6 - 7% yrly growth. A long time. We'll be lucky if we see 1% growth for the year. 

Tue, 07/31/2012 - 08:12 | Link to Comment youngman
youngman's picture

Not yearly growth.......yearly inflation....I think you will see 7-8% in food this year...maybe gas and electric too.....but the government number will show 2%....you are already seeing 10-12% increases in the deficit evey year......NOW that is Inflation..

Tue, 07/31/2012 - 08:10 | Link to Comment slackrabbit
slackrabbit's picture

In short out-right inflation adjusted theft for the next 10-30 years to bail out the central bankers.

Gold and silver may be worth a llot by that time, but what Gross is implying that our children or grand-kids may benefit...

Tue, 07/31/2012 - 08:07 | Link to Comment Money 4 Nothing
Money 4 Nothing's picture

OT Stupid question.. Why is the Fed in DC to discuss more QE when the Dow is at 13,000? Any information would be helpful.

 

TIA!

Tue, 07/31/2012 - 08:18 | Link to Comment Dr. Richard Head
Dr. Richard Head's picture

No information will be given this week, as the Bearded One will be giving a press conference this week.

Tue, 07/31/2012 - 08:23 | Link to Comment Money 4 Nothing
Money 4 Nothing's picture

Thanks, they just mentioned that's why The Bearded One was there today.

 

Anymore info would be helpful.

Tue, 07/31/2012 - 08:33 | Link to Comment orca
orca's picture

The operative word is "pro-active". Why go from S&P 1400 to 700 to 3,000 if you can skip the 700 bit? Doesn't 1400 > 3,000 send a more hopeful message of growth, love, understanding, happiness, peace and trust? He is not doing this for himself, he is doing this for us, and we should all be thankfull for his pro-activity. He ís a pro you know and he's also active.

Tue, 07/31/2012 - 16:36 | Link to Comment Hard Assets
Hard Assets's picture

The "equity" market is on a cautiously optimistic ramp-up as it anticipates inflation. Gold is nervously, confirming this.

The "bond" market is expecting the end of the road. cascading, cross-default, domino failure.

Bonds and equities cannot rise together, except recently. It is the very long, perhaps decade old argument of deflation/inflation.

Bottom line, something is going to blow apart, LARGE !

Hope "We" are in the right "asset" at the right time.

We hear the "doomer" speak each and every day but ask yourself, can the shit that is going on now continue?

No it can't, so prepare.  

Tue, 07/31/2012 - 08:35 | Link to Comment g speed
g speed's picture

M 4 N

The answer is the "who benifits first" from inflation question

Tue, 07/31/2012 - 09:03 | Link to Comment Money 4 Nothing
Money 4 Nothing's picture

Banksters? Just going by what happened in Greece. I could be wrong?

Tue, 07/31/2012 - 08:16 | Link to Comment 847328_3527
847328_3527's picture

"Inflation"

How Barabric!

And for those keen investors in DB (not FB, I am talking'bout DB):

 

Deutsche Bank investment bank profit plunges 63 pct

 

http://finance.yahoo.com/news/deutsche-bank-investment-bank-profit-10591...

Tue, 07/31/2012 - 08:17 | Link to Comment GMadScientist
GMadScientist's picture

"If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?"

Gee, uh...preferential tax treatment?

Tue, 07/31/2012 - 08:35 | Link to Comment Shizzmoney
Shizzmoney's picture

Gen Z has no money

This is what worries me (especially for me).  How the fuck are we going to keep propping up the only thing, the US Stock Market, that's propping up this ponzi economy?

By 2020, the DJIA/NASQ/S&P are bacially just going to end up being one game of ping pong between a handful of oligarchical entities. 

And there isn't a paddle big enough to handle those oversized saggy balls. 

Tue, 07/31/2012 - 09:49 | Link to Comment sockratte
sockratte's picture

didnt read? just inflate it to where you want it. ;-)

Tue, 07/31/2012 - 11:16 | Link to Comment ElvisDog
ElvisDog's picture

It's worse than that. Not only is Gen Z not making any money, but they're also draining the wealth of the Baby Boomers. How many 20-somethings are living at home after graduating from college paid for by their parents co-signing student loans?

Tue, 07/31/2012 - 08:42 | Link to Comment Reven
Reven's picture

Whether Gross realizes it or not, he just called for hyperinflation.  The US cannot fund the deficit at 7-8% of GDP.  No fucking way.  The financial repression gambit has to hold, or it's end of game.  And I put the odds at about 50/50 which way this thing goes.

