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Bill Gross Believes ‘Every Asset Price Is Artificially Elevated’

Stephanie Johnson

Bill Gross Shares His Investment Outlook for October

(Continued from Prior Part)

Asset prices have been rising in the US

The S&P 500 Index rose by over 60% in the last five years. According to Standard & Poor’s website, the S&P 500 is widely regarded as the best single gauge of large-cap US equities. Over $7.8 trillion worth of funds are benchmarked to the index. The SPDR S&P 500 ETF (SPY), the Direxion Daily S&P 500 Bear 3X Shares (SPXS), and the Direxion Daily S&P500 Bull 3X ETF (SPXL) are just a few examples of funds benchmarked to this index.

Buybacks and acquisitions have been inflating equity in the US

With cheap money available, US companies’ borrowing rate has surpassed their earnings rate. In fact, many firms have been funneling the money towards share buybacks. This makes their respective EPS (earnings per share) figures look better. While the Fed had assumed that lower interest rates would boost economic activity through the expansion of businesses and employment opportunities, many US companies aren’t exactly looking at expansion. In contrast, they’re using low-cost capital to fund their buybacks and acquisition sprees. This is leading to elevated equity prices. It proves that Bill Gross is right. He believes that “every asset price is artificially elevated.”

Firms like Apple (AAPL), Prudential Financial (PRU), and IBM (IBM) have been the forerunners of the share buyback race. Stock buybacks were at an all-time high in 2014 while acquisitions continue to make the headlines in the US. Oracle (ORCL), Aetna (AET), and Centene (CNC) are a few examples of companies that are engaged in an acquisition deal.

Safe-haven fund flow is another factor

With emerging markets (EDC) like China (YINN), Venezuela, Argentina, and Russia (RUSL) getting riskier, fund flow diversion from these countries to the US added to equity price appreciation in the US. Investors have been parking their money more in the US—compared to emerging market (EDZ) securities. The riskiness abroad has increased.

Is the housing market heading towards a bubble again?

The housing sector also rose. Over the last three years, house prices in the US rose nearly 30%. The ultra-low interest rates on mortgages have bolstered the demand and price of housing that’s taken on a mortgage. However, conditions like oversupply, tighter credit standards, a predominance of fixed-rate mortgages compared to floating rate, and high levels of foreclosures prevented asset prices from soaring to levels that are similar to the housing bubble in 2008.

While the US economy provides enough room for the artificial elevation of asset prices, there are negatives of a low-interest rate policy that could hurt your investments. Next, we’ll analyze the baggage that comes with a ZIRP (zero interest rate policy).

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