Bill Gross: Expect 4–6% p.a. for a diversified portfolio

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Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the shrewdest money men around. His monthly newsletter, this month entitled “Three will get you two (or) two will get you three”, therefore always makes for thought-provoking reading.

The following are a few excerpts from the report:

“Sovereign debtor nations are now saying all the right things and in some cases enacting legislation that promises to halt growing debt burdens. Not only Greece and the southern European peripherals, but France, the U.K., Japan, and even the U.S. are sounding alarms that might eventually move them towards less imbalanced budgets and lower deficits as a percentage of GDP. Still, credit and equity market vigilantes are wondering if in many cases sovereigns haven’t already gone too far and that the only way out might be via default or the more politely used phrase of “restructuring.” At the now restrictive yields of LIBOR+ 300-350 basis points being imposed by the EU and the IMF alike, there is no reasonable scenario which would allow Greece to “grow” its way out of its sixteen tons. Fiscal tightening, while conservative in intent, leads to lower and lower growth in the short run. Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits!

“Several months ago I rhetorically asked whether it was possible to get out of debt crisis by increasing debt. Yes – was the answer, but it was a qualified yes. Given that initial conditions were favorable – relative low debt as a % of GDP, with the ability to produce low/negative short-term policy rates and constructively direct fiscal deficit spending towards growth positive investments – a country could escape a debt deflation by creating more debt. But those countries are few – the U.S. among perhaps a handful that have that privilege, and investors, including PIMCO, have strong doubts about U.S. fiscal deficits leading to strong future growth rates.

“Fiscal tightening and budget conservatism may have come too late for Greece and its global lookalikes. Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that likely face New Normal growth rates and a continued bumpy journey toward that destination.

“Investors must respect this rather tortuous journey in the months and years ahead for what it is: A deleveraging process based upon too much debt and too little growth to service it. … 4-6% annualized returns for a diversified portfolio of stocks and bonds is the likely outcome.

Click here for the full article.

Source: Bill Gross, PIMCO – Investment Outlook, June 2010.

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1 comment to Bill Gross: Expect 4–6% p.a. for a diversified portfolio

  • Ross Healy

    Bill Gross’ scenario is a somewhat “pleasant” one, recognizing that there is a really big debt problem but expecting the US to muddle through once again. Like so many who recognize that there must be a limit to debt somewhere, somehow, they fall back on the hope (and prayer) that we haven’t reached that limit yet.
    Our own solvency numbers on the US economy tell us that we are not only there but beyond it. “Growth” will therefore depend on additional government debt issuance and transfers to consumers, that debt issuance being only possible because the US is the global key reserve currency. I calculate that the US is unable to enjoy organic growth any more. Investors may confuse cancerous growth with organic growth for a while, but the markets in the longer term are not as stupid as some apparently think.
    As for the US being able to escape its current condition by further debt issuance, Gross’ conditonal answer should have read, “yes, but only by essentially looting other countries using their key currency status to do so. That may keep things at bay, but, of course, will only make the problem and its final solution worse”.

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