DOW ZERO: Bill Gross calls the death of equities
Third article that made me noodle on the ski slopes while reading my iphone on the chairlifts was a Bill Gross interview where he claims that equities are dead.
Of course he could be talking up his book as Gross is a founder of PIMCO one of the biggest bond investors on the planet but I do think he has a point.
Equities is a small part of capital structures. Banks for example had 40x debt to equity ratios. Debt is usually big and senior. If assets get so impaired, typically in a deflationary environment, then the company is bankrupt and will be liquidated by debt holder. Equity goes to zero. If dividends go to zero (which is happening left and right) and cash only barely services debt then discounted cash flow analysis says the company is worth zero. Financial services accounted for 40% of the SP500 profits.
For equities to be worth something they have to return more than risk free securities. The 'over the long run' mentality has evaporated. Over the long run, data says that equities were a crappy investment now that the debt bubble has exploded. All those gain since 1985 were but a monetary mirage piled onto linear growth. Interestingly bonds still carry an exponential growth.
Then why take the risk?
Of course he could be talking up his book as Gross is a founder of PIMCO one of the biggest bond investors on the planet but I do think he has a point.
Equities is a small part of capital structures. Banks for example had 40x debt to equity ratios. Debt is usually big and senior. If assets get so impaired, typically in a deflationary environment, then the company is bankrupt and will be liquidated by debt holder. Equity goes to zero. If dividends go to zero (which is happening left and right) and cash only barely services debt then discounted cash flow analysis says the company is worth zero. Financial services accounted for 40% of the SP500 profits.
For equities to be worth something they have to return more than risk free securities. The 'over the long run' mentality has evaporated. Over the long run, data says that equities were a crappy investment now that the debt bubble has exploded. All those gain since 1985 were but a monetary mirage piled onto linear growth. Interestingly bonds still carry an exponential growth.
Then why take the risk?
Comments
But equities represent both ownership and control. But most owners of equities throw away their control by buying through general-purpose mutual funds that always vote with the board, so as a whole equities become a less attractive investment.
Would equities be more attractive if a fund passed through some of its control to its own investors, or if a fund launched with a "mission" that investors could buy into? There are already "socially conscious" funds that avoid sweatshops, booze and gambling, but a fund could go further. For example, a "stop AIDS" fund or a "green jobs for central Indiana" fund.
I am not sure if you are trying to say that "control" is worth something. It is an interesting point but in this day and age I wonder if that is worth much. The control I want is knowing that, contractually, bonds will be paid before equity, by definition of seniority bonds in the capital structure. That being said, many people made the case that activist investors in fact increased the value of stocks by their involvement so you are right that if that control were to be manifest equity could be worth more.