A SENSE OF UNREST

Guest post by Bill Gross

There is accumulation there is responsibility after these there is unrest great unrest

Having turned the corner on my 70th year, like prize winning author Julian Barnes, I have a sense of an ending. Death frightens me and causes what Barnes calls great unrest, but for me it is not death but the dying that does so. After all, we each fade into unconsciousness every night, do we not? Where was “I” between 9 and 5 last night? Nowhere that I can remember, with the exception of my infrequent dreams. Where was “I” for the 13 billion years following the Big Bang? I can’t remember, but assume it will be the same after I depart – going back to where I came from, unknown, unremembered, and unconscious after billions of future eons. I’ll miss though, not knowing what becomes of “you” and humanity’s torturous path – how it will all turn out in the end. I’ll miss that sense of an ending, but it seems more of an uneasiness, not a great unrest. What I fear most is the dying – the “Tuesdays with Morrie” that for Morrie became unbearable each and every day in our modern world of medicine and extended living; the suffering that accompanied him and will accompany most of us along that downward sloping glide path filled with cancer, stroke, and associated surgeries which make life less bearable than it was a day, a month, a decade before.

Turning 70 is something that all of us should hope to do but fear at the same time. At 70, parents have died long ago, but now siblings, best friends, even contemporary celebrities and sports heroes pass away, serving as a reminder that any day you could be next. A 70-year-old reads the obituaries with a self-awareness as opposed to an item of interest. Some point out that this heightened intensity should make the moment all the more precious and therein lies the challenge: make it so; make it precious; savor what you have done – family, career, giving back – the “accumulation” that Julian Barnes speaks to. Nevertheless, the “responsibility” for a life’s work grows heavier as we age and the “unrest” less restful by the year. All too soon for each of us, there will be “great unrest” and a journey’s ending from which we came and to where we are going.

A sense of an ending has been frequently mentioned in recent months when applied to asset markets and the great Bull Run that began in 1981

A “sense of an ending” has been frequently mentioned in recent months when applied to asset markets and the great Bull Run that began in 1981. Then, long term Treasury rates were at 14.50% and the Dow at 900. A “20 banger” followed for stocks as Peter Lynch once described such moves, as well as a similar return for 30 year Treasuries after the extraordinary annual yields are factored into the equation: financial wealth was created as never before. Fully invested investors wound up with 20 times as much money as when they began. But as Julian Barnes expressed it with individual lives, so too does his metaphor seem to apply to financial markets: “Accumulation, responsibility, unrest…and then great unrest.” Many prominent investment managers have been sounding similar alarms, some, perhaps a little too soon as with my Investment Outlooks of a few years past titled, “Man in the Mirror”, “Credit Supernova” and others. But now, successful, neither perma-bearish nor perma-bullish managers have spoken to a “sense of an ending” as well. Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date. To them, (and myself) the current bull market is not 35 years old, but twice that in human terms. Surely they and other gurus are looking through their research papers to help predict future financial “obits”, although uncertain of the announcement date. Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.

Policymakers and asset market bulls, on the other hand speak to the possibility of normalization – a return to 2% growth and 2% inflation in developed countries which may not initially be bond market friendly, but certainly fortuitous for jobs, profits, and stock markets worldwide. Their “New Normal” as I reaffirmed most recently at a Grant’s Interest Rate Observer quarterly conference in NYC, depends on the less than commonsensical notion that a global debt crisis can be cured with more and more debt. At that conference I equated such a notion with a similar real life example of pouring lighter fluid onto a barbeque of warm but not red hot charcoal briquettes in order to cook the spareribs a little bit faster. Disaster in the form of burnt ribs was my historical experience. It will likely be the same for monetary policy, with its QE’s and now negative interest rates that bubble all asset markets.

But for the global economy, which continues to lever as opposed to delever, the path to normalcy seems blocked. Structural elements – the New Normal and secular stagnation, which are the result of aging demographics, high debt/GDP, and technological displacement of labor, are phenomena which appear to have stunted real growth over the past five years and will continue to do so. Even the three strongest developed economies – the U.S., Germany, and the U.K. – have experienced real growth of 2% or less since Lehman. If trillions of dollars of monetary lighter fluid have not succeeded there (and in Japan) these past 5 years, why should we expect Draghi, his ECB, and the Eurozone to fare much differently?

