Seeking Alpha

GMO's Ben Inker takes on the Bond King, explaining why poor recent stock results do not signal...

GMO's Ben Inker takes on the Bond King, explaining why poor recent stock results do not signal the "death of equities," but are instead a necessary reversion that will allow decent returns going forward. Also, there is little basis for Gross' linking of GDP growth and stock performance. "Whether GDP growth ... is going to be slower in the future is not ... a reason to expect a lower return on equities." The battle is joined.
Comments (4)
  • 10-year T-note Yield

     

    Date

     

    Comments re: Bill Gross at MarketWatch, CNN/Money and TheStreet.com

     

    21-Day Change

     

    63-Day Change

     

    126-Day Change

     

    254-Day Change

     

    2/2/09

     

    …most Treasurys are widely viewed as expensive and low-yielding. Conventional Treasurys offer “little reward and increasing risk.”

     

    0.29%

     

    0.45%

     

    +

     

    5/22/08

     

    …investors should shun Treasurys, including inflation-protected Treasurys, and put their money into commodity-backed assets.

     

    0.25%

     

    -0.12%

     

    -0.38%

     

    -0.23%

     

    -

     

    12/5/07

     

    Standby for a tumultuous 2008…, accompanied by Fed Funds levels at 3% or lower.

     

    -0.16%

     

    -0.38%

     

    0.03%

     

    -1.27%

     

    +

     

    10/1/07

     

    …the Fed will probably cut the federal funds rate from 4.75% to 3.75% within the next six to 12 months.

     

    -0.18%

     

    -0.46%

     

    -1.02%

     

    -0.91%

     

    +

     

    9/18/07

     

    …the Fed will likely have to cut rates as low as 3.5% to counter the weak growth that he expects over the next year and a half.

     

    0.07%

     

    -0.25%

     

    -0.38%

     

    -0.71%

     

    +

     

    7/24/07

     

    Weakness in junk bonds and subprime-mortgage markets could lead to as much as a double-digit correction in U.S. stock markets.

     

    -0.32%

     

    -0.54%

     

    -1.46%

     

    -0.83%

     

    +

     

    6/26/07

     

    …recent subprime mortgage woes will spread, and prompt the Federal Reserve to cut interest rates.

     

    -0.32%

     

    -0.48%

     

    -0.93%

     

    -1.11%

     

    +

     

    6/7/07

     

    …he’s now a “bear market manager” and has raised his forecast for the yield on the benchmark 10-year note to 4 percent to 6.5 percent, up from last year’s forecast of 4 to 5.5 percent.

     

    0.06%

     

    -0.63%

     

    -1.19%

     

    -1.00%

     

    -

     

    3/27/07

     

    Tighter lending standards and stricter regulations will slow the U.S. economy and force the Federal Reserve to cut interest rates “significantly”.

     

    0.07%

     

    0.47%

     

    0.01%

     

    -1.18%

     

    +

     

    1/5/07

     

    Rate cuts totaling 100 points will reduce the fed funds rate from its current level of 5.25% to 4.25% by late 2007.

     

    0.11%

     

    0.02%

     

    0.55%

     

    -0.86%

     

    +

     

    8/28/06

     

    Even perennial bond bull PIMCO’s Bill Gross said on Aug. 4 that the 10-year note was a bit overvalued.

     

    -0.21%

     

    -0.25%

     

    -0.25%

     

    -0.26%

     

    -

     

    7/19/06

     

    …the most likely possibility is that the Fed will not just pause but bring an end to rate increases at its August meeting.

     

    -0.19%

     

    -0.27%

     

    -0.31%

     

    -0.12%

     

    +

     

    7/17/06

     

    Bill Gross…expects further increases in interest rates and subpar economic growth that could lead to a drop of at least 10% for the S&P 500.

     

    -0.14%

     

    -0.29%

     

    -0.32%

     

    -0.11%

     

    -

     

    5/19/06

     

    …the Federal Reserve is likely to pause in its rate tightening program, leaving the fed funds rate at its current 5% level. “Five percent is about as high as we can go,” Gross said.

