“The age of credit expansion, which led to double-digit portfolio returns is over. The age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price – both stocks and bonds.” On Friday, Gross tweeted, “#Fed to buy mortgages ‘til the cows come home. Think 7% unemployment, 2.5% inflation targets.
Buy real assets…gold…a house!” In an interview with Bloomberg TV on September 5, Gross said, “Gold can’t be reproduced. It can certainly be taken out of the ground at an increasing rate, but there’s a limited amount of gold and there has been an unlimited amount of paper money over the past 20 years to 30 years and now…central banks are at their leisure in terms of basically printing money…You know, I am not a gold bug. I am just suggesting that gold is a real asset and will be advantaged if the Federal Reserve or the ECB central banks start to write checks in the trillions. So what my objective is, I am not sure. I just think it [gold] will be higher than it is today and certainly a better investment than a bond or stock, which will probably return only 3% to 4% over the next 5 to 10 years.”
The history : Last week, the manager of the world’s largest bond fund at Pacific Investment Management Co. in Newport Beach, California, compared long-term returns from equities to a “Ponzi scheme” and said returns of 6.6 percent above inflation, known as the Siegel Constant, won’t be seen again. “The cult of equity is dead,” Gross, 68, said in an Aug. 2 interview with Betty Liu on Bloomberg Television
The dismissal of a long-held belief among stock pickers highlights the challenge Pimco faces in building an equities business while aligning its managers with an economic philosophy outlined by bond king Gross that predicts diminished returns across asset classes. Since starting its first equity strategy in 2010, Pimco has gathered $3.2 billion in the four main stock funds, less than 1 percent of the firm’s $1.8 trillion, held back by investor aversion to equity funds and subpar performance. The firm’s four main stock funds are trailing a majority of rivals this year.
Neel Kashkari, the former head of the U.S. government’s Troubled Asset Relief Program who was hired in December 2009 and oversees Pimco’s global equities, said Gross’s comments are consistent with Pimco’s outlook for stocks in a “new normal” environment of below-average economic growth.
“This makes it even more important to invest globally and actively select the companies best-positioned to deliver attractive returns,” Kashkari, 39, said in an e-mail.
Pimco’s first two equity strategies, EqS Pathfinder Fund (PATHX) and EqS Emerging Markets Fund, account for about $2.6 billion of the firm’s stock assets. Neither is beating its benchmark index in 2012, and both lagged behind at least 62 percent of peers as of Aug. 2, according to data compiled by Bloomberg.
EqS Emerging Markets Fund, which began in March 2011, and Pimco’s third equity strategy, EqS Dividend Fund, which started in December, have attracted less than $900 million in combined assets. Gross’s Total Return Exchange-Traded Fund (BOND), an ETF variation on his flagship fixed-income mutual fund, has soared to $2.4 billion in assets since it was started five months ago.
Pimco first experimented with stocks in the mid-1980s, a foray that was short-lived when the equity managers quit after about two years. Lessons from that time, when bond traders would shoot down equity managers’ bullish arguments for stocks during strategy meetings, led Gross to try to give the equities team more freedom, he told Bloomberg Markets magazine in its August 2010 issue.
“Those sessions basically said, ‘Hey, we’re a bond shop. This is what we’re going to do. It’s the party line,’” Gross said in the 2010 interview. “If I’ve been a problem, then I can be the solution in terms of allowing equity investments to grow and prosper.”
Another effort was set up in 1999 by Pimco’s then-parent company, which created an equity unit separate from the bond business to take advantage of the Pimco name. Five years later the unit was one of several fund companies accused by the Securities and Exchange Commission of allowing a hedge fund to engage in market timing, a practice of making short-term trades to exploit market inefficiencies, and was dissolved after paying fines and repayments to settle the lawsuits. It didn’t admit or deny wrongdoing.