Because of this stunted growth, zero based interest rates, and our difficulty in escaping an ongoing debt crisis, the “sense of an ending” could not be much clearer for asset markets. Where can a negative yielding Euroland bond market go once it reaches (–25) basis points? Minus 50? Perhaps, but then at some point, common sense must acknowledge that savers will no longer be willing to exchange cash Euros for bonds and investment will wither. Funny how bonds were labeled “certificates of confiscation” back in the early 1980’s when yields were 14%. What should we call them now? Likewise, all other financial asset prices are inextricably linked to global yields which discount future cash flows, resulting in an Everest asset price peak which has been successfully scaled, but allows for little additional climbing. Look at it this way: If 3 trillion dollars of negatively yielding Euroland bonds are used as the basis for discounting future earnings streams, then how much higher can Euroland (Japanese, UK, U.S.) P/E’s go? Once an investor has discounted all future cash flows at 0% nominal and perhaps (–2%) real, the only way to climb up a yet undiscovered Everest is for earnings growth to accelerate above historical norms. Get down off this peak, that F. Scott Fitzgerald once described as a “Mountain as big as the Ritz.” Maybe not to sea level, but get down. Credit based oxygen is running out.

At the Grant’s Conference, and in prior Investment Outlooks, I addressed the timing of this “ending” with the following description: “When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.” We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion. A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm.

asset prices may be past 70 in market years, but savoring the remaining choices in terms of reward risk remains essential

But what should this rational investor do? Breathe deeply as the noose is tightened at the top of the gallows? Well no, asset prices may be past 70 in “market years”, but savoring the remaining choices in terms of reward / risk remains essential. Yet if yields are too low, credit spreads too tight, and P/E ratios too high, what portfolio or set of ideas can lead to a restful, unconscious evening ‘twixt 9 and 5 AM? That is where an unconstrained portfolio and an unconstrained mindset comes in handy. 35 years of an asset bull market tends to ingrain a certain way of doing things in almost all asset managers. Since capital gains have dominated historical returns, investment managers tend to focus on areas where capital gains seem most probable. They fail to consider that mildly levered income as opposed to capital gains will likely be the favored risk / reward alternative. They forget that Sharpe / information ratios which have long served as the report card for an investor’s alpha generating skills were partially just a function of asset bull markets. Active asset managers as well, conveniently forget that their (my) industry has failed to reduce fees as a percentage of assets which have multiplied by at least a factor of 20 since 1981. They believe therefore, that they and their industry deserve to be 20 times richer because of their skill or better yet, their introduction of confusing and sometimes destructive quantitative technologies and derivatives that led to Lehman and the Great Recession.

Hogwash. This is all ending. The successful portfolio manager for the next 35 years will be one that refocuses on the possibility of periodic negative annual returns and miniscule Sharpe ratios and who employs defensive choices that can be mildly levered to exceed cash returns, if only by 300 to 400 basis points. My recent view of a German Bund short is one such example. At 0%, the cost of carry is just that, and the inevitable return to 1 or 2% yields becomes a high probability, which will lead to a 15% “capital gain” over an uncertain period of time. I wish to still be active in say 2020 to see how this ends. As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.

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Tommy
Tommy

An old boomer lamenting his fate and the fading beauty of riding the US hegemony into the sunset or worse. What’s next Bill, a coffee table book full of amateur water color self portraits?

bb

He has unrest and he is a multiple Godzillaion . So in reality his unrest of soul is about something much more profound. Maybe he is concerned about where he will spend eternity .Maybe he is worried about hell.Maybe he is thinking what if Christ is who he said he was then eternity for him is very scary.

Years ago I had a medical condition. I needed surgery. While on the operating table I passed into what was not 7th heaven but maybe 7th hell .I will never forget the images of foul creatures pulling and clawing at me.Then all of a sudden I was in front of a mass of humanity. The most wretched people I have ever seen.Then I woke up on the operating table. I ask the doctor if I had a near death experience.He said nope ,everything went just fine.Needless to say I felt very uneasy with many sleepless nights.

Montefrio

Well, I´m an old boomer myself, a year and change short of turning 70, and I lament nothing: what was, was, what is, is, and what will be will be. I’d like to believe I learned from things I’ve regretted, cherish the ups and downs of the peaceful, pleasant and comfortable life I’m fortunate to lead now and recognize that the future–mine and everyone else’s–is a surprise party that may or may not turn out as I would wish, but don’t lose any sleep over it.

