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Is Anyone Still Listening to Bill Gross?

Like any good book, the capital markets are full of protagonists and antagonists. In everyday market talk we usually refer to them as bulls and bears, and at the very least, they make the markets entertaining on a day-to-day basis.

One of my favorite antagonists of the past few years has been PIMCO founder Bill Gross and his sidekick, Mohamed El-Erian. Gross has built an investment juggernaut at PIMCO with $1.8 trillion under management, and this sort of success gives him a megaphone of sorts for communicating with the market. He writes a monthly Investment Outlook letter and, along with El-Erian, makes the rounds giving interviews to widely digested publications.

When you're a big name like Gross, you garner a lot of attention, and sometimes your catchphrases become market lore, for better or worse. "The New Normal" was a view of the market that El-Erian pushed at the height of our economic troubles in 2009 and which encompassed a number of predictions that never really materialized. Oops.

When Gross introduced a new line -- "The Ring of Fire" -- this week, I thought it was wise to look back on some of his previous predictions and ask: Why does anyone listen to Gross' predictions anymore?

Predicting Dow 5000
Gross predicted the market's big decline of 2007 to 2009 years before it happened. The problem is that he was six years early, and if you would have followed his advice and shorted the market, you probably would have been broke by the time the market crashed.

In his September 2002 Investment Outlook letter, he predicted that the Dow Jones Industrial Average (INDEX: ^DJI  ) was fairly priced around 5,000 and that the S&P 500 (INDEX: ^GSPC  ) should be around 650.

A 10-year review of that prediction shows that both the Dow and S&P 500 never reached those bearish levels and actually did quite well over the subsequent six years, despite our massive recession. The chart below shows that the total return of both indexes is around 7.5% annually -- near historical averages.

By Gross's own admission, he certainly got that prediction wrong.

^DJI data by YCharts.

"The New Normal"
Gross and El-Erian famously made the rounds in 2009 espousing their "New Normal" campaign. It made predictions of slower growth and lower margins for corporations as governments took over more of the economy and regulations crushed profitability. No longer were equities going to outperform bonds; we should shelter our assets in low-risk investments like bonds and safe dividend stocks and watch out for inflation.

To be exact, Gross said in 2009 that in the new normal, "Growth is slower, profit margins are narrower, and asset returns are smaller than in decades past." In April of 2009, when the markets were near their bottom, he said, "Yet there should be no doubt that the bull markets as we've known them are over and that the revolution is on."

Since the day he said that, the S&P 500 is up 73%. How's that for a bull market?

^SPXTR data by YCharts.

Gross also predicted higher corporate tax rates, which would sap returns from investors. Instead, in 2012, both presidential candidates are talking about lowering tax rates (and closing loopholes).

I guess the "New Normal" isn't quite what Gross thought it might be.

The "Ring of Fire"
The latest prediction sure to go wrong is surrounding what Gross calls the fiscal "Ring of Fire."

In his October Investment Outlook, Gross goes on and on about how terrible the financial condition of the U.S. is and the terrible things it will mean for the future. What should we buy? Gold and real estate.

I feel like I've heard these predictions before. The printers are running overtime at the Fed (figuratively), and inflation is around the corner. Protect yourself with gold and real assets before your dollars turn to Pesos!

It's true the "fiscal cliff" is coming, and we have huge budgetary challenges with regard to Social Security and Medicare in the future. But we've been predicting disaster because of these programs for a decade or more. People have also been predicting rampant inflation, which has failed to materialize.

As usual, Gross has valid points, and his analysis is thorough. I just don't think he's right. Somehow the U.S. seems to rise up to challenges, whether they involve our economy, our budget, or our national security. Buying gold may help a rich person sleep well at night in the current environment, but if we address our current challenges at all, it won't be the best place to invest your money.

Two lessons from Bill Gross
There are two things I take away from this review of Bill Gross's predictions.

First, no one knows what the future holds. Fellow Fool Morgan Housel recently put together a history of terrible predictions from some of the smartest people in America and crises that never quite materialized. Gross isn't any different from anyone else who goes on TV and tries to make a prediction. When we look back, it turns out most of these "experts" are wrong.

Second, Gross's predictions show why we at The Motley Fool have a very long-term investment horizon. I have no clue what a stock or the economy is going to do tomorrow -- or next week, or next quarter. But over the long term, if I invest in strong businesses at reasonable valuations, I should do well and even outperform the market. Equities also outperform bonds over the long term -- something Gross began to question when the market was at the bottom.