     

    0.11%

     

    -0.18%

     

    -0.44%

     

    -0.19%

     

    -

     

    5/17/06

     

    …he sees the 10-year Treasury in a range of 4 to 5.5 percent going forward.

     

    -0.02%

     

    -0.22%

     

    -0.54%

     

    -0.32%

     

    +

     

    4/18/06

     

    I’m basically saying there’s just one more round,” says Gross, meaning he thinks the pain will stop at 5%.

     

    0.18%

     

    0.10%

     

    -0.16%

     

    -0.32%

     

    -

     

    1/31/06

     

    …Bill Gross…believes the Fed will halt its tightening campaign Tuesday and perhaps cuts rates by the end of the year.

     

    0.11%

     

    0.60%

     

    0.46%

     

    0.28%

     

    -

     

    12/19/05

     

    Almost all assets people can buy — bonds, stocks or houses — are back in the 4 percent to 6 percent mode… “If people are expecting 10 percent-plus returns, they’re in trouble.”

     

    -0.08%

     

    0.28%

     

    0.72%

     

    0.11%

     

    0

     

    12/8/05

     

    …he sees the Fed stopping its rate-hiking campaign at 4.5%.

     

    -0.03%

     

    0.30%

     

    0.52%

     

    0.03%

     

    -

     

    10/3/05

     

    …the Federal Reserve would begin cutting U.S. interest rates by mid-2006.

     

    0.22%

     

    -0.03%

     

    0.45%

     

    0.31%

     

    -

     

    9/16/05

     

    “We look for a slow-growth economy over the next few quarters with still moderate inflation and the Fed stopping at 4%. We think 4% is the peak.”

     

    0.22%

     

    0.19%

     

    0.46%

     

    0.34%

     

    -

     

    7/25/05

     

    …many big-time bond strategists, such as Pimco’s Bill Gross, don’t foresee long rates heading north anytime soon.

     

    -0.06%

     

    0.14%

     

    0.23%

     

    0.74%

     

    -

     

    6/22/05

     

    …the Fed may let up on rate increases after short-term rates reach 3.5 percent, probably in August, up from 3 percent currently. He said the Fed could actually start cutting rates later this year.

     

    0.28%

     

    0.30%

     

    0.55%

     

    1.30%

     

    -

     

    6/6/05

     

    …it appears that opinion leaders such as Bill Gross…have moved to the bond bull camp, projecting that 10-year Treasury yields are likely to end the year with three-handles.

     

    0.11%

     

    0.06%

     

    0.61%

     

    1.03%

     

    -

     

    5/18/05

     

    Bill Gross from Pimco said Wednesday morning that he believes interest rates might stay flat or go lower.

     

    0.01%

     

    0.16%

     

    0.41%

     

    0.96%

     

    -

     

    2/27/05

     

    He’s guessing the 10-year yield has found a floor at 4 percent.

     

    0.20%

     

    -0.28%

     

    -0.20%

     

    0.38%

     

    +

     

    12/30/04

     

    He expects higher inflation due to the falling dollar and favors Treasury Inflation Protected Securities.

     

    -0.13%

     

    0.24%

     

    -0.27%

     

    0.10%

     

    -

     

    11/7/04

     

    “…if those [people] are holders of government bonds based upon a benign outlook for inflation, they had better cash some of them in, especially at today’s 4.0 percent yield for 10-year Treasurys.”

     

    -0.09%

     

    -0.17%

     

    0.06%

     

    0.34%

     

    -

     

    10/28/04

     

    …he’s still bearish on bonds.

     

    0.25%

     

    0.13%

     

    0.09%

     

    0.50%

     

    +

     

    9/29/04

     

    …investors [who] purchased government bonds on a “benign outlook for inflation…had better cash some of them in.

     

    -0.01%

     

    0.20%

     

    0.47%

     

    0.24%

     

    +

     

    8/10/04

     

    …the 10-year note yield “has no where to go but up.”

     

    -0.09%

     

    -0.10%

     

    -0.24%

     

    0.04%

     

    -

     

    7/1/04

     

    Gross…bought about $35 billion in Treasury notes and other high-quality U.S. debt securities over the past two weeks. Value is returning to the Treasury market.”

