'Almost All Assets Appear to Be Overvalued' - Bill Gross 25 comments
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Bill Gross, arguably the most powerful money manager in the world, has joined the ranks of Jeremy Grantham in saying stocks have risen due to artificial influences and are now substantially overvalued. In his latest monthly outlook Gross says “almost all assets appear to be overvalued on a long-term basis”.
He goes on to explain the long-term artificial price climb and the influence it has had on investors:
“The U.S. and most other G-7 economies have been significantly and artificially influenced by asset price appreciation for decades. Stock and home prices went up – then consumers liquefied and spent the capital gains either by borrowing against them or selling outright. Growth, in other words, was influenced on the upside by leverage, securitization, and the belief that wealth creation was a function of asset appreciation as opposed to the production of goods and services. American and other similarly addicted global citizens long ago learned to focus on markets as opposed to the economic foundation behind them. How many TV shots have you seen of people on the Times Square Jumbotron applauding the announcement of the latest GDP growth numbers or job creation? None, of course, but we see daily opening and closing market crescendos of jubilant capitalists on the NYSE and NASDAQ cheering the movement of markets – either up or down. My point: Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don’t go up – economies don’t do well, and when they go down, the economy can be horrid.”
Gross says the result of these actions is that the current economic environment does not justify the high asset prices:
“What has happened is that our “paper asset” economy has driven not only stock prices, but all asset prices higher than the economic growth required to justify them.”
Gross even says policy makers know they must help to prop up prices and says we are tracking Japan’s path in an effort to keep the patient alive:
“This is where it gets tricky, however, because policymakers, (The Fed, the Treasury, the FDIC) recognize the predicament, maybe not with the same model or in the same magnitude, but they recognize that asset prices must be supported in order to generate positive future nominal GDP growth somewhere close to historical norms. The virus has infected far too many parts of the economy’s body, for far too long, to go cold turkey. The Japanese example over the past 15 years is an excellent historical reference point. Their quantitative easing and near-0% short-term interest rates eventually arrested equity and property market deflation but at much greater percentage losses, which produced an economy barely above the grass as opposed to buried six feet under. The current objective of global policymakers is to do likewise – keep the capitalistic patient alive through asset price support, but at an “old normal” pace if possible, six feet or 6% in U.S. nominal GDP terms above the grass.”
In conclusion Gross states that the rally in risk assets is likely at its pinnacle despite the Fed’s efforts:
His full commentary can be found here.“If policy rates are artificially low then bond investors should recognize that artificial buyers of notes and bonds (quantitative easing programs and Chinese currency fixing) have compressed almost all interest rates. But while this may support asset prices – including Treasury paper across the front end and belly of the curve, at the same time it provides little reward in terms of future income. Investors, of course, notice this inevitable conclusion by referencing Treasury Bills at .15%, two-year Notes at less than 1%, and 10-year maturities at a paltry 3.40%. Absent deflationary momentum, this is all a Treasury investor can expect. What you see in the bond market is often what you get. Broadening the concept to the U.S. bond market as a whole (mortgages + investment grade corporates), the total bond market yields only 3.5%. To get more than that, high yield, distressed mortgages, and stocks beckon the investor increasingly beguiled by hopes of a V-shaped recovery and “old normal” market standards. Not likely, and the risks outweigh the rewards at this point. Investors must recognize that if assets appreciate with nominal GDP, a 4–5% return is about all they can expect even with abnormally low policy rates. Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets – while still continuously supported by Fed and Treasury policymakers – is likely at its pinnacle. Out, out, brief candle.”
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On Oct 27 06:48 PM The Geoffster wrote:
> Gross is preaching deflation which is exactly what we'll have if
> the U.S. defaults.
On Oct 27 06:45 PM noblepaladin wrote:
> There are good securities in every asset class. I loaded up on "too
> big to fail" bank bonds and preferred and other various corporate
> bonds during the March lows because I felt that they were less risky
> than equities. I got some pretty amazing returns, the stuff I brought
> at the low returned as much as 200-400% (too bad I can't time it
> perfectly, averaged all the way down and up). Unless we have massive,
> double digit inflation coming up within the next year or two, there
> are some great bond buys, last month I picked up some great corporate
> bonds yielding 13% that I think has very low default risk.
>
> On average, however, I think the SP500 is starting to get to the
> overvalued side and the Treasury bonds and average corporate bond
> yields are not taking into account the threat of a dollar collapse
> or massive inflation down the road. But there are select securities
> within the asset classes that are very attractive.
> I think it must be a hard time to be in the bond business. Bill Gross
> in my opinion is talking his book. That is justifying to his investors
> why they should accept puny returns. He said that at the very bottom
> and those who took his advise at that point locked in huge losses......<
jstratt, in my view you certainly don't deserve any thumbs down for expressing you're opinion. The thumbs down feature is for "bad comments", not for "I disagree". I don't necessarily agree with you but yours is a good comment in my books.
I'd just urge you to forget about 1980 because the economic situation in the world today is a universe apart from those days. It took me a long time to even allow myself to consider the deflationary case. But there is legitimate logic to both cases. Personally, I've come to the conclusion that we could very well experience a short, sharp period of deflation first, followed by an inflation that will make Zimbabwe's experience look mild. But I could be wrong and I'll know how to recognize it and react accordingly. Everybody should have an open mind, your life may depend on it.
1) a country who can issue debt and pay it down in its own currency
2) a country whose currency is the world's sole reserve currency
Under these circumstances, the U.S. can just print the money it wants to pay back, and the world will bear the pain.