Pimco’s latest stock effort came as Gross anticipated an end to the 30-year bond rally, which helped fuel Pimco’s growth since Gross co-founded the firm in 1971. The prediction was undermined as Europe’s sovereign-debt crisis sent investors to the perceived safety of bonds and out of stocks. Stock funds have seen client withdrawals in every year since 2008.
Investors have pulled about $197 billion from stock funds since the start of 2010 through this June, according to data from the Investment Company Institute, a trade group based in Washington.
“No one should be surprised that Pimco equity funds are a stepchild,” said Joshua Brown, vice president of investment for New York-based Fusion Analytics Investment Partners LLC, which has part of its $300 million under management in Pimco bond funds. “What they have against them is distaste for open-end mutual funds, dislike for equities and the fact that it’s a bond shop in everyone’s mind.”
Anne Gudefin and Charles Lahr, former Franklin Resources Inc. (BEN) managers, were brought in to oversee the first stock fund, EqS Pathfinder. The $2.13 billion fund’s managers follow a deep- value strategy of picking stocks they consider to be cheaper than they’re worth. In the 12 months through Aug. 2, it declined 0.2 percent, putting it ahead of 66 percent of similarly managed funds, according to data compiled by Bloomberg. This year the fund returned 4.1 percent, trailing 62 percent of peers.
The Pathfinder fund follows a more conservative strategy and tends to hold more cash so it hasn’t benefited as much from this year’s stock rally, said Karin Anderson, a senior mutual- fund analyst for Morningstar Inc. (MORN) The MSCI ACWI Index of global stocks is up 6.2 percent and the U.S. benchmark Standard & Poor’s 500 Index has risen 11 percent this year through Aug. 3.
Gross’s Total Return Fund returned 7.6 percent this year through Aug. 2 and the ETF version gained about 8.3 percent since it started trading in March. Pimco’s bond funds on average outperformed 59 percent of peers this year through June 30, according to data compiled by Chicago-based Morningstar.
Conclusion : More Time
The firm opened a fourth equity strategy in April, Pimco EqS Long/Short Fund, which lets clients participate in long-term stock ownership while seeking to limit losses when markets turn bearish by holding cash or selectively betting against securities. The strategy is run by Geoffrey Johnson, who joined Pimco in April from Catamount Capital Management LLC, and uses the same investment process as a hedge fund Johnson oversaw since 2003.
“It’s going to take more time to see what these managers can do with these tools at their disposal,” said Anderson of Morningstar. “It could be a hindrance if they’re constantly trying to think about this macro view and force stocks in and out based on it.”
Gross, the co-founder and co-chief investment officer of bond giant PIMCO, says it is time to write the obituary for stock investing as we know it.
Writing in his August investment letter, the manager of the world’s largest bond mutual fund said lower returns on stocks — and bonds, for that matter — means individuals will have to work longer to save for their retirements.
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
“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,” Gross wrote.
Gross, whose Pacific Investment Management Co has US$1.82-trillion in assets, took particular issue with the noted economist Jeremy Siegel, who popularized the notion that a portfolio of stocks can return on average 6.6% over the long haul.
“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,” he said.
In his April investment letter, Gross struck a similar tone on total return expectations. Gross then said investors should get used to smaller investment returns because of slower global growth and as the financial services industry continues to deleverage, or reduce its reliance on derivatives and borrowed money to generate higher returns.
This time around, Gross said at their currently low interest rates, investors should expect “mere survival” from their bond investments.“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,” he wrote.
In his August letter, Gross says the only “magic potion” monetary policymakers have to try and get higher returns for investors is through inflationary policies.
He said inflationary policies might work for bonds, but that they are bad for stocks. And over the long term, Gross said using inflation to solve retirement ills is not a real solution.
“Unfair though it may be, an investor should continue to expect an attempted inflationary solution in all almost all developed economies over the next few years and even decades,” Gross wrote. “The cult of equity may be dying, but the cult of inflation may have only just begun.”
“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,” he continued.
