By YOUNG MONEY Staff
14 September 2012

The amount of debt in the private credit market is too high and this has ended the era of credit expansion driving double-digit returns, legendary bond fund manager Bill Gross stated recently.

New environment

Gross wrote in his monthly investment outlook that market participants are in a new environment, where "the age of inflation is upon us, which typically provides a headwind, not a tailwind, to securities price - both stocks and bonds."

In an interview with Bloomberg Television, the legendary bond fund manager stated that "those days are over," and that "pension funds and individuals and investors that expect 10 percent consistent returns to pay those bills are going to be disappointed."

These statements come after he declared in the prior month's commentary that the "cult of equity" was dying. In the August edition of his monthly outlook, Gross likened the long-term returns generated by equities to a "Ponzi scheme" and stated that returns of 6.6 percent more than inflation, which has traditionally been referred to as the Siegel Constant, are a thing of the past.

'Excessive fat'

In his September outlook, the market expert stated that "our credit-based financial system is burdened by excessive fat and interest rates that are too low," and that "central banks are agog" in amazement that the vast liquidity that has been injected into the system since the financial crisis has not bolstered lending.

Detriment of debt

"Too much debt leads to forced diets and deleveraging, a process that has been going on since Lehman in 2008," Gross said in the monthly document, in reference to the bankruptcy of Lehman Brothers Holdings Inc.

He said that "not only households, but financial institutions as well as many countries have reduced their caloric intake which in turn has promoted slow growth and in some countries near recession and/or depression." He said that if these entities follow historical trends, seven years of fattening may require seven years devoted to focusing on being lean, if not longer.

Cult is dying

The market expert stated in an interview that "it’s really a diminished or dying cult of both bonds and stocks, from the standpoint of a belief that they can get 10 percent types of returns to pay their bills, to pay for education, to pay for retirement," according to the news source. He predicted that bonds will generate annual returns averaging between 2 and 3 percent, and that stocks will return between 4 and 5 percent.