Bill Gross: Sell Equities, Buy Treasuries

Bill Gross is a bond man. In fact, he is often called the “Bond King” because Pimco, the organization where he is founder and Co-Chief Investment Officer, is the largest bond fund in the world. In Bondland, what Gross says has a lot of weight.

And Gross has been talking about a “new normal” of deleveraging, deglobalization and reregulation. In his view, this means weak consumer demand counterbalanced only by heavier government intervention, leading to slow growth for the foreseeable future (See my post ‘Gross: The new normal for “the next 10 years and maybe even the next 20 years”’). In essence, he sees a scenario that is bullish for bonds (especially longer duration types like the 10-year and the 30-year) but not particularly bullish for shares.

But, Gross is also reducing risk. There has been a huge run-up in corporate bonds, especially in high yield bonds. And Gross believes now is the time to take profits and reduce exposure to riskier assets, a view he first put forth in his monthly newsletter at the beginning of July (see my post, “Bill Gross: the new normal means investors should shun risk”). And Gross is re-balancing his portfolio quite heavily to reflect this “glass half-empty” bias. His portfolio has its heaviest concentration in five years of Treasuries, considered the U.S.’s risk-free financial assets.

Below is a video of Gross talking on CNBC along with two other market experts, Bob Doll and Dan Tishman, regarding their view of the economy and financial markets. Gross goes as far as to say point blank that one should sell equities and other riskier assets like high-yield bonds.

Before you watch the video, be aware that two other formerly bearish analysts, Richard Bernstein and Jim Grant, have flipped to bullish recently. Gross mentions Grant by name and disagrees with his take on the economy, calling it “disingenuous.” Articles by or on Bernstein and Grant’s view’s are below the video.

This is the third in a series of posts about reducing risk. See also:

• Sell equities
• Way too much risk in the equity market

Comments

[chap08:]

As you say, "Bill Gross is a bond man" and, not surprisingly, "he sees a scenario that is bullish for bonds". I am reminded of the phrase "when all you have is a hammer, everything looks like a nail".

In his September Outlook, he identified these 5 "strategic conclusions:

1. Global policy rates will remain low for extended periods of time.
2. The extent and duration of quantitative easing, term financing and fiscal stimulation efforts are keys to future investment returns across a multitude of asset categories, both domestically and globally.
3. Investors should continue to anticipate and, if necessary, shake hands with government policies, utilising leverage and/or guarantees to their benefit.
4. Asia and Asian-connected economies (Australia, Brazil) will dominate future global growth.
5. The dollar is vulnerable on a long-term basis."

Maybe it's just me, but only No.1 of those sounds positive for US Treasuries. Even that one makes no mention of what inflation rate will go with these low policy rates. To me these strategic conclusions sound more like a recommendation for emerging market stocks and commodities.

Perhaps the difference is that these views are "strategy" and his other comments are "tactics", I don't know. Short term, I wouldn't disagree with a call to take some profits in risky assets. But long term, people with a heavy weighting in US treasuries might find out that these assets aren't so low risk after all.

Sep 22 06:36 AM

[Edward Harr...:]

chap08, you make a good point about Gross talking his book. I would add that Gross was off base about equities the last time he made similar comments about them back during the beginning of the last bull market rally in 2002-2003. I had looked for a quote but was unable to find one. This was originally why I mentioned he's a bond guy.

Nevertheless, I take what he says seriously especially because he has been saying it for two months now and is positioning himself accordingly. Ultimately, he will be proven right regarding treasuries if inflation remains low. The risky assets is another story - and that depends on the shape of recovery.

For some reason, the links to Grant and Bernstein's articles taking an opposing view were deleted by the Seeking Alpha editors. You can find then on the original on my site:

www.creditwritedowns.c...

Sep 22 06:55 AM

[Edward Harr...:]

oh and I meant "bear market rally." I'm sure you realized that. Perhaps it was a Freudian slip.

Sep 22 06:56 AM

[coldcall:]

I agree with Chap08.

Just to add i think it sort of odd to be touting bonds at the moment when they have enjoyed one of the greatest rallies of history over the last 12 months.

Perhaps Mr Gross notices many people pulling out of the bond market, or at least taking profits, and he is doing his best to protect the value of his bond funds.

Another reason i dont put much store in PIMCOs views is their behaviour towards private CIT bondholders was shocking (particularly their shoddy little agreement with CIT offering bondholders a tender under ridiculous terms).

PIMCO will always look to save their own skin whether or not the strategy used to do so protects the fiduciary rights of bond holders.

Sorry but i would not put a penny into a PIMCO fund. Just my personal opinion of course.

Sep 22 07:12 AM

[Edward Harr...:]

coldcall, I have to disagree on one minor point. Only higher risk bonds have had a tremendous rally. if you recall, 10-year treasuries were approaching 2 percent yields late last year. So, treasuries had an enormous sell-off. It is the high-yield area that gross is saying to take profits in where the rally occurred.


On Sep 22 07:12 AM coldcall wrote:

> I agree with Chap08.
>
> Just to add i think it sort of odd to be touting bonds at the moment
> when they have enjoyed one of the greatest rallies of history over
> the last 12 months.
>
> Perhaps Mr Gross notices many people pulling out of the bond market,
> or at least taking profits, and he is doing his best to protect the
> value of his bond funds.
>
> Another reason i dont put much store in PIMCOs views is their behaviour
> towards private CIT bondholders was shocking (particularly their
> shoddy little agreement with CIT offering bondholders a tender under
> ridiculous terms).
>
> PIMCO will always look to save their own skin whether or not the
> strategy used to do so protects the fiduciary rights of bond holders.
>
>
> Sorry but i would not put a penny into a PIMCO fund. Just my personal
> opinion of course.