Gross in June kept the proportion of U.S. government and Treasury debt in his US$263.4-billion Total Return Fund unchanged at 35% of assets, according to a report July 11 on the company’s website. Mortgages were at 52% for a second consecutive month. Pimco doesn’t comment directly on monthly changes in its portfolio holdings.
In developed nations, Gross has advised investors to favor debt of the U.K., as well as the U.S., as Germany faces risks related to the eventual costs required to end the region’s worsening sovereign and banking crisis.
The U.S. Treasury market is considered the cleanest “dirty shirts” for investors, Gross wrote in his previous commentary. “Don’t underweight Uncle Sam in a debt crisis. Money seeking a safe haven will find it in America’s deep and liquid, almost Aaa rated, bond and equity markets.”
Pimco’s Total Return Fund gained 7.3% during the past year, beating 73% of its peers, according to data compiled by Bloomberg.
Five-year Treasury yields slid to a record 0.577 percent yesterday after an unexpected drop in U.S. retail sales rekindled speculation Fed Chairman Ben S. Bernanke will use testimony today to hint at further monetary easing. That followed data earlier this month showing American employers added fewer-than-estimated workers to payrolls. Goldman Sachs Group Inc. (GS) (GS) and Deutsche Bank AG cut forecasts for U.S. growth.
The U.S. is “approaching recession when measured by employment, retail sales, investment, and corporate profits,” Gross, who manages the $263 billion Pimco’s Total Return Fund (PTTRX) (PTTRX), wrote on Twitter yesterday.
Ten-year Treasury yields added one basis point to 1.48 percent as of 4:11 p.m. in Singapore, compared with the all-time low of 1.44 percent reached June 1. The MSCI World Index (MXWO) of shares rose 0.2 percent.
Bernanke will present his semi-annual monetary policy report to lawmakers in the Senate and House of Representatives today and tomorrow. He said on June 20 that the central bank will be prepared to take more steps, including additional asset purchases, if the labor market doesn’t improve continuously.
Retail sales fell 0.5 percent in June, figures from the Commerce Department showed yesterday, exceeding the most pessimistic forecast in a Bloomberg News survey. U.S. employment increased 80,000 last month, according to a Labor Department report, trailing the 100,000 increase projected by economists.
“Pretty much everything is way weaker,” Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute, told reporters today in a teleconference from London. “There will be some more action from the Federal Reserve, but not probably dramatic action in a sense of massive stimulus.”
The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing from 2008 to 2011, seeking to cap borrowing costs and bolster the economy. Last month, it expanded the program known as Operation Twist that replaces short-term Treasuries in its portfolio with longer-term debt.
With U.S. debt yielding nears record lows, Treasuries are “already expensive,” Cameron-Watt said. The securities have returned 5.2 percent this year on an annualized basis, which would be the smallest yearly gain since 2009, according to a Bank of America Merrill Lynch index.
A cooling job market is sapping household spending that makes up 70 percent of the economy, curbing sales at retailers such as Target Corp. (TGT) (TGT) and Macy’s Inc. Fed Bank of Kansas City President Esther George said yesterday the U.S. economy probably won’t grow much faster than 2 percent in 2012.
Goldman Sachs analysts led by Jan Hatzius cut their estimate for second-quarter economic growth to 1.1 percent from 1.3 percent, while Deutsche Bank chief U.S economist, Joseph LaVorgna, reduced his forecast to 1 percent from 1.4 percent.
“The sharp downward momentum in the economy” increases the probability of further Fed easing either in the form of another round of quantitative easing or other nonconventional measures, LaVorgna wrote in a note yesterday. “We need a couple of more weak employment reports, with figures near zero and with the unemployment rate increasing, for the Fed to undertake easing action.”
Fed’s George Says U.S. Growth May Not Exceed 2% in 2012
Federal Reserve Bank of Kansas City President Esther George said the U.S. economy probably won’t grow much faster than 2 percent this year, held back by caution among consumers and businesses.