I can see it now....in a few years.... the Federal Reserve, having bought over a trillion dollars in US Treasuries, will just "forgive" the debt and somehow erase a trillion dollars in liabilities for the American people. How convenient. And why not? The Fed's balance sheet has an infinite capacity for capital (i.e. it can create or destroy as many assets it wishes). Loan losses are meaningless to them.
I see a dark cloud on the horizon. Winds are picking up. A storm's approaching....
On Oct 27 07:51 PM doubleguns wrote:
> I see no way out of a default situation. No jobs, no tax revenue
> to pay debt, more spending in Washington, less spending by tax payers,
> rinse and repeat.
On Oct 27 06:30 PM jstratt wrote:
> I think it must be a hard time to be in the bond business. Bill Gross
> in my opinion is talking his book. That is justifying to his investors
> why they should accept puny returns. He said that at the very bottom
> and those who took his advise at that point locked in huge losses.
>
>
> It is a great time for long term investors. Many quality long term
> stocks are still at or near 10 year low PE ranges.
>
> In the last big recession around 1980 every kook came out with their
> opinion on why the world was ending and why you have to sell everything
> and why the US was in decline. As a young investor I foolishly allowed
> myself to sell my meager holdings.
>
> Stocks may or may not be great values but they are better than when
> they were 4000+ points higher on the DOW.
>
> For Bill Gross however an article like this may save a few billion
> in assets under mangement from leaving. If I was him I might continue
> to write articles like this.
Do you not feel that creeping doubt, that itch, that prickle in your neck, that perhaps the morals and values that made us great have been taken to the woodshed and chopped for firewood or fishing bait?
Can you really look at the past 100 years, other than Civil Rights legislation, and say that we have lived up to the Constitution?
Taxpayer money given to private banks for bonuses and mergers and acquisitions?
A private company bought by the government to appease union voters?
The sacred right of private property ownership, of the land you bought and paid for, raised your family on, prostituted out by the Supreme Court for the sake of increased tax revenues in the KELO decision?
The Founders of the nation are rolling in anguish in their graves!
And we are supposed to celebrate and equivocate and rationalize that it was all for the good and that good will come of it?
Lies! Sophistry! Tyranny!
On Oct 27 06:30 PM jstratt wrote:
> I think it must be a hard time to be in the bond business. Bill Gross
> in my opinion is talking his book. That is justifying to his investors
> why they should accept puny returns. He said that at the very bottom
> and those who took his advise at that point locked in huge losses.
>
>
> It is a great time for long term investors. Many quality long term
> stocks are still at or near 10 year low PE ranges.
>
> In the last big recession around 1980 every kook came out with their
> opinion on why the world was ending and why you have to sell everything
> and why the US was in decline. As a young investor I foolishly allowed
> myself to sell my meager holdings.
>
> Stocks may or may not be great values but they are better than when
> they were 4000+ points higher on the DOW.
>
> For Bill Gross however an article like this may save a few billion
> in assets under mangement from leaving. If I was him I might continue
> to write articles like this.
Increasingly, their only card left to induce people to buy US Treasuries is the threat of contracting the money supply so much that the dollar rebounds and the US goes into collapse mode again. People have rightly assumed that the odds of Bernake doing that are slim. He's having too much fun raining mad money down on his banker friends. Apparently Bernake thinks he lives in Argentina and his name is Eva Perone.
Happy Haloween Ben! The whole world knows when it comes to fiscal matters you wear a dress. Please grow some before we get our fiscal asses kicked.
It was
Correct! The Fed and the Obama regime will do their utmost to keep rates at or around 0% forever (till Kingdom comes though). The dollar will remain the reserve currency and nations around the world will forbid it to devalue since they will race to devalue their own.
The pain will come out of Unemployment. A lot of folks, citizens, corporations, and even governments (bail out funds evaporating) lost a lot of money. So where would the money come from to make up for the loss. It comes out of poor folks with a paycheck - cost cuts are in fashion, and no one is hiring.
Sad. Wait till Unemployment goes up, and up, and up...
TK
On Oct 28 03:59 PM Teutonic Knight wrote:
> Bill Gross speaks his mind. I think the future scenario is going
> to play out something like this, after all the talks about inflation,
> deflation, stagflation, depression, Great Recession, etc.
>
> Correct! The Fed and the Obama regime will do their utmost to keep
> rates at or around 0% forever (till Kingdom comes though). The dollar
> will remain the reserve currency and nations around the world will
> forbid it to devalue since they will race to devalue their own.<br/>
>
> The pain will come out of Unemployment. A lot of folks, citizens,
> corporations, and even governments (bail out funds evaporating) lost
> a lot of money. So where would the money come from to make up for
> the loss. It comes out of poor folks with a paycheck - cost cuts
> are in fashion, and no one is hiring.
>
> Sad. Wait till Unemployment goes up, and up, and up...
>
> TK
The folks buying all these "safe" long-term bonds, at historical low yields, are going to get absolutely annihilated, if money-supply and inflation histories are any indicator.
On Oct 28 01:00 AM untrusting investor wrote:
> Hard time to be in the bond business .. you say. Based on what? If
> you read any publically available reports, you would know that money
> is flooding into bonds. For example Morningstar (hardly a Bill Gross
> subsidary) just reported that for 2009 only about $15 billion has
> gone into stock funds whereas over $250 billion has gone into bond
> funds. Many similar reports show the same thing.
The trick is to find stocks that are undervalued anyway - why worried about the rest.
Aspen Holdings just reported - stock is $26 and has a book value of $33. That is not overpriced.
Loews, a stock I have written about on this site, is undervalued. Verizon and AT&T appear reasonable.
Why focus on investments I shouldn't make - I would rather hear discussion on investments that I should consider.