Continuing on the bearish tack, readers will also want to take note of the comments of Bill Gross, the founder of PIMCO and perhaps the world’s best-known bond investor. In his Monthly Investment Outlook dated 6th January, Gross warns readers to “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.”
Although Gross admits that “Timing the end of an asset bull market is nearly always an impossible task,” he goes on to say that “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.” Ominously, Gross believes that “Now is that time”, and beseeches investors to “lower [their] expectations for future returns over the next 12 months.”
Gross lays the blame for the current bubble squarely at the feet of the central bankers, whose “increasingly innovative monetary policy initiative… [has] kept the bull market in asset prices alive.” The power of additional and cheaper credit to add to economic growth and financial asset bull markets has been underappreciated by investors since 1981, he argues, with the consequence that “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.”
But with the power of central bankers beginning to show its limits, could we be approaching a Minsky Moment?
“There comes a time… when zero-based, and in some cases negative yields, fail to generate sufficient economic growth…. 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.” Although Gross admits that “timing is never certain”, he leaves the following stark warning for investors: “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.”
So how can investors position themselves for the impending denouement?
Gross steers investors towards 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.” Above all, Gross suggests that investors should be “cautious and content with low positive returns in 2015. The time for risk taking has passed.”