We live in interesting times. We continue to see repercussions from Brexit. The other major players — in Europe, China, and Japan — seem to be in a downward spiral. Not to mention, the bubble-like issues we see in Canada and other parts of the world.
The world is quickly getting far more complex… something that central banks’ (and everybody else’s!) models can’t capture. We are tiptoeing into a period of enormous uncertainty.
Bill Gross addresses these topics in two of his recent letters (I featured them in my free weekly newsletter, Outside the Box). His first deals with the expectations that most investors have about future returns over the long term — as opposed to what reality suggests. Of course, your mileage may vary. It depends on how you choose to create your portfolio. The average investor, however, is at best looking at about a compound 4-5% over the next 10 to 15 years.
And that’s if everything works and we see the top end of the expected returns. Given current bond yields and stock valuations, that outcome may be unlikely.
Bill’s take is not significantly different from what I’ve been writing, but he makes a number of very good points and has data sets that are really worth paying attention to.
Plus, Gross is just a fun writer.
His second letter starts with the simple game of Monopoly that we are all familiar with.
Bill then begins to develop an analogy to the real economy.
Nowadays, central banks keep increasing the amount of money you get every time you pass Go. If that happens in Monopoly, your investing strategy changes significantly— the price of assets goes up because the supply of money increases at an ever faster rate. Which means that the velocity of money rises until at some point you have a problem. Quoting:
[H]owever with yields at near zero and negative on $10 trillion of global government credit, the contribution of velocity to GDP growth is coming to an end and may even be creating negative growth as I’ve argued for the last several years. Our credit-based financial system is sputtering, and risk assets are reflecting that reality even if most players (including central banks) have little clue as to how the game is played.
Bill is shouting a warning about the viability of the current economic system.
He didn’t quote Yeats, but I will: “The center cannot hold.”
is the chairman of Mauldin Economics
, which publishes a growing number of investing resources, including both free and paid publications aimed at helping investors do better in today's challenging economy. Mauldin uncovers the truth behind, and beyond, the financial headlines.
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