I’d Gladly Pay You Tuesday For A Hamburger Today
Bill Gross wants to sell you a bond. For that matter he wants to sell you trillions of dollars of bonds and, preferably, in one of his Janus products. He did catch my attention, however, with an interesting article in Wednesday June 14’s edition of The Wall Street Journal where he predicts reversal of fortunes for investors who are confidently surfing an equity wave without understanding the jagged coral beneath them:
“Money will currently be made, or at least conservatively preserved, by acknowledging the exhaustion of “making money with money”. Strategies involving risk reduction should ultimately outperform “faux” surefire winners generated by central bank printing of money. It’s the real economy that counts and global real economic growth is and should continue to be below par.”
Mr. Gross is right about several things. The Fed’s “QE forever” campaign has created a financial Disneyland where returns on capital are available in only a few asset classes. Those asset classes, however, are squarely reliant on real economic forces that Mr. Gross fears will end the prosperity trade. Among them he especially fears demographics and productivity. Investments in productivity enhancements have diminished and the aging baby boomers just are not spending. There are a number of industries with a “Whimpy- Gladly Pay You Tuesday for a Hamburger Today” business model. Fixed future promises like life insurance, bank deposits, defined benefit pensions (private and public), medicare, social security, annuities, interest rate swaps and long term care insurance in exchange for a deposit or a premium dollar today are at risk:
“But asset prices and their growth rates are ultimately dependent on the real economy and, the real economy’s growth rate is stunted by secular forces which monetary and even future fiscal policies seem unable to reverse… Investors have discovered that making money with money is a profitable enterprise and have exchanged the support of central banks for the old-time religion of productivity growth as a driver of their strategy. The real economy has been usurped by the financial economy.”
In the private equity world we have confirmation of Mr. Gross’ real economy observations. Unit growth is hard to find in many of the industrial companies we see. Earnings and cash flow are often enhanced through a plow horse playbook of cost reductions, selective price increases, synergistic tuck-in acquisitions and working capital management. Larger companies increasingly manufacture their earnings by acquiring smaller competitors and, unlike other investment periods, are not penalized by the capital markets for lack of organic growth. Investments in productivity usually mean labor displacement first and innovation second. When once determined rivals like Dow and DuPont merge acknowledging they cannot grow the Whimpy economy is at its zenith and, like a financial “Ground Hogs Day”, rightly predicts a succession of unfulfilled Tuesday promises.