The Fight Is On! Malkiel And Gross Blast Each Other In Debate Over Equity Cult Death

Wednesday, August 15, 2012 06:37
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The Fight Is On! Malkiel And Gross Blast Each Other In Debate Over Equity Cult Death

Tags: bonds | investor behavior | markets

Bill Gross’s pronouncement that the cult of equities is dead has raised the ire of equity guru Burton Malkiel. In a full-out rebuttal, Malkiel blasted Gross by stating that equities offer a more favorable comparison to bonds now than at any other time in history.

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The author of “A Random Walk Down Wall Street” used the fact that interest rates are close to zero to support his argument. He says today’s low to negative bond yields are destined to produce negative real returns.
 
Gross referred to the stock market as a Ponzi scheme. He blasted the claim that, over time, investors would be rewarded an average of 6.6% for the risk they take by investing in equities.
 
Because gross domestic product (GDP) is faltering significantly, Gross says the 6.6% return was actually an anomaly that will not be repeated in what he calls the New Normal economy.
 
Malkiel acknowledged the present uncertainty in the markets but also pointed out that there is always uncertainty in the markets. He says the markets’ biggest problem at this point is people’s fear that the markets will not work the way they are supposed to.
 
This fear is supported by the electronic high-speed trading glitches that have plagued the market recently. But the most recent glitch involving Knight Capital really showed investors that the markets still do work.
 
The pounding of Knight gave investors in other companies a bargain entry point while punishing Knight with a huge loss in market cap. This was a far more severe result than any regulator would have imposed.
 
Malkiel says the market made short shrift of rectifying the inefficiencies in the Knight trading debacle and did not harm long-term investment strategies.
 
Such bombastics between market gurus certainly makes for good entertainment. It can also signify extremes in sentiment which may offer useful signals for investors who are willing to pay attention.

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