Sep 22 07:50 AM

[chap08:]

Edward, you're right about Gross. I remember this too. I can't see the commentary for the time on the PIMCO website but this:

money.cnn.com/2002/09/.../

includes his prediction that the Dow would fall to 5000.

Out of interest, this piece contains his mea culpa and his explanation:

europe.pimco.com/LeftN...


On Sep 22 06:55 AM Edward Harrison wrote:

> chap08, you make a good point about Gross talking his book. I would
> add that Gross was off base about equities the last time he made
> similar comments about them back during the beginning of the last
> bull market rally in 2002-2003. I had looked for a quote but was
> unable to find one. This was originally why I mentioned he's a bond
> guy.
>
> Nevertheless, I take what he says seriously especially because he
> has been saying it for two months now and is positioning himself
> accordingly. Ultimately, he will be proven right regarding treasuries
> if inflation remains low. The risky assets is another story - and
> that depends on the shape of recovery.
>
> For some reason, the links to Grant and Bernstein's articles taking
> an opposing view were deleted by the Seeking Alpha editors. You
> can find then on the original on my site:
>
> www.creditwritedowns.c...

Sep 22 09:37 AM

[Joanito:]

Oh what does Bill Gross know anyway?

Sep 22 09:47 AM

[TxTim:]

Chap08 is spot on again.

I would add that if Gross's statement number 5 is true, "the Dollar is vulnerable on a long term basis," this by definition would make long term treasuries vulnerable, as well.


On Sep 22 06:36 AM chap08 wrote:

> As you say, "Bill Gross is a bond man" and, not surprisingly, "he
> sees a scenario that is bullish for bonds". I am reminded of the
> phrase "when all you have is a hammer, everything looks like a nail".
>
>
> In his September Outlook, he identified these 5 "strategic conclusions:
>
>
> 1. Global policy rates will remain low for extended periods of time.
>
> 2. The extent and duration of quantitative easing, term financing
> and fiscal stimulation efforts are keys to future investment returns
> across a multitude of asset categories, both domestically and globally.
>
> 3. Investors should continue to anticipate and, if necessary, shake
> hands with government policies, utilising leverage and/or guarantees
> to their benefit.
> 4. Asia and Asian-connected economies (Australia, Brazil) will dominate
> future global growth.
> 5. The dollar is vulnerable on a long-term basis."
>
> Maybe it's just me, but only No.1 of those sounds positive for US
> Treasuries. Even that one makes no mention of what inflation rate
> will go with these low policy rates. To me these strategic conclusions
> sound more like a recommendation for emerging market stocks and commodities.
>
>
> Perhaps the difference is that these views are "strategy" and his
> other comments are "tactics", I don't know. Short term, I wouldn't
> disagree with a call to take some profits in risky assets. But long
> term, people with a heavy weighting in US treasuries might find out
> that these assets aren't so low risk after all.

Sep 22 10:21 AM

[John Lounsbury:]

chap08 - - -

Thanks for the Bill Gross links. I enjoyed reading them.

Gross' experience with Dow 5000 reminds me that, no matter how logical a process, it will always fall victim to inappropriate assumptions, should they be made. Gross, in 2002, assumed a repeat of previous cycle interest rate policy. It did not happen and the rest is history.

I have one disquieting thought in conclusion. Bill Gross has not been proven right about Dow 5000 YET. So far he has been proven wrong. The first week in March I thought he had a shot of at least coming close.

Sep 22 11:19 AM

[coldcall:]

Edward,

You could be right as i dont track US bond prices so closely, but canadian government and corporate bonds have had a major rally since last october. I assumed the US market would have enjoyed the same dynamic, apologies if i am in error.

As far as i can see alot of the so-called "money on the sidelines" is currently locked up in both gov and corp bonds.

On Sep 22 07:50 AM Edward Harrison wrote:

> coldcall, I have to disagree on one minor point. Only higher risk
> bonds have had a tremendous rally. if you recall, 10-year treasuries
> were approaching 2 percent yields late last year. So, treasuries
> had an enormous sell-off. It is the high-yield area that gross is
> saying to take profits in where the rally occurred.

Sep 22 01:41 PM

[Socialism c...:]

Talking his book? I wouldn't touch U.S. Treasuries with a pole of any size!!!

Sep 22 02:02 PM

[Gtarras:]

"New normal" = "This time its different"

never works this way.

Sep 22 08:17 PM

[storm999:]

I think the market is pricey right now, but it depends on the stocks you want to buy.

Sep 22 11:39 PM

[johngonole:]

Bill Gross is for Bill Gross, period. He will seek government intervention when it benefits him and seek free markets for the same reason. At some point he began to use his voice to help the bets he has made.

Sep 23 12:36 AM

[George Enone:]

Bill Gross is right. The bond market will be superior to the equity markets in the next 5-10 years, even so will be long-term treasuries. Most clients tell me they want to pay down their debt AND more than likely will avoid borrowing moving forward. This sounds like a secular trend. Consumer and business deleveraging will take some serious time as people continue to reduce or totally avoid risk associated with equities.

Sep 27 03:07 PM