Anyone who has read me for any length of time knows that I have nothing but disgust for Bill Gross and PIMCO, and in fact call them "PIMpCO", because it is my belief that he has repeatedly prostituted himself with both The Fed and Government.
Nonetheless, he is highly intelligent. And what he's written in his last public missive is something you better pay attention to.
Got those three points?
Now recall what I've been saying for the last three years and change:
Now listen to this:
The last time I checked, the investment grade bond market yielded only 2.5% and a combination of the two classic asset classes would require 12% from stocks to hit the magical 8% pool ball. That requires a really long cue stick dear reader, or what they call a bridge in pool hall parlance. Best of luck.
Not gonna happen, in other words.
If you're an avid Ticker reader, you knew this two years ago. Now you have the Bond King of the world telling you.
You may think I'm a nut.
You would be wise to listen to Bill Gross.
Now if you remember, I wrote a rather poignant Ticker back in the early part of 2009 when it appeared that there was no way to stop the slide in equities, and that the real valuations of bank "assets" would be exposed. It was entitled "What's Dead? All Of It." I subsequently took some heat when Congress twisted FASB's arm and legalized accounting fraud - and as a result, it didn't happen.
But as I have repeatedly pointed out, cash flow never lies. The bank will never let you forge a deposit ticket. Balance sheets, with government approval, sure. A deposit ticket? Nope.
So what does PIMCO pop up with? Oh, this:
The predicament, of course, is mimicked by all institutions with underfunded liability structures insurance companies, Social Security, and perhaps least acknowledged or respected, households. If a family is expecting to earn a high single-digit return on their 401(k) to fund retirement, or a similar result from their personal account to pay for college, there will likely not be enough in the piggy bank at times end to pay the bills.
Now go back and read the Ticker again. Annuities. Pension funds. Insurance companies.
We not only didn't fix it, we made it worse. By "buying a couple of years of time" we also added more than $3 trillion in debt to the US Government's balance sheet - but as you can see Bill Gross now acknowledges we fixed nothing.
Bill still thinks that "reflation", where nominal GDP can reach 5% growth with nearly all of from "shaving the currency" (that is, actual monetary debasement) is possible. He's wrong on this point, even though he gets the rest - but I can somewhat forgive him for that failure, since the reason for it is that he's likely never had to earn the money for his food with his own hands, and never had to run an actual household budget to make sure his baby had a diaper on his ass for the entire 30 days in the month. He does, however, acknowledge why - he just fails to make the connection:
In the meantime, they are faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less. There is no 8% there for pension funds. There are no stocks for the long run at 12% returns. And the most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living. Stan Druckenmiller is leaving, and with good reason. A future of low investment returns, and a heap of trouble for those expecting more, is what lies ahead.
A "lower standard of living" doesn't mean a lot to a guy like me who grills a few more brats instead of going out to eat at three times the price.
For the person who is already eating Ramen or worse, is counting his kid's diapers and hoping the kid doesn't poop too many times before the "magic card" with welfare benefits turns back on at the first of the month, however, it's a different matter.
These people have no margin to squeeze, and there's a very significant percentage of the population that is stuck in that space in this country. Like about a quarter.
The usual cry from the Liberal Left is "give 'em some more help."
But the government doesn't have the money either.
More to the point for everyone else, if that family doesn't have the money, and doesn't spend it, that "trickles back up" to the people who would have made the diapers - or the Ramen. They work fewer hours, get paid less money, and, well, you know the cycle.
So here's the deal folks.
For three years I've been screeching on this for anyone who cares to listen. Sometimes I think I'm*****ing into the wind. But now - after all this time - there are people who have the "panache" to bend ears in places that are saying the same thing.
Do they see the wall in front of us?
I think so.
The maddening part is that even so, folks like Gross won't stand and say "stop that stupid ****!" They should, but thus far, few have.
The fact that the storm has not passed, however, will do for now.
And Bill: If you're reading this, sit down with a calculator and try to figure out how far the government can go with $1.3 trillion annual deficits before it becomes impossible for the bond curve to normalize without instantly bankrupting the nation.
Japan appears to already be there, and you might want to start talking about that - before we go there, and make a return to something approaching a normal economy quite literally impossible.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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