     

    -0.11%

     

    -0.47%

     

    -0.24%

     

    -0.46%

     

    +

     

    6/20/04

     

    Barron’s mid-year roundtable is positive about stocks in the second half, with even Bill Gross…saying nice things.

     

    -0.20%

     

    -0.56%

     

    -0.51%

     

    -0.75%

     

    +

     

    2/1/04

     

    …this is a lousy time to buy U.S. stocks and bonds.

     

    -0.09%

     

    0.35%

     

    0.30%

     

    0.01%

     

    +

     

    1/16/04

     

    …he trimmed his position in Pimco’s signature Total Return bond fund and placed the proceeds in a series of inflation-averse funds such as Pimco’s Commodity Real Return Strategy fund.

     

    0.04%

     

    0.34%

     

    0.35%

     

    0.15%

     

    +

     

    12/12/03

     

    …the time to move is now. He continues to recommend, as he has for months, moving into Treasury inflation-protected securities, or TIPS, which offer a fixed rate of return over inflation. …Gross also recommends buying foreign currencies along with overseas bonds and equities…

     

    -0.25%

     

    -0.47%

     

    0.45%

     

    -0.06%

     

    -

     

    10/1/03

     

    “…the stocks, bonds, and currency of a debtor nation in the process of reflating are not attractive investments…”

     

    0.41%

     

    0.35%

     

    -0.09%

     

    0.24%

     

    0

     

    9/15/03

     

    “For the next 12 months, these levels [in bond yields] will hold; the damage for the near term has been done.”

     

    0.11%

     

    0.00%

     

    -0.47%

     

    -0.11%

     

    +

     

    7/16/03

     

    …last month was probably the top for the Treasury market, just as March 2000 was the top for stocks. …the time has come to look for returns globally…

     

    0.65%

     

    0.32%

     

    0.09%

     

    0.51%

     

    +

     

    6/11/03

     

    Gross hedged a little, suggesting Dow 5000 to 6000 represents “fair value…”

     

    0.45%

     

    1.18%

     

    1.09%

     

    1.50%

     

    -

     

    5/16/03

     

    …the U.S. stock market is “20 to 25 percent overvalued” at current prices.

     

    -0.19%

     

    1.13%

     

    0.95%

     

    1.33%

     

    -

     

    2/28/03

     

    “…the imminent demise of bonds…has been exaggerated…I still prefer an overvalued Treasury to an overvalued stock.”

     

    0.12%

     

    -0.36%

     

    0.84%

     

    0.36%

     

    -

     

    1/20/03

     

    Some of the best investors, including Gross, argue that bonds are still more attractive than stocks right now, given the possibility of war with Iraq.

     

    -0.14%

     

    -0.01%

     

    0.18%

     

    0.08%

     

    -

     

    1/8/03

     

    “…the odds favor bear market Treasury trends…”

     

    -0.06%

     

    -0.04%

     

    -0.27%

     

    0.10%

     

    -

     

    12/4/02

     

    …the three-year rally in bonds could be officially O-V-E-R because of higher inflation rates. He predicts returns closer to 5 percent. “There’s little doubt…that the bond market’s salad days are over.”

     

    -0.10%

     

    -0.52%

     

    -0.84%

     

    0.11%

     

    -

     

    9/6/02

     

    Gross predicted stocks would continue to flounder until the Dow Jones Industrial Average hits 5000.

     

    -0.41%

     

    0.13%

     

    -0.42%

     

    0.23%

     

    -

     

    8/12/02

     

    …over the next five years bonds will probably outperform stocks by a few percentage points, but both will return much less than double digits. …The next six to 12 months are going to be stinkers for most stocks.

     

    -0.28%

     

    -0.29%

     

    -0.29%

     

    0.03%

     

    -

     

    6/24/02

     

    “…foreign stocks and bonds will do better than U.S.-dollar-denominated securities.”

     

    -0.44%

     

    -1.06%

     

    -0.89%

     

    -1.31%

     

    -

     

    6/3/02

     

    Long-term bond yields may touch 6.5% during…our full three- to five-year forecast period…stock investors can no longer expect 10% to 15% to 20% types of returns. Given today’s investing environment, stock and bond investors alike should reset their expectations to somewhere in the range of 5% to 7%.

