LONDON -- Stocks and shares are dead. Finished. They have ceased to be. All those people who have worshipped at the altar of the equity can pack up and go home.
Yes, a multibillion-dollar industry will close. I will have to find a new job. Stocks and shares are over. I know this because Bill Gross, the world's biggest bond manager who runs the $260 billion PIMCO Total Return Bond fund, tells us so in his August Investment Outlook.
"The cult of equity is dying," he says.
So now you know. We can all find something else to do with our time and money.
Thanks, Bill.
Bill kills
Silly us. We were fooled all along. "Several generations were weaned and in fact grew wealthier believing that pieces of paper representing 'shares' of future profits were something more than a conditional IOU that came with risk," Gross informs us.
Now that illusion has been shattered.
At least we know whom to blame. It is all down to Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School, whose 1994 book Stocks for The Long Run encouraged us to invest in equities at the worst possible time.
What was he thinking?
Freakonomics
So why were we all so gullible? We have misread history, Gross says. Since 1912, stock markets have delivered an inflation-adjusted annual real return of 6.6%, recently fading.
Over the same period, GDP grew at just 3.5% a year. Gross concludes that "somehow stockholders must be skimming 3% off the top every year," presumably at the expense of lenders, laborers, and the government.
Investors have taken this kind of outperformance for granted, but the whole thing is a Ponzi scheme. The Siegel constant, he says, is a "historical freak, a mutation likely never to be seen again as far as we mortals are concerned."
Talk about freaking out!
Bonds are dying, too
As a bond fund manager, you could accuse Gross of talking his book -- except that he has been talking down Treasuries, as well. On a current yield of 2.55%, the bond market will also struggle to repeat its past performance, he says. Gross predicts a future annual return of 4% for equities and 2% for bonds. In a balanced portfolio, that will produce a nominal 3% a year -- or zero, when adjusted for inflation.
Gross concludes that the cult of the equity will replaced by the cult of inflation as developed Western economies try to inflate away their debts.
He was clearly having a bad day.
The dividend is Siegel's friend
There's only one drawback with this theory: It's wrong. Or so claims Jeremy Siegel, who popped up on Bloomberg to defend his data, showing that equities can deliver 6.6% a year when GDP is growing by just 3.5%.
It all comes down to our Foolish friend, dividends.
That 6.6% figure is a total return, assuming all dividends are reinvested. In practice, they aren't. Most are "consumed" and ploughed back into the economy. That largely explains the discrepancy between the two figures.
And he claims he can stand up to that "freakish" 6.6% figure over 19 different stock markets and across periods stretching for as long as 200 years. That's some freak result.
And if we are to be menaced by the cult of inflation, as Gross (and many others) suspect, Siegel says stocks will profit much more than bonds.
The market died? Time to buy!
Siegel also echoed my first reaction, word for word: "I love to hear people saying the cult of the equity is dead. That's usually that's the start of a bull market."
Equities are typically declared dead in the pits of the recession, when markets are volatile and nobody can see a way out. Historically, that's been a great time to buy, Siegel says, and today will be exactly the same. It just may take a little longer for markets to recover -- but they will.
Grossed out
Given the choice, where would you put your cash? In a best-buy savings account that pays 3.2% and whose headline rate is distorted by a short-lived 2.7% introductory bonus that expires after 12 months? Or bonds, yielding 2.25%?
How about solid blue chips such as Aviva, which yields 9%; GlaxoSmithKline, yielding 4.7%; SSE, yielding 6.1%; Marks & Spencer, yielding 5.09%; Sainsbury, yielding 5.03%; Legal & General, yielding 5.06%; and Vodafone, sporting a dividend yield of 5.07%?
I know which I prefer -- especially since these stocks could enjoy the mother of all reratings once the crisis is behind us.
Equities are dead. Long live equities!
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