Despite having picked the Wrong Trade, once, you should listen when Bill Gross speaks. PIMCO’s latest reading summary. We advise to read the whole article here.
- Once interest rates inch close to zero and discounted future cash flows are elevated in price, it’s difficult to generate much more return if economic growth doesn’t follow.
- Equity markets should be dominated by dividend yields and the return of capital via share buybacks, as opposed to growth.
- In fixed income assets, we suggest that portfolios should avoid longer dated issues where inflation premiums dominate performance.
- For long-term investors, meaning those prepared to stay invested for three, five and even 10 years, who can endure volatility, we believe equities can offer attractive returns.
- In an extended period of slow economic growth and deleveraging, interest rates are likely to remain low. Actual income generation from investments is important.
- Hopefully society can institutionalize the lessons from this crisis so that future generations don’t repeat it: Individuals, corporations and countries should only borrow to fund long-term investment, not current consumption.
Let’s consider how equities offer returns to investors and see what markets today are telling us:
Latest out of PIMCO, on central bankers around the World.
In removing interest rate risk from the bond market – by removing “duration,” the Fed through QEI and QEII prods investors to move out the risk spectrum. Call it a rebalancing effect – QE actually never was QE, because that entails banks lending their $1.6 trillion of excess reserves and expanding the money supply, which amid a liquidity trap just ain’t happening, as they say. The goal is to boost asset prices and loosen financial conditions to promote increases in aggregate demand to spur economic growth.