It will be recalled by anyone with an adult memory that Mr. William Gross, the billionaire manager of the largest bond fund in the universe, strongly suggested not once but twice-in the last months of both the 2000-2002 and 2007-2009 bear markets-that the Dow Jones Industrial Average might fall as far as to 5,000.
His musings are enshrined forever in the Contrarian Hall of Fame, as they were quite spectacular buy signals. And their timing was very close to perfect.
It will come as no surprise, then, that in his August 2012 "Investment Outlook" piece titled "Cult Figures," Mr. Gross has, in his own highly idiosyncratic fashion, done it again. That is, I think he has, to the limited extent that I can make any sense of his reasoning. Because where he is not simply wrong-and that covers a lot of territory-Mr. Gross's logic is well nigh impenetrable, and the only really important question it raises goes not simply unanswered but essentially unaddressed.
It is not necessary to try to parse this screed line by line-one would surely go mad-but his main points seem to be as follows.
(1) The hundred-year real (net of inflation) equity return of 6.6% during a period when GDP growth has only been 3.5% is "an historical freak, a mutation likely never to be seen again as far as we mortals are concerned." In and of itself, this is a quite remarkable statement, implying as it does two ideas that are manifestly untrue: (a) that the return of equities should not exceed the rate of GDP growth, and (b) that markets are so persistently irrational and inefficient that they have, lo these hundred years past, steadfastly refused to obey the iron law expressed as (a).
This is beyond voodoo economics. This is Monty Python economics.
Note that Mr. Gross does not say that corporate earnings, cash flows and dividends -which are the essential drivers of return, and which have always grown at a significant premium to the economy-ought not to have done so, because only a fool would suggest that. No, he says that the market's response to that premium performance-i.e., a premium rate of return-was irrational, indeed "an historical freak."
It is impossible to derive the foregoing theory rationally. But it is the quintessence of Aristotelian logic compared to what comes next.
(2) The premium return of equities-6.6% despite only 3.5% GDP growth-is not merely irrational, says Mr. Gross; it is malign-premised on "a commonsensical flaw much like that of a chain letter or yes-a Ponzi scheme." For in the act of owning businesses which enjoy significantly better outcomes than does the economy on average, and deriving from this activity a concomitantly enhanced return, stockholders "consistently profit at the expense of (other economic actors such as) lenders, laborers and government."
Can we even be sure we know what he is saying at this point? Is he asserting that the economy is (and the markets are, or ought to be) a zero-sum enterprise, in which an enhanced return to one class of economic actors is somehow theft from the others? Because that would be positively Marxian, would it not? (A point of clarification: I'm referring here not to Groucho but to Karl. Admittedly, reading Mr. Gross, this would be an easy mistake to make.)