And so we must return to his essay, where with diligence we may unearth one sentence fragment that refers hypothetically to " ... a presumed 2% return for bonds and an historically low percentage nominal return for stocks-call it 4% ... "
And that's all the specificity we're going to get out of Mr. William Gross.
But it is in fact quite a lot, when you come to think of it. It certainly demonstrates a significant capacity for magical thinking on his part with respect to the prognosis for bonds in an inflationary environment. But once again: put that aside.
The real news here is that Mr. Gross seems to see the nominal return of equities (historically upwards of 10%, which is how you get to his 6.6% real return obsession) falling by a factor of 60% or so to the neighborhood of 4%.
Speaking only for myself, I'd take it. I certainly wouldn't be happy about it, but I'd take it. If I think for a minute that the nominal return of equities (Mr. Gross's hypothetical 4%, say) is still going to be twice the nominal return of bonds (his 2%), then I was an equity investor going into this exercise, and I'm still an equity investor coming out of it. I might have to make some big adjustments in the percentage of my income that I'm saving (if I'm in the accumulation phase of life) or the percentage of my capital that I'm withdrawing (if I'm in the distribution phase), but so be it. You can't get blood from a turnip.
But suppose we reason this out just a little further. Again, if nominal equity returns are going to go down 60%, they would have to be discounting a concomitant, secular decline in the rates of earnings and dividend growth. Now, as reasonable observers of the global economy, does such a savage slowing seem probable to us?
I confess that it doesn't to me. Maybe I've got stars in my eyes, but I see billions of people in the developing world vaulting into the middle class between now and midcentury. I see my country-which had been a huge net importer of foreign oil for forty years and more-suddenly sitting on a hundred years' supply of natural gas that it can produce (and even export) cheaply and cleanly. I see a new industrial revolution getting underway, spurred by technological miracles in robotics, 3D printing and even product engineering at the molecular level. Finally, I see corporate earnings, cash flows and cash positions stubbornly continuing to rise to new all-time highs even as we speak. (Presumably they have not yet gotten Mr. Gross's memo.)
And in an inflationary environment such as the one Mr. Gross forecasts, would I rather own bonds that tick down in value every time interest rates tick up? Or might I prefer to own-just to pick a number off a bus-500 well-managed, well-financed global companies which may have some ability to raise their prices (and thus, nominally, their earnings and dividends) in response to that inflation? This seems to me a rather easy choice to make.
Mr. Gross is not the first high-profile person to herald the death of equities; he will not be the last. Such pronouncements are always wrong, and much more often than not they actually signal the imminence of an era of excellent returns. Coming as it does at a moment when-for only the second time since 1958-the world is already so down on equities that the dividend yield of the S&P 500 is higher than the yield of the 10-year U. S. Treasury note, Mr. Gross's essay most probably indicates that he's about to go three for three.
© 2012 Nick Murray. All rights reserved. An earlier version of this essay was previously sent to the subscribers of Nick's newsletter, Nick Murray Interactive.