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Bill "Bond King" Gross of Pacific Investment Management Co. (Pimco) raised the unwelcome possibility that the era of credit expansion – now 40 years old – is now over. Unfortunately, the history of global bond yields and developed world demographics support his view.
Mr. Gross turns 70 next year and it's tempting to believe that in confronting his own mortality he has mistakenly extended morbid sentiment in his view of asset markets as we know them. In his most recent Investment Outlook, Mr. Gross writes:
"All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience. Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely … could, and in some cases, was rewarded with the crown of 'greatness.' Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch."
In terms of credit markets, Canada has been the exception in the past five years as households have continued to strap on debt. In the United States and Europe, the trend has been mass private sector deleveraging and a decline in outstanding credit. This represents a reversal to the 1970 to 2007 period of investing glory.
Mr. Gross effectively describes the short-term focus of investors and the subsequent rewards available for portfolio managers that successfully navigate market cycles that last a few years. The longer-term factors affecting investment returns, are ignored.
Two of these long-term positive drivers of post-1970s investing returns – interest rates and demographics – are either gone or fading. The trend of falling bond yields that made debt affordable and credit abundant is no longer mathematically possible with interest rates at virtually zero. The demographic tailwind which saw the baby boomers moving toward and then through their peak earnings and consuming years has now as boomers move from spenders to dependants.
Mr. Gross coyly summarizes his pessimistic outlook with a series of ominous questions, "What if a future epoch favours continual bouts of 2008 Lehmanesque volatility, or encompasses a period of global geopolitical confrontation with a quest for scarce and scarcer resources such as oil, water, or simply food, as suggested by Jeremy Grantham? What if the effects of global 'climate change or perhaps aging demographics' substantially alter the rather fertile petri dish of capitalistic expansion and endorsement?"
Let's hope the Bond King is just getting old and cranky.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.