Bill Gross: Inflation Coming Soon to a Developed Country Near You

In a recent, rather grim article, bond king Bill Gross stated that investors can expect inflation to cut significantly into their returns in the coming years. In fact, he went as far to say that he believes the average return on a nominal basis will fall around 0%. His argument looks at a long history of both stocks and bonds and compares the past to the present to arrive at his final figure [see also Warning: Ignore Bill Gross’ Hard Money Prediction At Your Own Risk].

First and foremost, Gross dispels the Siegel constant in today’s environment, stating that 6.6% per year may have once been a possibility, but today’s markets and money printing environment has taken that figure off the table. “If labor and indeed government must demand some recompense for the four decade’s long downward tilting teeter-totter of wealth creation, and if GDP growth itself is slowing significantly due to deleveraging in a New Normal economy, then how can stocks appreciate at 6.6% real? They cannot, absent a productivity miracle that resembles Apple’s wizardry” states Gross.

Next, Gross takes a stab at fixed income, an asset class which he is well-versed in and has long been considered an expert of. Investors, according to Gross, would be foolish to think that the last 30 years of bond returns can be replicated in the current environment. With bonds yielding an average of just 1.8% with an average maturity of six to seven years, stocks would have to do some heavy lifting by returning 7-8% after adjusting for inflation says Gross (this is all assuming a well diversified portfolio of fixed income, equity, and more) [for more updates and trending news subscribe to our free newsletter].

“The problem with all of that of course is that inflation doesn’t create real wealth and it doesn’t fairly distribute its pain and benefits to labor/government/or corporate interests. Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades” says Gross of inflation.

What to Do?

A rather depressing outlook from a well-respected investor leaves those who buy into Gross’ ideals little options for return. The bond king did mention that on many occasions, higher risk in a portfolio (like taking on more stocks) was often rewarded with a higher return. Of course, for every story of someone who struck gold stock picking, there are dozens who had an opposite experience. So what is an investor to do if we truly are faced with a 0% nominal return for the next decade. Is it enough to just keep pace, or will there be ways to find real return? [see also Four Commodities To Buy Before Roubini’s “Perfect Storm”].

There are always assets like gold and other commodities that will help you keep pace with inflation, and may rise even above those rates, but just making ends meet is not on the agenda of many investors. It would appear that active traders have the upper hand in such an environment, as the inflation rate and historical returns mean little to them, as their trades make handsome returns (and lose extraordinary amounts as well). What do you all think, are we really at a point where 0% inflation-adjusted return is the norm?

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Disclosure: No positions at time of writing.