Bill Gross: Six Month Rally Is 'At Its Pinnacle'

Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the shrewdest money men around. His monthly newsletter, this month entitled “Midnight Candles”, therefore always makes for thought-provoking reading.

He concludes the newsletter as follows:

Asset appreciation in US and other G-7 economies has been artificially elevated for years. In order to prevent prices sinking even lower than recent downtrends averaging 30% for stocks, homes, commercial real estate, and certain high yield bonds, central banks must keep policy rates historically low for an extended period of time. 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.”

Click here for the full article.

Source: Bill Gross, PIMCO - Investment Outlook, November 2009.

Comments

[MoneyTalk1:]

We are in a deflationary crash, a kind that happens once a century or once in 400 centuries. We have borrowed non-stop for 50 years. We have inflated the money supply and the prices with borrowed money. This money needs to be paid back with interest. There are no borrowers left. That is why bank credit is deflating. Boomers are beyond their peak spending years. The stocks are at the top of a bubble akin to South Sea Bubble. This crash will go into history books for a thousand years! Prepare yourselves.

Oct 28 08:29 PM

[Michael2343:]

I think there is a good chance this is all part of a massive deflationary spiral. It could be a very strange decade. Thank goodness for ultrashort ETFs.

Oct 28 08:47 PM

[Dean M:]

This commentary by Gross is consistent with what his outlook has been for quite a while. But calling a top on the stock market is something new for him and you have to wonder about his motives when someone of his stature does that.

Oct 28 09:15 PM

[vman650:]

I could not agree with you more. We are using borrowed money to solve a problem created by borrowed money. It will not work.


On Oct 28 03:38 PM cyclingscholar wrote:

> The problem since 2000? Interest rates have been too LOW for too
> long. Result? A bubble which finally burst.....
>
> SOLUTION: lower interest rates.
>
> D

Oct 28 09:34 PM

[just_anothe...:]

Just curious -- regardless of market conditions did the Pimco guys ever come out and say equities are cheap?

I'm hedging myself rather than switching to bonds. I got no beef with bonds, just prefer sticking to something I understand slightly better.

Oct 28 10:57 PM

[Plan B Econ...:]

Bill Gross is good at identifying imbalances within the economy. I don't exactly use their commentaries to time the markets. But they are a fantastic way to highlight the risks to the economy.

With that said, they are only saying what we all know...the markets are on a 'sugar high' based on recovery news that is not robust:

www.planbeconomics.com.../

Oct 29 12:17 AM

[chris coonan:]

i am more interested in how the Chinese Yuan is compressing interest rates

Oct 29 12:32 AM

[blonde molly:]

if markets are liquidity driven, and they mostly are, then how will they deflate before the liquidit is sucked out?

Oct 29 02:27 AM

[ready_to_rock:]

Sure there are stocks over/undervalued. Why does eveyone think the market will crash? I am guessing a long period of market stagnation. Bottom 15% of companies close shop while the top 15% accellerate. Seems everyone expects some catastophe or something to happen every couple years. Why can't there be sanity?

Oct 29 08:28 AM

[Jim P. Smith:]

Some of the commenters that say equities are "it" seem to be ignoring the lessons of the past. How can one expect the stock market to rise when the consumers who drive this economic engine DON'T HAVE JOBS?

(pls. forgive the yelling... but no jobs = no dough = GDP negative).

What am I missing here? We can't leave interest rates at zero forever given how much we rely on imports.

Oct 29 09:54 AM

[TradingHelp...:]

"Bill Gross: Six Month Rally Is 'At Its Pinnacle'":

For once I agree with the bond salesman.

Oct 29 12:22 PM

[KingGeithner:]

I find it amusing that people take what Bill Gross says as gospel. He farts and the sheep follow him. He has a self-interest in poor performance of equity markets....HE IS THE LARGEST BONDSMAN IN THE WORLD. I take what he has to say with a grain of salt, much like I take what Cramer has to say with a grain as salt because stocks are not always the ideal investment.

