Bill Gross says there is “too much hope” in equity prices and high yield markets are priced for too much growth as the world heads for a major productivity slowdown.
Productivity has averaged 0.5 per cent over the last five years compared to 2 per cent in the pre-Lehman era, the Janus Capital fixed income manager says.
“High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era,” Gross says, adding increasing tariffs and restricting immigration will only exacerbate the problem.
“Equity markets are priced for too much hope, high yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman.”
While US Federal Reserve chair Janet Yellen has argued no one really knows why productivity is so low, Gross says there is an “obvious” connection between recent years’ low levels of private sector investment.
“An ongoing level of low to negative interest rates have resulted in a misallocation of capital to low risk projects and a slowdown in small business creation,” Gross says.
He points to an IMF study that states unless there is an unforeseen technological breakthrough, productivity growth is unlikely to return to the higher rates of the 1990’s for advanced economics or the early 2000’s for emerging economics.
However, Gross adds optimists believe smartphones and medical technology have yet to have an impact and could lead to a resumption of historical trends.