Tue, 07/31/2012 - 16:40 | Link to Comment Hard Assets
Hard Assets's picture

Bingo !

This man wins a free hat !

Tue, 07/31/2012 - 08:53 | Link to Comment dvsteenk
dvsteenk's picture

propping up the stock market seems like the easiest thing lately, daily 2-3% moves on request...

it's like end-of-month window-dressing "on command", perhaps helped by the inevitable short squeeze, but pumping with cheap money is the main driver

i keep being amazed at how this keeps going on without any apparent losses - shouldn't there be any losers exposed after having been taken off-guard like last few days? If there are no losers, then this move can only be a zero-sum event, ping-pong shares between insiders up to a target level

if markets tank on august 1st, it will be clear that end-of-month window-dressing manipulation was behind this

Tue, 07/31/2012 - 08:53 | Link to Comment Snakeeyes
Snakeeyes's picture

I believe it WHEN the banks start lending again. Right now, it's hard to generate meaningful inflation when the economy is DEAD and banks aren't lending. M2 Money Velocity the lowest since WWII.

http://confoundedinterest.wordpress.com/2012/07/29/the-feds-fomc-decisio...

Tue, 07/31/2012 - 08:59 | Link to Comment Reven
Reven's picture

I've been saying it since 2008.  They MUST make more sub-prime loans.  There are too many people with less than stellar credit histories, especially after 2008/09.  The people with good credit either don't need loans or don't want them.  The student loans are not enough to fuel this ponzi's need for more debt.

Tue, 07/31/2012 - 08:56 | Link to Comment overmedicatedun...
overmedicatedundersexed's picture

.gov will take your 401k,IRA..as you didn't save that! you didn't earn that! someone else did.

nothing is safe, nothing is predictable but the fear and greed of elites and the puppets in gov.

those who refer to the FED will do this or that, I hope they understand the FED is big banks from across the globe.

what is best for those multinational banks??? there is your answer.

Tue, 07/31/2012 - 08:59 | Link to Comment Blue Dog
Blue Dog's picture

Money printing won't last for decades. We're going to see hyperinflation and an economic collapse very soon. As early as the fall. The EU countries will default one by one. Then the US will default.

Tue, 07/31/2012 - 09:00 | Link to Comment Reven
Reven's picture

By default I assume you mean CTRL+P.  If so, I agree.

Tue, 07/31/2012 - 11:18 | Link to Comment ElvisDog
ElvisDog's picture

Defaulting on bonds would initially be highly deflationary (fake paper wealth evaporating) rather than inflationary. Real cash money would become very valuable if Euro countries start defaulting on their debt.

Tue, 07/31/2012 - 09:27 | Link to Comment bugs_
bugs_'s picture

the cult of inflation (and QE hopesters) have been with us for a long time.  Gross is a part of it.  the real worry from his perspective is that the cult of inflation may be dying and the CULT OF DEFAULT is on the rise.

Tue, 07/31/2012 - 10:00 | Link to Comment Confundido
Confundido's picture

My own calculations tell me that gold only underperformed the Dow by about 50bps CAGR since 1912 (the period Bill Gross takes), yet, given its liquidity, it was the way to go. You couldn't have taken the Dow to Australia, for instance or fled with it from Poland to America...

Tue, 07/31/2012 - 10:41 | Link to Comment Againstthelie
Againstthelie's picture

Who am i that i disagree with Mr. Gross, but i can't resist:

Interests as a measure of risk have been eliminated by central banks. But IMO it is wrong to assume, that this status is not transitory. It is as transitory as the housing bubble was. As every bubble is.

What makes this bubble so special? Well it suggests that overindebted states, like Japan, USA, UK, Germany, France offer secure debt. Because of this total misconception, this biggest bubble of all times makes look equities bad in saturated markets. They may not be really good, but big solid companies with "eternal" products will survive almost any financial apocalypse. Their shares my tumble, but when a new currency will be established they will be priced in the new currency - while all bonds and treasuries will go the way of all paper assets and payback promises in a ponzi scheme...

What makes the current situation so dangerous, is the misconception how hyperinflation is created in a fiat-system. Hyperinflation is NOT the product of unlimited money printing. It is not the result of rising inflation to 5%, 10%!

Hyperinflation is a phenonemen that has it's origin at the core of every fiat-money system and it does not need inflation or high inflation at all! Hyperinflation is the result, if TRUST in the currency vanishes. Understanding this leads directly to the conclusion, that the appearance of hyperinflation is connected to the believe, if the state, will be able to pay back it's debt with money that keeps it's purchasing power. But nothing erodes the financial situation of a state more than a deflationary development.

