Asset returns have a cold, according to Bill Gross.
For most of us, sneezing is at best an inconvenience. But for Gross it is an existential release and physical pleasure.
In a recent note, the PIMCO founder writes (via Zerohedge):
There’s nothing like a good sneeze; maybe a hot shower or an ice cream sandwich, but no — nothing else even comes close. A sneeze is, to be candid, sort of half erotic, a release of pressure that feels oh so good either before or just after the Achoo! The air, along with 100,000 germs, comes shooting out of your nose faster than a race car at the Indy 500. It feels sooooo good that people used to sneeze on purpose. They’d use snuff and stick it up their nose; the tobacco high and the resultant nasal explosion being the fashion of the times. Healthier than some of the stuff people stick up their nose these days I suppose, but then that’s a generational thing. My generation is closer to the snuff than that other stuff.
Yes, Gross made a cocaine reference.
What he’s actually talking about is the overall health of the global economy and the importance of understanding what a neutral federal funds rate means for our super-leveraged world. If we’re not honest with ourselves about what rate the world can handle, the returns-flu won’t go away.
Right now the general consensus among Fed participants is that 4% would be ideal, Gross observes. But the way the world is operating, 2% is more realistic, he says.
At PIMCO, we believe that this focus on the future “neutral” policy rate is the critical key to unlocking value in all asset markets. If future cash returns are 2% (our belief) instead of 4%, then other assets such as stocks and real estate must be assumed to be more fairly priced as well. Current fears of asset bubbles would be unfounded. A 2% neutral policy rate, however, is not a “win/win” for investors. It comes at a price — the cost being a financial future where asset returns are much lower than historical levels.
So what can investors get over the counter? Gross:
Most pension funds assume 7 — 8% total returns in order to fund future retirement liabilities. Investors want their “cake,” priced at current market prices, but they want to “eat” future returns of near double-digits. That won’t happen with a 2% neutral policy rate.
Still there are ways to fight back — most of which involve taking different risks than you may be commonly used to taking: alternative assets, hedge funds, levered closed-end funds, a higher proportion of stocks vs. bonds in a personal portfolio.
We heard you loud and clear, Bill.
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