I Can Hear the Bells

“I Can Hear the Bells” is a wonderful song from the musical Hairspray, sung by Tracy Tumblad as she “hears the bells” when thinking about her fantasy love with heartthrob, Link Larken. Yes, even after all these years bells still ring when I think about my husband. However, each time I hear someone bemoan or provide a short dissertation on the death of equities, I hear another set of bells; actually it is beginning to sound more like a loud siren. The latest market sage to proclaim the death of equities is Bill Gross, Founder, Managing Director and Co-Chief Investment Officer at PIMCO.

Bill Gross has always been considered by most to be well-reasoned. Yet, I was unable to follow the thinking or rationale of his argument. He begins by pointing out the returns of long term treasuries for the past 30 years. As he puts it they “have been the higher returning and obviously “safer” investment than a diversified portfolio of equities. In turn it would show that higher risk is usually, but not always, rewarded with excess return.”

Certainly this is true, but why does he not look at the prior 30-year period, or better yet the prior 170-year period? The high interest rate, high inflation environment of the late 70’s and early 80’s were an anomaly which created an anomaly in the bond market that took 30 years to play out. Now we have gone to the other extreme, rates are reaching all-time lows creating another anomaly in the bond market.

He correctly articulates that stocks are more risky than bonds and therefore should have higher returns. He then goes on to explain the 6.6% long-term real returns from equities are made up of 3.5% GDP growth with the other 3% representing excesses to investors who are “skimming” at the expense of lenders, laborers and government. WOW! He totally ignores the risk levels related to each of these other constituencies’ vis-à-vis equities. He does not take into consideration that the profits that accrue to investors are what is left after the other constituencies have been compensated/rewarded for their risks. Further, he assumes that GDP growth equals wealth creating and that all wealth is created equally. He illustrates this by providing a chart titled: Capital Trumps Labor which shows real US wages declining as % of real GDP from a high of 53% in 1970 to a low of 44% in 2010/2011. Facts are facts but correlation does not mean causation. He totally ignores the fact that our free markets have provided the opportunity for significant productivity enhancements over the last 40 years!

Finally, we note that at the market lows in early 2009 Mr. Gross also predicted the market was headed to 3000.

With so many market pundits proclaiming the death of equities and capital flows out of equities into an already overpriced bond market, the bells are ringing loudly!! When I see someone going to such great lengths and make such a weak case for the death of equities the siren going off begins to hurt my ears! I could not disagree more with Bill Gross’s analysis or conclusions. In short, at Sigma our firm solidly believes in the merits of long term investing in equities and that the bells being rung by market pundits are signaling an opportune time to invest in stocks.

Your thoughts and questions are welcome.

Denise Farkas
Chief Investment Officer