Bill Gross's investment outlook this month makes case for the last century being an anomaly and future returns of equities being much less than anyone is expecting. I'm wondering what everyone thinks of this. It is available at

http://www.pimco.com/EN/insights/pages/ ... ures.aspx#

In case you've never heard of him, Bill Gross is a very highly respected bond manager and has done fairly well at predicting the broad direction of the economy over a long period of time.

The basic premises are:
1. Equities have returned 6.6% over the last century, but there is no economic basis for equity returns to exceed GDP growth over long periods.

2. The only way out of the current debt load is by inflating our way out of it over a couple of decades.

I'm not sure I agree with either point and he doesn't fully support those premises in my opinion. But it is an interesting read.

I found myself thinking that one way to support stocks growing faster than GDP is for there to be a shift in money from some investors losing money on companies going bankrupt. Basically, in the early 1900s some people invested in auto companies that failed while others invested in Ford and GM. The money lost in the failed companies is not counted in the returns. It's an example of survivorship bias and partly results from the losses being shifted to the winners.

What do you think lies ahead?

What will stocks return on average between now and 2112?

Will there be an attempt to inflate our way out of the debt situation in a few years?

Business Insider thinks that Bill Gross is mistaken because of one crucial error in the terms that he used: stocks have not "appreciated" 7% (over inflation) over the long term. They've "returned" 7%. They only" appreciated" 2%.

I don't know if the article is right or wrong. I do know that Bill Gross is one sharp cookie. But we've seen in other threads how the use of a single wrong word can change the entire meaning of a sentence and what it portends. But my knee-jerk reaction is to raise a skeptical eyebrow whenever I hear the claim, "This time it will be different."

I agree. But, as a scientist, I like to see both evidence and a plausible, causal theory behind any explanation like this. I've always been bothered by the lack of a causal explanation for the empirical observation that stocks have returned 6% (or 6.6%) over inflation for the long term. (This seems to go back centuries as near as we can tell.) Most people chalk it up to some parameter of human behavior and risk/reward expectations. I think Gross misses out of proposing an explanation for why things have changed but I also think he is right in questioning WHY stocks could have returned so much. Simply projecting past returns forward is not an answer to me.

He also doesn't suggest any alternatives. He says stocks won't return. He doesn't expect bonds to either. He predicts inflation so don't hold cash...and before anyone brings it up, gold and real estate don't have the right characteristics either.

What we need is ACTIONABLE intelligence!

Since I have absolutely no bearing on the future of the entire market, I don't really care to get into my predictions. Ok, 2.71% real. Any prediction does not change my behavior today (at least I haven't run into one that will).

But, my opinion is inflation will at least be a part of the debt solution. Once this ship is righted and Bernacke can stop pulling the puppet strings, a little more inflation may not hurt. A lot more inflation, probably will. As with almost everything, moderation is the key.

I think it is going to be a few years before Bernanke (or his successor if he gets fed up with being blamed for everything) can start inflating out of the debt situation. Until then I think it is actually quite brilliant how the US is refinancing much of the debt at historically low rates. The deficit hawks ought to be thrilled about this yet they continue to criticize. I can only assume they are just playing politics. They are getting their spending cuts on behalf of the Fed.

*past performance is not indicative of future results

I've posted before that the historical data show a 2% real return of equities based on asset value, then add in whatever dividends are being paid. The last 50 years (or, 60 yrs ago to 10yrs ago) is indeed above longer term trend-line, closer to 3%. One other glitch is that prior to early 1800s there was hardly any publicly-traded equity, almost all public securities were bonds. The markets may indeed be random ("A Random Walk Down Wallstreet"), as the shorter a period you look at the wider the variation in returns...

Long story short, invest in productive (earning) assets - which may include dividend-paying stocks - and you should be able to keep ahead of inflation. As Ben Franklin advised, spend less than you earn and you'll be secure.

According to Dave Ramsey, stocks return 12% on average.

What?

"If you know how to spend less than you get, you have the philosopher's stone."
- Benjamin Franklin

Not sure about the secure part. But it does make sense. I'd like to have the stone he mentioned personally

This is true. Take Enron for example.



Lol. That would be great if it were true. The guy only does getting out of debt well. Dave's investment advice is sorry at best.

Thanks for posting this.

The document seems to be poorly supported, especially for something coming from someone who is so highly respsected. I know much less about the economy than Bill Gross, but I tend to disagree with him on this.

My mind is twisting up in knots thinking about it, but it seems to me that the issue is that Gross is equating the growth of wealth with the growth of GDP. He argues that stockholders would eventually own all wealth if the equity premium stays so high, but if national wealth grows faster than national product, then his premise is untrue. Do you think wealth has to grow at the same rate as national product over the long run? Doesn't this depend on the savings rate?

Also, the "permanent stockholder" that ends up owning all the wealth would actually be taxed on his dividends and capital gains all the time - and the taxes get redistributed throughout the economy.

Speaking of future returns, the Chief Economist at just weighed in on bonds. His article is called The outlook for bonds: Are the good times about to end?

Agreed. He program helps people with no financial discipline but his investment advice makes me cringe.

New article on the subject. CBS Marketplace's Larry Swedroe has written a piece called Should You Listen to Bill Gross?

The article gives a little perspective to what Gross had to say.