     

    -0.30%

     

    -0.90%

     

    -0.83%

     

    -1.69%

     

    -

     

    5/15/02

     

    “Although inflation should stop at 4% at the peak of our next cyclical upturn, current long bond yields do not reflect this risk. We may see 6.5% long Treasury yields or more before we are done.”

     

    -0.39%

     

    -1.19%

     

    -1.40%

     

    -1.88%

     

    -

     

    4/17/02

     

    …the Fed will raise the fed funds rate to 3% by the end of this year.

     

    -0.03%

     

    -0.56%

     

    -1.22%

     

    -1.24%

     

    -

     

    2/1/02

     

    The long bull market in bond prices and the long downtrend in bond yields…is basically over. …the bull will be replaced with a trading range rather than a bear market… Inflation will come down significantly over the next six to 12 months. Since bond prices and bond yields are a function of inflation, if inflation is diving you can’t expect a new bear market in bonds.

     

    0.13%

     

    0.16%

     

    -0.66%

     

    -0.98%

     

    -

     

    10/1/01

     

    Gross expects the Federal Reserve to lower interest rates by another three-quarters of a point, increasing the odds of a modest economic recovery by year-end–and boosting the bond market. …Today’s historically low bond yields reflect a fully priced stock market and an economy that is at or near a cyclical peak, he explains, adding, “We’re entering a period of diminished expectations.”

     

    -0.13%

     

    0.57%

     

    0.74%

     

    -0.91%

     

    +

     

    6/26/01

     

    “the return from bonds will mimic 5% or so. …Given 2% inflation, about a 1% dividend yield and 2% economic growth, that works out to about a 5% return for stocks, too. Stocks are overvalued and we won’t see the 10% or 15% returns we’ve come to expect.”

     

    -0.07%

     

    -0.65%

     

    -0.11%

     

    -0.48%

     

    +

     

    5/11/01

     

    He expects a half-percentage point cut, the fifth such reduction this year [at the Federal Reserve meeting Tuesday].

     

    -0.24%

     

    -0.45%

     

    -1.11%

     

    -0.38%

     

    +

     

    3/22/01

     

    …a temporary bottom is in place for the stock market for the next month or two, “but after that, we’re based on the economy, we’re based on profits and those two aspects of the economy don’t look good.”

     

    0.48%

     

    0.49%

     

    -0.01%

     

    0.57%

     

    +

     

    2/1/01

     

    It looks like we’re in for a hard landing, so I think the Fed will lower rates by at least half a point in January. …You want to flee to quality…you’re looking at 6% for the next couple of years, which would resemble stock returns.

     

    -0.10%

     

    0.22%

     

    0.01%

     

    -0.09%

     

    +

     

    8/23/00

     

    …he thinks Treasuries can rally.

     

    0.11%

     

    -0.06%

     

    -0.57%

     

    -0.79%

     

    +

     

    4/6/00

     

    …it still makes more sense to buy long-term Treasuries than to sell them.

     

    0.65%

     

    0.12%

     

    -0.02%

     

    -0.84%

     

    -

     

    3/17/00

     

    …he’s bullish on the Treasury market.

     

    -0.20%

     

    -0.15%

     

    -0.42%

     

    -1.42%

     

    +

     

    2/2/00

     

    …the 30-year Treasury bond yield has peaked [intermediate-maturity yields "are another story"], and that the inversion of the Treasury yield curve that has occurred in the last few weeks could last for years.

     

    -0.23%

     

    -0.29%

     

    -0.61%

     

    -1.45%

     

    +
    11 Aug 2012, 03:25 PM Reply Like
  • I am in the MONSTER Stock Market Bull Run Camp! Go Jack Bogle!
    11 Aug 2012, 04:07 PM Reply Like
  • Inkster & GMO make a solid argument and analysis for their view. Always worth the time to read what GMO has to say about markets and current valuations and why.
    11 Aug 2012, 11:49 PM Reply Like
  • So, GDP grows at say 1% and stocks grow at 6% ... this is insane and will not happen ... no way.
    12 Aug 2012, 06:20 PM Reply Like
DJIA (DIA) S&P 500 (SPY)