The economy “is growing slowly for sure and some may characterize it as growing erratically,” George said today in a speech in Kansas City, Missouri. Growth will be “not much beyond 2 percent” in 2012, with some pickup in following years.
The Federal Open Market Committee voted last month to extend a program swapping short-term securities for long-term bonds in the Fed’s portfolio with the aim of bolstering a slowing U.S. economy and enlivening the job market. The Fed also said it would consider more stimulus if needed.
Policy makers face a “real challenge” in weighing whether more accommodative Fed policy will spur growth in employment, George said.
“We have provided a highly accommodative stance of monetary policy,” said George, who doesn’t have a vote on policy this year. “Will monetary policy put people back to work at this point? That is not clear to me.”
The U.S. recovery over the past three years has been marked by periods of solid growth followed by disappointing slowdowns, she said. “It looks like this summer’s slowdown will be no exception to that.”
Retail spending has waned, hurt by weakness in employment, the Kansas City Fed leader said. Businesses have raised their cash holdings and are reluctant to invest in part because of uncertainties including fiscal policy, the European debt crisis and the “regulatory landscape,” she said.
Credit Suisse highlights that not only has gold effectively decoupled from European sovereign risk, it has
also become increasingly disconnected from its traditional driver of falling real bond yields rates (the opportunity cost of
holding gold). The U.S. 10-year TIPS yield has continued falling since the end of March without this translating into a higher
gold price (and the TIPS yield alone would appear to imply a gold price of around $1,850). Credit Suisse notes that gold stocks’
12-month forward P/E relative is at a 10-year low and speculative positioning on gold is now the most bearish it has been since
Separately on Friday, Eric Sprott highlighted some key developments in the physical gold market that have
taken place over that last couple weeks:
1) The Chinese gold imports from Hong Kong in April 2012 surged almost 1,300% on a
2) Central banks from around the world bought over 70 tonnes of gold in April 2012. Data from the IMF showed
developing countries such as the Philippines, Turkey, Mexico and Sri Lanka were significant buyers of gold as prices dipped;
3)Iran purchased $1.2-billion worth of gold in April 2012 through Turkey. As the developed nations continue devaluing their currency
at the expense of developing nations, countries such as Iran, China and Mexico are forced to look at alternative stores of
4) After twenty years of lacklustre returns and stagnant bond yields, Japanese pension funds have finally discovered the
value of investing in gold. The $500-million Okayama Metal and Machinery pension fund placed 1.5% of its assets into gold
bullion-backed ETFs in April in order to “escape sovereign risk”;
5) Reading between the lines of Bill Gross’ most recent statements, the bond king is recommending gold – YES,
; 6) The Gold Mining ETF, GDX, has seen strong inflows in the past three months.
Sprott believes there has been a material change in the gold investing landscape, and that the significant macro changes in the supply/demand dynamic of the gold market should propel the price of gold to new highs.
“Offensively-minded risk takers in the markets have historically been the ones who have dominated the headlines and won the hearts of that beautiful gal (or handsome guy).
Aside from the rare examples of Steve Jobs and Bill Gates; however, the secret to getting rich since the early 1980s has been to borrow someone else’s money, throw some Hail Mary passes and spike the ball in the end zone as if you had some particular genius that deserved monetary rewards 210 times more than a Doctor…
He went on to say, “Low yields, instead of fostering capital gains for investors via the magic of present value discounting and lower credit spreads, begin to reduce household incomes, lower corporate profit margins and wreak havoc on historical business models connected to banking, money market funds and the pension industry.
The offensively-oriented investment world that we have grown so used
to over the past three decades is being stonewalled by a zero-bound, goal-line stand.”
PIMCO’s investment strategy going forward:
Recognize zero-bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible.
A. Emphasize income we believe to be relatively reliable/safe.
B. De-emphasize derivative structures that are fully valued and potentially volatile.
C. Combine A and B along with security selection to seek consistent alpha with admittedly lower nominal returns than historical industry examples.”
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