Foolish bottom line
Like any story, the economy needs an antagonist. Treasury yields, corporate profits, and dollar reserve currency tell us that the U.S. is doing fine for now, but without someone screaming about deficits and growth, nothing would get done until it was too late. Gross can play that role well, and I hope the powers that be will listen. I'm just not buying gold or real estate solely on his advice. I know too much about the track record of these predictions to fall into that trap.

Maybe I'm entertained by these dire predictions simply because I'm certain that I can't accurately predict what's going to happen next in the economy or on the stock market. But few talking heads would say the same thing, because that attitude doesn't make a good bumper sticker or a good sound bite for TV.

One of the uncertainties we face is a presidential election that will define policies for the next four years. To help prepare, we've identified a few stocks that could skyrocket after the presidential election, and you can find out about them in our free report by clicking here.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (15) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 04, 2012, at 1:08 AM, lowmaple wrote:

    Real estate could also be a long term investment IF bought carefully just as some stocksare if bought carefully. Diversification.

  • Report this Comment On October 05, 2012, at 11:27 AM, ziq wrote:

    Well, he must be doing something right.

  • Report this Comment On October 05, 2012, at 11:49 AM, whyaduck1128 wrote:

    If Bill Gross talks about bonds, I'll listen. He has the track record in that area. If he talks about stocks, taxes, corporate earnings, or macroeconomic trends, he's just another talker IMO.

  • Report this Comment On October 05, 2012, at 2:13 PM, chopchop0 wrote:

    Bill Gross did talk about bonds (US treasuries to be exact). And he lost his shirt by recommending getting away from them a few years ago....

    Bill Gross is probably a good "opposite" indicator. Just do the opposite of whatever he says LOL

  • Report this Comment On October 05, 2012, at 3:39 PM, PostScience wrote:

    Bill Gross said that stock market returns cannot outpace the overall growth in the economy. Think about that for a sec. Spot the error?

    If so, you're smarter than Bill Gross. Congrats!

  • Report this Comment On October 05, 2012, at 8:33 PM, bordereiver wrote:

    Minor point but didn't the S&P drop to 666? Or close. I remember the world's end aspect. For me was great opportunity to double down, with stuff like GE at under $10.

  • Report this Comment On October 07, 2012, at 9:40 AM, irvingfisher wrote:

    "The problem is that he was six years early, and if you would have followed his advice and shorted the market, you probably would have been broke by the time the market crashed."

    markets can remain irrational longer than you can remain solvent. - Keynes.

  • Report this Comment On October 07, 2012, at 2:01 PM, wellsoption wrote:

    Hey, I agree with you. Yeah, Bill Gross, what a joke!

  • Report this Comment On October 07, 2012, at 4:31 PM, Frankydontfailme wrote:

    Short answer, yes.

    Maybe try a longer time frame. I thought the fool was focused on time frames longer than three months?

  • Report this Comment On October 08, 2012, at 11:55 AM, kthor wrote:

    lol 6 years early LOL ..need i say more?

  • Report this Comment On October 08, 2012, at 12:44 PM, jwfoster wrote:

    His fund has beaten stocks over almost any reasonable time frame on lower volatility.

    PTTRX has a 15-year Sharpe ratio of 1.14

    SP 500 has a 15-year Sharpe ratio of 0.20

    5x the risk adjusted return for Gross over the general time frame of proffessional incompetence according to the article.

  • Report this Comment On October 08, 2012, at 1:35 PM, digitalroom wrote:

    The Feds keep pumping tax payer money to prop up the mkt. The inevitable will happen. Bill Gross is absolutely right. The time "when" it will happen is the million dollar question.

  • Report this Comment On October 08, 2012, at 2:17 PM, hbofbyu wrote:

    "Somehow the U.S. seems to rise up to challenges, whether they involve our economy, our budget, or our national security."

    That statement will be true until it isn't. And that day will eventually come - but hopefully not for another 100 years.

  • Report this Comment On October 08, 2012, at 3:43 PM, griderX wrote:

    I think you may be overlooking the most obvious reason for all his drive more assets into the fund ;)

  • Report this Comment On October 08, 2012, at 3:55 PM, knighttof3 wrote:

    To summarize the obvious:

    Bill Gross always talks his book (unlike Warren Buffett.) Filter him accordingly.

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