I don't know when the bubble will pop, and where, but i know, that once the flow out of bonds suddenly begins, then everything that has worked for the past years since Lehman will no longer work:

Since then the bond buying of central banks was perceived as security layer against deflation. But once the trust of payback of the debt is eroded enough, and bond prices begin to fall (it will look as if they start to fall for no reason) and the CBs will step in to buy more to prevent rates from rising, it will have the oposite effect from the past years: it will destroy the trust into the purchasing power of the money even further and it will accelerate the flight from bonds and the overindebted fiat-currency. From deflation to hyperinflation: no need of inflation.

Ofcourse the precious metals will be choice #1 in this crackup boom. But i think every real asset will be preferred over all payback promises of debt in paper (cash, bonds).

Tue, 07/31/2012 - 11:09 | Link to Comment ElvisDog
ElvisDog's picture

Problem with what Gross wrote is that 7-8% long rates destroy the housing market, auto market, student loan market, basically the whole economy over the short term. Mid- to long-term it might be an answer, but short-term we go into a steep depression and most incumbent politicians get voted out of office. That's why it won't happen.

And stop with the 100 year investment timelines Jeremy Siegel and others. No one has a 50 year investement timeline let alone a 100 year one. To think that the investment climate from, say, 1900-1920 has any relevance today is just stupid.

Tue, 07/31/2012 - 11:31 | Link to Comment reader2010
reader2010's picture

Bill Gross has proven out of money when he shorted treasury and Hugh Hendry got it right when he said the yields were going to be around 1%. 

Tue, 07/31/2012 - 11:42 | Link to Comment Dingleberry
Dingleberry's picture

What we have witnessed over the last decade, in particluar since 2008, is that preconceived notions about the "bond vigilantes" are a myth. Except when we are talking about a small nation such as Greece.  We already have inflation....or more accurately, stagflation. There is no way out.  

Tue, 07/31/2012 - 16:52 | Link to Comment ATG
ATG's picture

Mr Market may be no respecter of famous persons making headlines.

After GS called for 1285 SPX in June 2012, SPX responded by going from 1309.27 to 1391.74, with GS stopped out at 1390:

http://investmentwatchblog.com/goldman-go-short/#.UBhEjbTJGSo

Whoops.

After BG called for the Death of Bonds and launched Stock Funds in March 2010, TYX went from 4.671% to 2.452%, a bond gain of +90% in two years, and SPX from 1219.80 to 1010.91, a loss of -17% in three months: 

http://articles.businessinsider.com/2010-03-26/markets/30076536_1_biggest-bond-fund-bill-gross-pimco

Double whoops.

BG announced Now is the Time to Buy Gold in March 2012, and gold dropped a clean -10% in two months:

http://silverdoctors.blogspot.com/2012/03/bill-gross-tells-cnbc-now-is-time-to.html

Today BG's saying Stocks are Dead, as reported by TD/ZH.

Meantime Big4 are long SPX, SPX Point and Figure targeting + 12% and Bears salivating on double dojis and do-nothing ECB and FED.

So Options Overnight just bought long open SPY August calls at the former low of the day.

Hell may have no fury like spurned asset classes...

http://richcash8tradeblog.blogspot.com/2012/07/rich-cash-overnight-options.html

Tue, 07/31/2012 - 18:15 | Link to Comment Johnk
Johnk's picture

Gen Z may have no money, but can't foreigners with money buy US stocks?  Many talk as if the US stock market (such as it is nowadays) is only open to Americans.  Chinese middle-class people may want to own Exxon shares. 

Wed, 08/15/2012 - 12:28 | Link to Comment NEOSERF
NEOSERF's picture

Give credit for starting the discussion to Mr. Gross.  We need more of this.  Let's face it bonds are called the smart money for a reason.  Every company, town, city, state and country is up to their eyeballs in bond rollovers which are getting bigger, faster and then the game is over.  Every town in America should be forced to shut the schools down for a year and use all the tax receipts (except for teachers who would be on unemployment) to pay off their pension debt and to restructure so that new employees get what the rest of us get...keys to contribute to your own IRA.  In good times the town can offer 1-3% match...that's it.  Time for nickel and diming solutions are over...we have 5 years to show the world how to do something bold or you will be sitting in your house with a Smith and Wesson waiting for the tripwire alarm..

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