I strongly disbelieve in the notion of “fate”; things happen and we have free will to determine how those things affect our moods and behaviors. If “fate” is being equated with eventual infirmity and death, then perhaps Mr. G could be said to be “lamenting” his “fate”, but it’s a “fate” common to all, so I for one can see no point in “lamenting” it; better to learn something from the knowledge of its inevitability.

Mr G, however, is to my mind more interested in making a point (and I believe making it well) that investing will become increasingly more problematic. I, like he, misjudged the timing of it, but share his belief in its inevitability and his concerns for the implications that will have for our posterity. THAT, I believe, is the source of his “unrest”. Trust me, bb, by age 70 one has formed a firm “assumption” (call it faith if you like) as to what if anything comes next; what might cause one unrest is pondering what may take place in the departure lounge, so to speak.

Age has its weaknesses, but if one has lived a full life, one rich with varied experiences, and one has studied, truly studied, during that life, then one has acquired experience and wisdom. I’m strongly inclined to believe Mr. Gross has acquired both.

Read the post for its investment-outlook analysis. Mr. G is known to be experienced in that and his track record speaks well for that experience. I’d bet he picked up more than a degree of wisdom while accumulating that experience.

Tommy
Tommy

@Montefrio, yeah, Mr. Gross has learned to react to each and every action of the Fed…..because that’s always been the game. That’s it….’don’t fight the fed’. Between that and ‘80% of life is showing up’, you boomers and silents had it made. Yeah, yeah, yeah…bad shit happened to you to – because you’re not special despite what you were indoctrinated with in your formative years. The bullshit magic of world reserve currency and a demographic chart to die for made your world possible. That’s come and gone. Honest to Pete, if you can’t manage a nice retirement with double digit returns in your peak earning years, well nobody can help you. The bullshit only accelerated as the fiat nature of the beast intensified – if that passes for wisdom, then we’re truly fucked. And yes, I get the notion that Bill was looking to puke sunshine on a variety of tangential areas of interest. I swear, you boomers write the same way every fucking time – read your post again. You boomers always work some self congratulatory bullshit into a lecture and sign off with a modicum of truthy-ness. Do you stuff this shit down the throats of your children and grand children and their friends….their generation? Most who reply, ‘yes’ to that question are fortunate enough to have successful heirs and overlook the generation in general. The millenials are so fucked it ain’t even funny – maybe a sage lecture down at the student union from someone in your successful generation would be helpful….no? I’m cranky today boomers, fair warning.

Montefrio

@Tommy

You seem embittered, although the grouchy warning tempers it a bit.

“Do you stuff this shit down the throats of your children and grand children and their friends….their generation? Most who reply, ‘yes’ to that question are fortunate enough to have successful heirs and overlook the generation in general.”

Yes, I most certainly do, and yes, my heirs (my children, 39 and 34; grandson still too young) are successful, perhaps because they learned something from what I and others “stuffed down their throats”. But I also offer advice when sought by anyone of any age if I believe I may have advice worth offering on the subject at hand.

Here’s some: Generational generalizations are of little use to you when you’re trying to make a life of your own within the space-time location in which you landed. Stick to dealing with what’s in front of you now and what you can best guess it’ll be in the future.

Tommy
Tommy

I disagree. Generalizations are incredibly valuable, as a successful business person – I watch trends and look for exceptions. If you don’t believe in generalizations, you’ll be stuck reading and believing whatever you are told, see, and hear. You don’t believe in generalizations……..?. I don’t understand that, please explain. Unless you are employed in a discipline that is focused like a laser beam on a narrow spectrum of the world, I don’t get what you are referring to.

Montefrio

@Tommy

Sigh. I wrote GENERATIONAL generalizations, not simply “generalizations”.

“If you don’t believe in generalizations, you’ll be stuck reading and believing whatever you are told, see, and hear. ”

Good lord, man! Reading and believing whatever you are told, see and hear is exactly how “generalizations” become generalized! Those who question generalizations are critical thinkers and as a rule don’t take orders from the generalizers or their generalizationized followers.

That said, it’s obvious that some generalizations are true, others aren’t. Case closed.

Tommy
Tommy

@Montefrio, take your sarcasm and shove it up your ass. Have a great day and remember, positivity is state of mind!

Montefrio

@Tommy

No sarcasm was intended. I fear you have reading comprehension difficulties as well as a lack of civility. But in the spirit of incivility, I might add that you come across as a frustrated, embittered twerp who knows deep down that others’ days will always be better than his. Always.

Tommy
Tommy

I am cranky today, you might be on to something. Maybe you should consider how you come across, there is simply no way I’m ‘your first’.

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