Yet in the next breath Mr. Gross admits that the equity investor is fully entitled to a premium return compared to lenders (like Mr. Gross), for the simple reason that his returns are so much less certain, and subject to so much more volatility and risk. Thus, the stockholder's enhanced return is neither irrational nor theft, but an efficient market's way of rewarding him for taking on more risk. Otherwise, he wouldn't do it.
And Mr. Gross must also be aware, as is any sentient being, that equity capital earns a higher return than does labor, because if it didn't, no rational company would hire anybody. The first duty of any business is to earn a return for its owners-as even the great labor pioneer Samuel Gompers observed-and a rational business will attempt to derive as much productivity (i.e. the greatest return for the least expenditure) from its laborers as it possibly can. For if it does not, a competitor will, and it will be driven out of business. Indeed, there is a school of thought which holds that, excepting only innovation itself, productivity is the essential genius of the American economy. (Full disclosure: I myself am an alumnus of this school. I wear my raccoon coat and porkpie hat, and wave my pennant lustily, at all its football games.)
(3) It will be clear to you, as you slog your way through this philosophical bog, that Mr. Gross must be winding up to suggest that equity returns will henceforth not be (because by his reasoning they cannot be) those of the last century. This he surely does, but here we come to something of a grace note, and we begin closing in on what, to a rational investor, must be the real issue. To wit, never mind what the absolute return of equities will be going forward; what will it be in relation to the alternatives, most particularly bonds?
Here, to his credit, Mr. Gross has the decency to acknowledge what presumably everyone already knows: "With long Treasurys currently yielding 2.55%, it is even more of a stretch to assume that long-term bonds-and the bond market-will replicate the performance of decades past." Forgive me: The italics are mine.
I think it no more or less than fair to sum up Mr. Gross's position so far in two sentences. Equities should not have produced-and from here on out will not produce-the return they have for the last hundred years. It is a mathematical certainty that bonds will not produce the same return they have over the last 30 years.
Now, at last, we may be getting somewhere.
Set aside for the moment the fact that, if a rational market is about to slash the return it pays the equity investor, the rate of growth of corporate earnings and dividends-of which the return is simply the discounting mechanism-would have to slow significantly from its trend of the last hundred years. Set it aside, that is, because this isn't Mr. Gross's argument.
Then set aside for the moment the fact that-if the developed world is going to try to inflate its way out of its current fiscal hole, as Mr. Gross believes it is-bond returns aren't merely going to be lower than they've been in the past three decades. They are in all probability going to go negative, as an efficient market prices in the inflation gambit and demands higher-and perhaps much higher-interest rates.
Set those dispositive facts aside, I say again, and let us proceed directly to the only issue that matters, by asking Mr. Gross, "Sir, as rational investors we believe we are capable of making rational decisions if we can just get you to quantify your qualms, as it were. Sir, can you give us your best guess as to what the real returns of equities and bonds are going to be, in the scenario you hold most probable?"
At this, the oracle goes silent. He either cannot (heck: join the club) or will not hazard a guess at these two numbers.