Bill Gross, the famous bond manager who founded PIMCO, has a new article out where he argues that we shouldn't expect much in the way of equity returns over the next few decades.
Although you might think that he would use this as a chance to plug bond investing, you'd be wrong: he doesn't think that bonds will fare much better, and we'll instead see central banks try to inflate their way out of the problem going forward.
This article really got me thinking about the broader implications of living in a world where the premium for investing in equities is very uncertain. We (people in our 20's-30's) won't have the pensions and stable, 30 year jobs that our "Greatest Generation" grandparents did, and it's far from certain that we'll have the explosive equity returns that our "Baby Boomer" parents did. In spite of this, however, I'm very optimistic about our generation's ability to find meaningful, substantive work even if it means less assurance of a conventional career path.
Going back to Gross's original article for a second, he starts off by arguing that it's going to be difficult to realize a 6.6% future equity return going forward because the historical situation that created those returns was particularly favorable to capital---and we can't expect that to continue going forward...
Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?
The legitimate question that market analysts, government forecasters and pension consultants should answer is how that 6.6% real return can possibly be duplicated in the future given today’s initial conditions which historically have never been more favorable for corporate profits. If labor and indeed government must demand some recompense for the four decade’s long downward tilting teeter-totter of wealth creation, and if GDP growth itself is slowing significantly due to deleveraging in a New Normal economy, then how can stocks appreciate at 6.6% real? They cannot, absent a productivity miracle that resembles Apple’s wizardry.
And he's not much more optimistic about bonds...
With long Treasuries 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...What you see is what you get more often than not in the bond market, so momentum-following investors are bound to be disappointed if they look to the bond market’s past 30-year history for future salvation, instead of mere survival at the current level of interest rates.
The main "out" that Gross sees is governments inflating the problem away, which of course has the potential to be very destructive:
The primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. The easiest way to produce 7–8% yields for bonds over the next 30 years is to inflate them as quickly as possible to 7–8%! Woe to the holder of long-term bonds in the process! Similarly for stocks because they fare poorly as well in inflationary periods. Yet if profits can be reflated to 5–10% annual growth rates, if the U.S. economy can grow nominally at 6–7% as it did in the 70s and 80s, then America’s and indeed the global economy’s liabilities can be “reflated” away.
Although there have been some good critiques of Gross's point on Seeking Alpha and from Jeremy Siegel, I think that it's still reasonable to assume that it will be much more difficult for individuals, families, pension managers, and governments to make long term investing plans when there are so many compelling reasons to think that the historical 6-7% equity premium won't persist going forward.
The ongoing financial crisis has already caused people to postpone retirement, or has perhaps put individuals in a position where retirement isn't even a possibility--I've seen this in my own family. Job growth is still anemic, and many underemployed recent grads may never be able to fully catch up. I don't think that the traditional model of working for a set number of years before retiring will be nearly as common in the future as employment lengths and salaries become more volatile.
But is this such a terrible thing? Perhaps not entirely. Anecdotally, I think that my generation (mid-20's) has less overall desire to follow the traditional path of climbing the corporate ladder and then retiring at a set time. I would bet that just as many people at top schools want to work at a startup as a large corporation. And the internet is making it much easier to work remotely on project work or other tasks. I think that going forward we'll see more flexible work arrangements and hours, though the price that we'll pay for that will be in the form of less security and more income volatility.
Monkeys, what do you think the "workplace" will look like 20-30 years from now? Do you think that you'll "retire" in the same way that the American "Greatest Generation" did? How do you think that investment fund managers will deal with this a world with more volatile asset returns?
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