Bill Gross, the so-called “Bond King,” thinks stocks are currently “priced for too much hope,” and here’s why: He doubts President Trump can deliver rapid economic growth because the United States simply isn’t as productive as it used to be.
“High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era,” he notes in his monthly investment outlook released Thursday morning.
Gross, who rose to prominence as a star bond investor with Pimco, is now a fund manager with Janus, and his sometimes clever, tongue-in-cheek monthly newsletters have a wide following.
This month the newsletter starts with a rather grotesque brainteaser. (Gross asks: “If forced to choose between killing your favorite pet or an anonymous human being, what would you do?”)
But then he dives into the real-life conundrum currently facing economists and policymakers: An important ingredient of economic growth has stalled in recent years, and it’s still a mystery as to why.
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Known as total factor productivity, it’s essentially a measure of how efficient workers and capital are in producing services and products. Improvements in technology, education, and even public health can factor into this somewhat ambiguous, but crucial variable for developed economies.
The pessimists in the debate, like Northwestern University economist Robert Gordon, have argued that the best days for the U.S. economy may be behind us, after we already picked the “low hanging fruit” of massive technological improvements like electrification, indoor plumbing, the automobile, jet engines and the Internet. Optimists, meanwhile, argue we cannot foresee the technological improvements of the future, which may still lead to strong economic growth.
Federal Reserve Chairwoman Janet Yellen touched on the debate earlier this week in a speech at the University of Michigan, noting that recently productivity has been “very disappointing,” despite stronger job growth.
“The fact that you can create that many jobs in the context of growth that is so low points to a significant problem,” she said. “And the problem is that productivity growth is very low.”
As with his brainteasers, Gross notes, “There is no right or wrong answer” for economists. But in his view, investors are relying too heavily on models based on history that may not repeat itself. And for this reason, stocks, high-yield bonds, and other asset prices are too high.
“Equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman,” Gross wrote.