Oct 29 12:58 PM

[geohjr:]

Just what we need, a bond expert calling the stock market technicals.

Oct 29 03:03 PM

[DonFurio:]

Everyone seems to have missed this point, but you are 100% correct. He wants the money he has under management to stay at PIMCO.

On Oct 29 12:58 PM KingGeithner wrote:

> I find it amusing that people take what Bill Gross says as gospel.
> He farts and the sheep follow him. He has a self-interest in poor
> performance of equity markets....HE IS THE LARGEST BONDSMAN IN THE
> WORLD. I take what he has to say with a grain of salt, much like
> I take what Cramer has to say with a grain as salt because stocks
> are not always the ideal investment.

Oct 29 04:05 PM

[ebworthen:]

You don't have to be a bond king or rocket scientist to understand that the low volume 60% market gains in six months are packing peanuts and cotton candy spinning using taxpayer dollars that have yet to be earned.

Musical chairs can be a fun game but not when the person without a seat turns into the person without a home or food or marching off to war to pay for someone else sitting on their posterior.

Oct 29 06:44 PM

[Peter Mycro...:]

I think Bill Gross should read this quote from a real master.

“Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” – Sir John Templeton

Oct 29 06:44 PM

[jstratt:]

Hi Bill

I would likely remove my money from the market before I would invest in your theory of expect minimal returns for life.

Lets see if in April I had taken your advise I could have a negative return instead of 40%. I know you are just talking your book (ie invest in bonds) but your advise sucks.

I kind of think the new normal is a suggestion to invest without expectation of return. We have had a crash I think I will stay with stocks. Enjoy hibernating with Mohammad! Hope you have plenty of blankets.

Oct 29 08:36 PM

[roy piper:]

BankAmerica is at 20X next years earnings. Wells at 17X. That seems awfully rich for a bank in a quasi-deflationary environment, doesn't it? Apple is at 31x trailing and 23x future earnings against a 16% five year future growth estimate. Google is 35X a 21% growth rate. Folks, these are all moderately to significantly over-valued. If we see continued unemployment losses and minor to zero economic growth after this government-fed rally, these will all come back to Earth. It seems to me that fair market given the risks is 20-30% below where we are now.

Oct 29 10:06 PM

[ebworthen:]

True, but it all depends on the time frame.

In Fall 1930 using this maxim would have gotten you in trouble for two years. This is why everyone lost everything because in their personal experience and paradigm it wasn't conceivable that the market could drop 89%. Thus, the 45% rally was bought, and held for a time before collapsing, which brought in more contrarian buyers, which reflated the markets above fundamentals until unemployment, lack of spending, and loan defaults brought the markets down again.

In 1981-82 this maxim would have worked, however, the economic and political fundamentals were nearly opposite what they are today.


On Oct 29 06:44 PM Peter Mycroft Psaras wrote:

> I think Bill Gross should read this quote from a real master.
>
> “Bull markets are born on pessimism, grown on skepticism, mature
> on optimism and die on euphoria. The time of maximum pessimism is
> the best time to buy, and the time of maximum optimism is the best
> time to sell.” – Sir John Templeton

Oct 30 12:46 PM

[TradingHelp...:]

You can look at your Dow 5-month return of 40% or your Dow 10-year return of -3%, depending on whether your glass is half-full or just realistic.


On Oct 29 08:36 PM jstratt wrote:

> Hi Bill
>
> I would likely remove my money from the market before I would invest
> in your theory of expect minimal returns for life.
>
> Lets see if in April I had taken your advise I could have a negative
> return instead of 40%. I know you are just talking your book (ie
> invest in bonds) but your advise sucks.
>
> I kind of think the new normal is a suggestion to invest without
> expectation of return. We have had a crash I think I will stay with
> stocks. Enjoy hibernating with Mohammad! Hope you have plenty of
> blankets.

Oct 30 12:54 PM