Bill Gross Investment Outlook April 2017, April 13, 2017
- Recent Internet blog posed the predicament of many medium/long-term relationships: at some point couples run out of historical stories or even topical things to say
- Blog suggested inventing some new philosophical brainteasers to keep the conversation alive: here are my twisters and summary comments following each (Please think of your answer before reading the “comments”)
- If forced to choose between killing your favorite pet or an anonymous human being, what would you do?
- Comment: In a USA Today survey from a decade ago, the majority of responses seemed to favor killing the person and saving the pet
- Would you rather be “interested” or “interesting”?
- Comment: Most say “interested”, (as would I), but it’s a close vote
- If you were offered one year of quality life in addition to how long you would have lived anyway, would you give up your cellphone for it?
- Comment: This one creates the most controversy. Young people do not give up their phones. Older people jump at the chance for that additional year. They don’t know how to use a cell phone anyway
- If you were stranded on an island with a totally repugnant looking and abusive human being, would you entertain romance with him (her)?
- Personal comment: Maybe at 22, not 72!
- If offered the certainty of a second life after your current one, but it would be a life of misery with no moments of happiness, would you take it?
- Comment: A few actually say yes, suggesting that their misery might in some way lead to happiness for others
- Is there an emotional distinction between saying “Luv you” and “I love you”?
- Comment: Almost certainly inserting the “I” signifies a much stronger – and riskier – personal commitment
Investment Brainteaser – Can the Trump agenda recreate 3% growth?
- 3% growth leads to a levered rate of corporate revenue / profit increases and a significantly higher P/E ratio, all else equal
- 3% growth also sends a green light / all clear signal to high yield bonds and other risk assets that are leveraged and growth dependent
- May also lead to higher real interest rates and a future bond bear market
- Growth is productivity dependent and the experts are in a tizzy trying to explain why productivity in the last five years has averaged only 0.5% versus a prior pre-Lehman old normal of 2%
- Northwestern University economist Robert Gordon has long argued that lower productivity may now be a function of having picked all of the “low hanging fruit” such as electrification and other gains from 20th century technology
- Optimists claim that future benefit of smartphones and medical technology have yet to have an impact and that eventually they will lead to a resumption of historical trends
- In a detailed report by the IMF, their economists argue that the current trend is an offspring of the financial crisis. Slowing business investment/trade and an ongoing level of low to negative interest rates have resulted in a misallocation of capital to low risk projects and a slowdown in small business creation. Longer term secular demographic factors such as an aging population also play a significant part since older consumers consume less of almost everything except healthcare
- Same IMF study suggests that unless there is an unforeseen technological breakthrough, productivity growth is unlikely to return to the higher rates of the 1990’s for advanced economics or the early 2000’s for emerging economics – in other words, their warning speaks to a global productivity slowdown
- If there is a global productivity slowdown, what are the investment conclusions?
- Equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman. High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era
Bill Gross, considered the “king of bonds”, is the co-founder and former Co-CIO of PIMCO. He left PIMCO in 2014 and joined Janus Capital as Managing Director and CIO. Janus Capital is an investment firm based in Denver, CO with disciplines across fixed income, equity, global macro, and alternatives.
Further Reading: Bill Gross Investment Outlook (March 2017)