That’s the prediction from Bill Gross.
Recently, from his perch atop $700 billion in bonds at PIMCO, in addition to advising the U.S. on its $500 billion fund to buy mortgage-backed securities and $250 billion commercial paper program, Gross sounded the death knell for common stock.
Yes, according to venture capitalist Peter Cohen of Peter S. Cohen & Associates, who cornered the bond king for the exclusive interview, “the current economic contraction is killing the animal spirits that drive risk taking and that’s contributing to the death of equity capitalism as we’ve come to know it.”
The Gross outlook is very grim for those who expect stocks to ultimately regain their historical performance advantage over bonds. “Things will never be the same. Risk taking has been destroyed…asset classes will be readjusted for that outlook. That is — stocks will be more of a subordinated income vehicle as opposed to a ’stocks for the long run’ growth vehicle.”
Common shareholders are seeing their values eroding because of their subordinated position relative to debt in the liquidation hierarchy, because when a company files for bankruptcy, all of the other stakeholders — such as bondholders, lenders, and preferred stock holders — get their money before the common shareholders see a dime.
That may be the case for some time to come, but as sure as Truman defeated Dewey, common stock returns will eventually trump bonds. But in the indiscernible interim lies the rub…inflation, interest rate and default risk has not been greater in years. Bonds are about as unattractive as stocks for the intermediate-term.
So where will growth-minded investors find compelling asymmetric return opportunities amidst the new world disorder?
Gold is probably the next bubble. Commodities are too correlated to the economic cycle. Managed Futures quant models are a black swan breeding pond, and Hedge funds? Well, that brain is drained for now.
Private Investment in Private Ventures
That’s right. This may not be intuitive to the remaining fossils that still subscribe to dogmatic asset allocation models or efficient market hypocrisies, but prudent and appropriate allocations to private investments in; your own business, start-up and early-stage ventures, mezzanine opportunities, distressed real estate and other forms of private equity are about the only remaining viable and proven means of wealth that is truly non-correlated to the whatever remains of your investment portfolio.
Every credible study into the origins of wealth has verified that the vast majority of family fortune has been generated through business ownership or investment in private enterprise. Affluent investors already know this…because that’s how they became affluent.
The counter-cyclicality of venture investing is counter-intuitive to most investment professionals. Yet, the VCs that have experienced the salad days and the soup lines will tell you that many of the most disruptive and most profitable new companies have emerged from the ruble of past downturns (Exxon, Microsoft, Google, Ebay and Skype, to name a few).
Pending breakthroughs in alternative energy, power distribution, privatized education, medical devices, non-invasive healthcare, genetic disease prediction, processors, nanotech, wireless communication, cloud computing, and so on, are agnostic to the vicissitudes of investor psyche and economic cycles.
Ultimately, the job and wealth creation that will restore our economy will emerge from the confluence of investment capital, entrepreneurship an innovation.
This is our debut post. Though Venture Populist is an unabashed advocate of private venture investing, we intend to bring you the good, the bad and the ugly of private investment. From the agonies of angel investors to the victories of VCs, we will examine the sourcing, diligence, deal terms, risks, returns, liquidity and exits associated with the various stages, structures and sectors of private investment.
Album: For the Whole World to See, Death, 1975
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