Pimco boss says "good night" to future capital gains

In his August commentary Bill Gross is typically nuts, but also kind of rational.

Pimco boss says "good night" to future capital gains
The well-known, possibly crazy, bond fund manager Bill Gross, may be trailing the other mangers in his sector in terms of performance. But the literary-minded head of massive bond firm Pimco is in classic form in his just-released August market commentary.

Gross is famous for his digressive, free-form, over-wrought, wordy and decidedly non-staid market commentaries. Hey man, the firm is based in Newport Beach California. They’re way out there on the Left Coast, far from Wall Street, where the air is...clouded with something...that sees Gross get creative in his commentaries. The latest missive is classic Gross.

Working out a tortured "Good night Vietnam" metaphor, he manages to shovel loads of meandering text before getting to some gems of dispiriting advice.  As Gross puts it investors are not quite saying "good night" to normal asset returns, but are, at least, say "good evening " to the big returns of yesteryear. Somehow he works a reference to 1969 and the beginning of the winding down of the Vietnam War into his story. But the basics are simple: When it comes to future capital gains in asset markets….investors won't be getting much of them," says Gross.  

The reasons are simple: "Financial markets have had nearly a half century of peaceful (sometimes volatile) asset appreciation fueled particularly by the decline in real and nominal interest rates from 1981 onward....Almost all commonsensical and historical financial models tell us interest rates are a key asset price driver. But now -- and since 2012 - we have reached the beginning of the end just as I did in 1969 -- the dusk of asset appreciation -- because [the market] has lost its primary interest rate driver."

Or, to put that in common English, now that rates are as low as they can go, the driver of asset appreciation over several decades is done, asset appreciation is not going to happen in the future as it has in the past. Gross quotes Pimco Paul McCulley, as a way of explaining the structural dynamics at work. Global growth rates will be low because there is a "yawning gap of aggregate demand relative to aggregate supply." Consumers have too much debt, boomers are getting older, workers are outdated and “out-jobbed” by technology, and labor is overwhelmed by “corporations with the power to contain wages at a low rate.” All of which means consumers won't have any money to spend in the consumer economy. Corporations will be challenged to grow as a result. Or, as Gross says, "Demand is deficient because consumers are experiencing their own Vietnam from a multitude of directions."

What to do? According to Gross, investors need to “reduce expectations.” The Fed will be on hold in terms of rate rises until mid-2015. Rate hikes will happen only gradually after that, rising to perhaps, 2% by 2017. Don’t worry about that big bond sell-off that would follow on fast, rapid rate increases. “Low but relatively dependable income will be the market's future driver,” says Gross.