Bill Gross: We’re Witnessing the Death of Equities —WSJ Market Beat

Bond King Says Stocks are Dead:  Believes Consistent, Annual Returns Are “Thing of the Past.”  On the Horizon?  Inflation.

“The cult of equity is dying,” Bill Gross wrote in his August Investment Outlook, the Wall Street Journal’s Market Beat blog reports.    “Like a once bright green aspen turning to subtle shades of yellow then red in the Colorado fall, investors’ impressions of ‘stocks for the long run’ or any run have mellowed as well.”   Gross points out stocks have averaged a 6.6% annual gain on an inflation-adjusted basis since 1912. But he labels that rate of return as an “historical freak” that isn’t likely to be duplicated anytime soon, due to slowing economic growth around the globe.  More:

From Gross:

“The 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes — a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?”

Gross wonders how stocks can keep appreciating at a 6.6% annual rate in this “new normal” economy, in which GDP growth remains stubbornly low.

U.S. second-quarter GDP, reported on Friday, grew at a meager 1.5% rate. That growth rate is well below historical standards, and is partly why the unemployment rate remains stuck above 8%.

“The legitimate question that market analysts, government forecasters and pension consultants should answer is how that 6.6% real return can possibly be duplicated in the future given today’s initial conditions which historically have never been more favorable for corporate profits,” Gross says. He says it cannot, “absent a productivity miracle that resembles Apple’s wizardry.”

Where Have All the Good Times Gone?

So what does Gross think may be in store?  

“The cult of equity may be dying, but the cult of inflation may only have just begun.”

Read the whole piece here.